Public Submission to Water Market Rules issues Paper by
Mourquong Co-Operative Rural Society Limited
(Vince DeMaria Secretary/Director)
On 7 May 2008
Mourquong Co-Operative Rural Society is a 48 year old private irrigation co-operative in south western NSW. The Co-Operative has 20 members and provides irrigation water for use in horticultural production. We wish to provide a submission on the following questions in the ACCC issues paper;
Question 3: Are there any other factors that the ACCC should consider when interpreting the water market and trading objectives?
Protection of third parties should be a paramount objective. Remaining irrigators will be impacted by trade out of a system and increased costs may reduce their business viability. Before water was unbundled all irrigators in a system would be confident that their system would be operated as designed and at optimum efficiency to all irrigators. Contraction in demand will increase costs and make the area less viable to farm. An example of this is the number of irrigators that have ceased farming in the Merbein district of the Sunraysia area. As more irrigators sell their water off and cease farming, the remaining irrigators will have less services available in terms of agricultural services, but also social services such as healthcare and education as populations shift. A further problem is that as water is shifted out of irrigation districts, there will be a state of abandonment on remaining land that may lead to issues of noxious weeds, fire hazards, crop disease and pest problems and possibly salinity. Permanent horticultural crops also rely on a significant labour requirement, any reduction in size of traditional irrigation districts will make it less attractive for seasonal workers to visit these areas.
The nature of water being moved to the highest value crops does not take into consideration the cyclical nature of agriculture. What is today’s high value crop may not be worth pursuing in 5 or 10 years. If water is moved out of existing viable irrigation areas to be used on new crops, the current irrigation operators will become unviable and cease business. This will impact on communities and create a merry-go round for water with no security for any industry to develop over a sustained period. Farmers will not want to be part of irrigation delivery systems because of uncertainty and the potential for increased costs if their fellow irrigators leave the system.
Question 4.1: To what extent, and in what circumstances, is it appropriate for an operator to be able to impose restrictions on the parties to whom water can be sold?
It should be appropriate for an irrigation operator to impose restrictions on trade to non-landholders and non-water users as this will limit the likelihood of water barons controlling large licences and manipulating the water market. For example if a large company was to accumulate water licences and push the price of water up by restricting the timing of seasonal water placed on the market this would jeopardize a lot of viable businesses and communities. By allowing a restriction that water be traded within a tight geographical zone and to genuine farmers or water users, then the impact on existing communities and infrastructure will be reduced.
Question 4.2: To what extent, and in what circumstances, is it appropriate for an operator to be able to impose restrictions on the export of water?
Operators should be able to impose restrictions on the export of water to protect the interests and the future interests of their remaining customers. The limitation of permanent trades and the imposition of exit/termination fees should be allowed if they are used to protect the interests of third party irrigators. This is extremely relevant to small irrigation operators as due to the smaller number of irrigators, any permanent trade will have a big impact on the share of fixed costs and system viability. Another factor is that small operators are owned and operated by the member irrigators and often a lot of the running costs are through in-kind work. Due to this, any access fees charged by small irrigation operators do not really reflect the full costs of the service. This in turn has an impact on the termination fees that are allowed to be charged, currently 15 times the access fee. As a result of this, the termination fee to permanently sell water out of a small operator is significantly lower than that to sell out of a large operator. In effect, the small operator is at a disadvantage because they are more efficient or aim to keep their access fees low. The problem that this creates is that the water in these small irrigation operators becomes cheaper for large companies to buy as the termination fees are lower and may increase the rate at which water is traded out. This problem already exists with some real estate agents flagging the fact that certain irrigation operators have lower termination fees. The possibility of charging shadow access fees to reflect voluntary work by members is difficult to calculate and therefore unlikely to be used. A good analogy of the different cost structures of small and large irrigation operators would be to compare the running of the Manangatang Football Club with the Collingwood Football Club. Perhaps a tiered structure of rules may be beneficial as the act does not differentiate between an operator servicing 1000 customers and one servicing 3.
Question 4.4.1: To what extent do irrigators who elect to maintain their delivery entitlement following the sale of their water entitlement present a risk to the revenue security of an operator?
They present a significant risk as it would be difficult and costly for an operator to recover outstanding fees as an unsecured creditor. This would be particularly the case where the irrigator is a company that has no other assets and once the water has been stripped. Even if security was given over the remaining land, this may not be worth anything if it is in a state of abandonment.
Question 4.4.2: To what extent, and in what circumstances, is it appropriate for an operator to require security to be offered as a condition on the transformation and/or trade of water rights? More specifically:
a) What is the impact and significance of operators requiring security in terms of achieving the Basin water market and trading objectives and principles?
Operators would definitely need security once water has been traded off a joint licence. However, the difficulty is that this would create significant administrative costs to the operator and particularly to small operators.
c) What are the implications for operators if they were unable to require security for payment of future access fees as a condition of transformation and/or trade?
The operators would expose their business and remaining customers to significant risk. In the event of non-payment of future access fees, the remaining customers would need to meet the shortfall in meeting the fixed costs. This would be an unfair burden on those remaining and would have a direct impact on their business viability.
d) Are existing legal remedies for the recovery of debts adequate for operators to manage their credit risks?
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Are there impediments that limit an operator’s ability to enforce its contractual arrangements?
No, at present there is little or no risk to the operators as the water is used as security. If the operators had to rely on existing legal remedies, it would be costly and time consuming and would also be at great risk as an unsecured creditor in the event of an insolvency administration. The costs of a legal recovery to a small operator may be prohibitive and limit such action. Further to this the cost of insuring against this form of bad debt may not be a viable option.
f)
Should the amount of any security collateral requested be capped? If so, why and to what extent?
