Public Submission to Water Market Rules Issues Paper

PUBLIC SUBMISSION TO WATER MARKET RULES ISSUES PAPER

BY

MACQUARIERIVER FOOD & FIBRE

ON

9 MAY 2008

MacquarieRiver Food & Fibre Submission on ACCC’s Water Market Rules Issues Paper9th May 2008

TABLE OF CONTENTS

1)INTRODUCTION......

2)THE MACQUARIE VALLEY OF NSW......

3)THE CHARACTERISTICS OF MACQUARIE OFF-RIVER SCHEMES..

4)TERMINATION FEES FOR THE MACQAURIE......

5)REVIEW OF DISCUSSION PAPER CONTENTS......

6)CONCLUSION......

EXECUTIVE SUMMARY

ACCC’s Issues Paper appears to start from the premise that the seller’s rights are foremost. It is also focused on addressing issuesperhaps related to the Murray or southern valley scenarios and takes an extremely prescriptive and detailed approach to issues relating to water market rules. MRFF understands that water market rules will need to be consistent and detailed enough to protect the rights of individuals to trade. However it is crucial that the ACCC realizes that ‘one size will not fit all’ with respect to Water Market Rules. This is due to the distinct physical, infrastructure scale and governance differences across the Basin. Therefore it will be important to be less prescriptive in ACCC’s final advice to the Australian Government, with the approach of setting broad guidelines spelling out specific principles or requirements as necessary and leaving detail to be developed by Schemes in order to suit their own members’ circumstances.

In this submission, Macquarie River Food & Fibre (MRFF) aims to achieve 4 outcomes:

1)To explain the characteristics of Off-river schemes in the Macquarie;

2)Give the ACCC our most current thinking on the process underway for developing a “Termination Fee” template to consistently apply to transformation arrangements across the Macquarie Infrastructure Operators;

3)Address the Water Market Rules Issues paper & Questions it raises in the context of the Macquarie; and

4)Request a dialogue between MRFF and ACCC to seek ACCC feedback on point 2) above and enable further input by MRFF prior to the ACCC’s draft advice and consequent opportunity for public submissions – especially given our lack of opportunity to comment on ACCC’s approach to termination fees in this submission, given their absence from ACCC’s Issues Paper.

The Nature of the Macquarie’s Off-River Schemes

MRFF notes that there are riparian irrigators, extractions for town water supply, stock and domestic use and industrial use in the Macquarie as well as off-river irrigation schemes. Macquarie River Irrigation Schemes[1](Infrastructure Operators) differ from the southern valleys, with respect to the internalisation of losses and the original intent and method of their establishment. MRFF understands that southern NSW valleys have a separate conveyance licence (which is not tradable), in addition to their WAL in order to account for delivery losses within the scheme, without cutting into the WAL. However in the Macquarie there is no additional ‘losses’ licence, so losses throughout the scheme system are socialized across all members and deducted from the volume of the WAL delivered to the Scheme.

The second key difference is the basis of establishment of the Macquarie Infrastructure Operators being private investor/ business based as opposed to the southern valleys, where Infrastructure Operators were Government funded. Therefore it is important that the Water Market Rules proposed by the ACCC do not erode the business case that drove the establishment of these schemes. All the Macquarie Infrastructure Operators are ‘off-river’, with initial investment and ongoing operations owned and funded by members (whose interest was based on adjacent land ownership). It is because of the Infrastructure Operators’ physical constraints to access to the broader market for trading in (limited buyers and delivery capacity) and the potential for externalities on remaining scheme members, from delivery losses and operating costs with the ultimate potential consequence of creating ‘stranded assets’ from trading out, that means some fees need to be a component of water market rules for Infrastructure Operators.

The Need for Termination Fees

The following points specify the justification of a termination fee as part of the water market rules specifying conditions of permanent trade or transformation of licences away from an Infrastructure Operator.

• Externality Created by trading out: There are a finite number of members on each of the Macquarie Infrastructure Operators, derived from the number of landowners adjacent to the scheme. There will always be some water losses involved in water delivery via the schemes, despite ongoing investment in reducing losses by Infrastructure Operators (nb: Macquarie Infrastructure Operators’ average losses vary between 10 and 20%, with World Best Practice for Scheme Delivery Losses being 15%). There is also a system of socializing the losses incurred throughout the Macquarie Schemes equally across all members, as referred to above. Therefore it is obvious that with less water in the Scheme WAL there is less water being delivered and less members to share losses across, so remaining Scheme members will face higher maintenance fees and higher charges per Megalitre of water used for irrigation to cover the comparatively higher losses unless these impacts are mitigated through fees that are a condition of transforming and / or trading water out of the Scheme WAL. (Refer Table 1 on page 6 for an example of the impact discussed above).

• Efficiency of Water Delivery –Implications of trading. With each megalitre of water traded out of a scheme,there is a decline in the efficiency of water remaining within the scheme. While there may be some demand from remaining scheme members to buy more water in to satisfy individual’s water security objectives, in the Macquariethere will be a limit to water traded in, both due to the limited number of buyers and the physical delivery capacity limitations of each scheme. This has implications not only for the remaining scheme members in terms of higher delivery losses relative to water used, but is also contrary to the objectives of the Basin Water Market & Trading Objectives as set out in Schedule 3 to the Act, specifically related to a) to facilitate the operation of efficient water markets and e) to provide appropriate protection of third-party interests.

• Termination Fees as a Solution: The future sustainability of off-river schemes and the imperative by both Government and industry to avoid the ‘stranded asset’ scenario has highlighted to the Macquarie Schemes, the need to develop a combined approach to a termination fee, suited to each particular scheme’s set of physical characteristics, and operating and maintenance cost structures. While exit fees are mentioned in ACCC’s glossary, MRFF is unclear on ACCC’s position on them. Termination fees do not appear to have been mentioned at all by ACCC, which is very concerning, given that MRFF believes they are a critical element of water market rules for off-river schemes.

The principles underlying the termination fee concept are that fees required as part of transformation (where access fees are no longer being charged)and /or trading arrangementsare fair and reflective of expenses associated with departing from the Scheme in order to absolve the entitlement holder from any future obligation to pay access fees. There would then be no grounds for delay or restriction of trade by Infrastructure operators as the remaining members & the viability of the Scheme are not impacted by the sale of water from the scheme. This means in essence that following a licence being transformed into an individually held access entitlement, the Infrastructure Operator must be able to continue to operate the irrigation scheme with no increased charges from transformation arrangements being passed on to remaining members even where only one member remains in the scheme.

The Proposed approach is to have 3 components forming a Termination fee to be placed on entitlement transformed out of an Off-River Scheme into an individual access entitlement, where the licence holder is no longer using and being charged an access fee associated with his delivery rights. The termination fee would also be charged on the sale of water out of the scheme. The fee would comprise:

1. A dollar valuefee paid to the Infrastructure Operator to mitigate fixed cost expenses into the future, derived from relevant components of the annual access fee (to be invested so as to deliver an annual return adequate to cover the departing member’s portion of these costs)

1. Forfeit to the Infrastructure Operator of a volume of the entitlement being sold out of the scheme, as a ‘conveyance loss fee” to be placed in a Losses Account and to cover the departing member’s previous share of delivery losses each year.

1. An agreed Contribution to Capital Expenditure fee based on each Infrastructure Operator’s agreement with scheme members on capital expenditure, brought back to a Net Present Value amount.

The rest of this submission provides more detail on the above points and then attempts to provide the Macquarie’s context in responding to ACCC’s submission points. However MRFF notes the hypothetical response it has made to many of the ACCC’s questions, given the lack of existence of the facility for members to trade water out of schemes in the Macquarie at present. As discussed again throughout this submission, it is critical that ACCC works with MRFF to clarify and confirm its position on termination fees, so that there is no further delay in the establishment of water market rules specific to Macquarie Infrastructure Operators.