No it should not be capped as the security collateral would need to be sufficient to generate enough annual return to meet the ongoing access fee obligation of the traded water entitlement. Any amount less than this would create a shortfall that will need to be met by the remaining irrigators.
g)Are operators in a position to assess the extent to which particular irrigators represent a credit risk?
It would be difficult for operators to assess the credit risk of individual creditors. Due to the risky nature of agricultural businesses, any risk evaluation would need to be continual and very costly. Small operators may not have the resources or expertise to continually assess the credit risk of irrigators. There may also be scope for fraudulent dealings whereby shell companies are used to strip water from operators and then avoid their ongoing obligations to pay access fees.
Question 4.5: In relation to operators’ administrative fees and charges for processing a transformation and/or trade:
c) Should the water market rules specify that these fees and charges be based on cost recovery?
Yes the fees and charges should be based on cost recovery, but it should be noted that different sized operators will have distinct cost structures. Therefore prescribed fees may not be suitable.
Question 5.1.1: To what extent are operators’ terms and conditions for transformation and/or trade presently:
a) Clearly specified?
b) Comprehensive?
c) Readily available?
This varies significantly between operators, with many smaller operators having fewer prescribed terms and conditions than the larger operators. This may be due to Government regulation, greater necessity, business evolution and the difference in administrative resources.
Question 5.1.2: Should operators’ terms and conditions for transformation and/or trade be comprehensive and clearly specified as part of the supply agreement?
a) What are the implications of not having comprehensive, clearly specified terms and conditions?
The lack of comprehensive and clearly specified terms and conditions has significant implications in light of transformation and trade. A lack of clear terms and conditions exposes small operators and their Directors to legal challenges against their rules and operation. In the past the lack of specified terms may not have been as big an issue because water was not recognized as a tradeable commodity. Small operators will need to adopt comprehensive terms and conditions to reduce the risk of legal challenges against their rules as a result of the significant change in value of water. This process will be onerous on small operators as they will have to seek expert advice and the cost of such advice can only be shared amongst fewer members/irrigators.
c) Should these terms and conditions be open to unilateral variation by the operator? If so, how often and according to what processes?
Yes, the operator should be able to set terms and conditions as need be and as circumstances warrant. Small operators are typically controlled by the irrigators as Directors and members and have established rules for implementing changes. The way water use is evolving in terms of seasonal utilization, leasing and temporary trade will necessitate changes in terms and conditions as new issues arise.
Question 5.5.1: Should requirements be placed on operators in the development and operation of their water registers and water accounts? If so, what should these water registers and water accounts record?
Such a register would be costly to maintain and any error may expose an operator to legal ramifications. Any register needs to be easy to administer or administered by a central body with costs spread evenly. The adoption of NICWER would be a positive step.
Question 5.5.2: Is interoperability and/or compatibility between the water registers and accounts of operators and jurisdictions a significant issue?
Yes and because of this a central register that allows for direct comparison would be beneficial. Timely information would be required similar to a stock exchange system and due to the value of water being traded the system would need to be well scrutinized to prevent fraudulent activity.
Question 5.6: In relation to water market information (i.e. volumes and/or prices of irrigation rights and/or water access entitlements traded within, into and out of their area of operations):
a) Is adequate market information currently available from operators?
No, information varies significantly between operators as they all have different administrative structures. An operator with only a few irrigators does not maintain the same sort of registers and information as a large operator. Even operators of similar size provide different levels of information that is often difficult to compare due to different state rules and water classifications.
c) Should operators be required to provide market information and what should this include?
Operators should not be required to provide market information as this may lead to misleading and incorrect information in the marketplace that may lead to problems. Government agencies should be able to provide consistent and accurate market information in this regard.
Question 6.1.1: To what extent are irrigators that do not hold an individual water access entitlement disadvantaged in terms of access to finance, or the terms and conditions for finance, as a result of this arrangement?
The irrigators may be able to mortgage their shares held in an Irrigation Operator which would hold a joint authority licence. Likewise it is also difficult for an Irrigation Operator to obtain competitive finance if it does not hold an interest in the water entitlement. In this instance if the irrigators are bona fide farmers, they would be reliant upon the successful operation of the irrigation infrastructure to provide them with a reliable source of water for their enterprise.
Question 6.1.2: What processes are undertaken by operators to identify whether an irrigation right has an encumbrance? Have there been instances where this process has not been effective?
Operators maintain a register of interested parties and receive notices of such interest.
Question 7.1.1: To what extent should the water market rules apply to all operators to the same degree?
It would be unfair to apply the same rules to all operators as this would put a significant burden on small operators and increase their costs on a disproportionate basis. Due to the smaller customer base and limited administrative resources small operators would not be able to comply.
a) Should any distinctions between classes of operators be based on the number of customers serviced, the volume of entitlements or another characteristic of the operator?
Yes there should be a distinction between classes of operators based on the number of customers serviced. The burden of complying with the rules and reporting requirements will be significantly different for large water corporations as compared to small co-ops with ten members.
Question 7.1.2: Is there merit in a delayed application of the water market rules for specific classes of operators? If so, on what basis should operators be classified?
Yes there should be a delayed application for specific classes of operators. Operators should be classified primarily on the basis of the number of customers that they service. The added cost of administrative compliance should also be viewed as a portion of an operators existing cost structure to determine the extent of the financial burden on specific classes of operators.