1)INTRODUCTION

Macquarie River Food & Fibre (MRFF) is an organization representing the interests of 600 irrigators in the MacquarieValley, including the interests of riparian irrigators and the individual members of the valley’s 7 irrigation schemes. MRFF promotes triple bottom line sustainability in water use and water policy and advocatesa free and open water trading market, apart from where physical or environmental constraints exist or where there is an externality or third party impact. In the case of externalities it is MRFF’s policy position that any impact would need to be addressed as part of the conditions of the trade on the seller, to ensure no other water users are worse-off as a result of water trading.

MRFF thanks the ACCC for the opportunity to comment on the Water Market Rules Issues paper, but reiterates the concerns raised in the Executive Summary regarding the absence of reference to termination fees by the ACCC and the consequent need for some dialogue between ACCC & MRFF prior to the ACCC’s draft advice being released for public submissions.

MRFF must state that it is dissatisfied with the extremely short timeframe for consultation, especially given the critical impacts that new water market rules will have on Macquarie Infrastructure Operators. Given the little time available, some of our responses refer to the need for further clarification pending professional advice from solicitors and accountants.

The other major concern MRFF reiterates is the extremely prescriptive, micro-management approach ACCC has taken to the many administrative and operational issues related to water market rules in its issues paper. Infrastructure Operators in the Macquariehope that ACCC leaves discretion to each scheme to develop its own approach to addressing many of the more administrative issues raised in this submission.

2)THE MACQUARIEVALLEY OF NSW

The Macquarie-Cudgegong catchment is located in the Central West of NSW with an area of approximately 73,700 square km. While the Macquarie is a regulated system, there is a large proportion of water allocated to environmental flows. The total average annual flow of the Macquarie is 1,448,000ML, with 73% allocated to the environment, 2% to industry and other uses and 25% to irrigation, representing the lowest consumptive use of the Western flowing regulated rivers of NSW. Below is a schematic map of the valley.

3)THE CHARACTERISTICS OF MACQUARIE OFF-RIVER SCHEMES

As discussed in the Executive Summary, the Macquarie Infrastructure Operators are off river schemes and the members of these schemes are also theowner operators, who act in a voluntary capacity on a Scheme board to benefit each member of the scheme. Schemes were built and developed by the owners of the land. Water at this time was legally attached to land and this was one of the main reasons that this investment took place.

It is noted that the ACCC continually refers to the Infrastructure Operator – with the inference that the Operator potentially holds restrictive powers over individuals wanting to trade water out of Schemes. However MRFF makes the point throughout this submission, that in the Macquarie, the Infrastructure Operator effectively refers to the remaining scheme members, who are also individuals who need their water rights and conditions protected.

There are seven schemes in the Macquarie:

• Trangie Nevertire Scheme
• Nevertire Scheme
• Narromine Irrigation Board of Management
• Tenandra Scheme
• Buddah LakeScheme
• Greenhide Scheme
• Marthaguy Scheme

These schemes have a combined entitlement of approximately 275,000 ML (at 100% allocation). These entitlements are gross entitlements and any losses within these schemes are losses to the scheme from the pumping head works, as noted in the Executive Summary and as distinct from the ‘conveyance licence’ approach to losses by southern NSW valley Infrastructure Operators. Losses within these schemes are socialized and divided between members. This is an essential difference between Macquarie Infrastructure Operators and many of the southern Operators therefore it is important that ACCC understands that for a member to terminate with his entire share entitlement from the scheme would have impact on the losses to each remaining member. The proposed rules for termination in the MacquarieValley would allow for the retention by the individual Infrastructure Operator of a proportion of the termination members entitlement to account for losses which are inherent in the scheme operation.

The Macquarie Infrastructure Operators are unincorporated associations, except Narromine which is a Statutory Corporation representing an irrigation area set up as an individual entity. These schemes are legally bound by a deed of constitution and as such are required to abide by the governance already in place on their schemes, which have been operating effectively for many years. As each member is treated fairly in line with this level of governance, there has been a good working relationship and understanding by all parties.

As discussed in the Executive Summary, the Macquarie Scheme Infrastructure Operators, (through MRFF) are developing guidelines for termination fees, with the aim of enabling trade or transformation of shares of the Scheme WAL into individual WAL’s. The need to develop termination fees is based on the principles of:

1)ensuring no externality or third party impacts from the transformation or trade on remaining scheme members; and ultimately

2)to ensure the Macquarie Infrastructure Operators are not faced with stranded assets at some point in the future.

MRFF notes its disappointment that ACCC and other Government agencies have not invested effort into working with irrigation groups such as ours on developing termination fee concepts to ensure efficient and appropriate arrangements to avoid stranded assets. We hope ACCC can address this gap in its Issues Paper through consultation with MRFF and others prior to its Draft Advice.

4)TERMINATION FEES FOR THE MACQAURIE

In the knowledge that there are Scheme members who are interested in transforming their entitlement into an independently held water access entitlement, with a view to sale on the open market, the Macquarie Off-River Schemes, (through MRFF) are progressing towards finalizing a template/formula that could be applied consistently by licence holders in the Macquarie when trading water out of an Off-River Scheme. A consistent formula that is suited to the Macquarie Schemes will ensure equity and transparency of water market rules in the Macquarie for entitlement holders and will ensure the ongoing sustainability of the Schemes. The termination fee formula is being developed within the guidelines set out in the MDBC’s Schedule E Protocol for Access, Exit & Termination fees (29 May 2007).

Impacts of Trade on Remaining Scheme Members if no Termination Fee Exists:

Table 1, below outlines the scenario raised in the Executive Summary, related to impacts on scheme members where no termination fee process is available to Infrastructure Operators.

Table 1: Scenario of Trading out of Off River Schemes with no Fees/Conditions

Scheme A with 10 members / Scheme A with 7 members remaining after 3 trade out / Cost Impact of Trade out of 3 members
Total Scheme Entitlement / 10,000 ML / 7,000 ML
Entitlement per member / 1000 ML / 1000 ML
Delivery Losses – channel seepage & evaporation (20% of Scheme WAL) / 2000 ML / 2000 ML / Total delivery losses remain the same
Water available for use per member / 800 ML
ie a 20% loss / 714 ML
ie: 28% loss / Water available per member decreases by 8% or 86 ML
Total Operation & Maintenance Fee ($5.60/ML across total Scheme WAL) / $56000 / $56000 / Total O&M remains the same
Operation & Maintenance Fee per member / $5600 / $8000 / Increase in O&M per member of
$3,000 or 42%
Capital Expenditure Fee per member ($10/ML across total Scheme WAL) / $10,000 / $14,286 / Increase in Capital expenditure fee per member of $4,286 or 42%

Please note that the numbers in Table 1 are indicative for a relatively small scheme with 10 members, but not actual costs and have been used to demonstrate the impacts of the Scheme’s WAL being reduced without appropriate fees being charged as part of transformation and/or trade arrangements. From Table 1 the externality on remaining members of Schemes is clear with nearly 8% less water available for use and 42% higher O&M and capital expenditure fees for remaining members.

Method for Calculating the Termination Fee

The following table provides an example of MRFF’s Termination Fee concept associated with transforming or trading entitlement away from and Infrastructure Operator. Please note again that the numbers used are indicative but not meant to be final or applicable to each of the Macquarie Infrastructure Operators.

Table 2: Scenario of Applying Fees to Water Transformed from Off-river Scheme into Individual Entitlement