Chapter 3 - Progress

This chapter discusses the progress of water reform in the 10-year period since the National Water Initiative (NWI) was agreed by Australian governments in June 20043. Water reform efforts by jurisdictions have been robust and most areas under the NWI are substantially progressed. Continued reform efforts are required to ensure NWI-consistent, fit-for-purpose water planning that supports economic, environmental and social outcomes.

Sections 3.1 to 3.5 assess progress against the agreed implementation actions of the NWI and subsequent reform actions required by the Water Act 2007 (Cwth), as below:

3.1 Water access entitlements and planning

3.2 Water markets and trading

3.3 Best practice water pricing and institutional arrangements

3.4 Water for environmental and other public benefit outcomes

3.5 Water resource accounting

Section 3.6 focuses on the progress of reform in the Murray–Darling Basin and Section 3.7 discusses urban water reform.

A more detailed examination of jurisdictional action against NWI commitments can be found in Appendix C.

3.1 Water access entitlements and planning

The NWI establishes a framework for a nationally compatible approach to water access entitlements and statutory-based water planning processes. This section focuses on progress made in the following areas:

  • water access entitlements
  • water planning
  • environmental and other public benefit outcomes
  • addressing overallocated and overused systems
  • assigning risks for changes in allocation
  • Indigenous access
  • managing water-intercepting activities
  • integrating surface water and groundwater management
  • water use impacts of mining and unconventional gas.

3.1.1 Water access entitlements

Under the NWI, statutory water entitlements establish a property right to water which is a share of the available resource. Entitlements, as outlined in the NWI, should be exclusive, unbundled from land, mortgageable, tradeable, and defined as a perpetual or long-term right to a share of the water available for consumption in a given system4. Entitlements are intended to deliver investment confidence and security for the environment and consumptive users. Legislation required to create secure, NWI-consistent water access entitlements has been enacted in the Australian Capital Territory, New South Wales, Queensland, South Australia, Tasmania, and Victoria (NWC 2011a).

There has been ongoing but incremental legislative improvement against NWI commitments. For example, Queensland has recently amended its legislation to extend the expiry date of existing licences and new licences to 30 June 2111 (unless otherwise specified in a water resource plan or a resource operations plan). This effectively creates perpetual entitlements in line with NWI requirements.

Varied interpretations of NWI requirements have led to alternative water rights arrangements for extractive industries in some cases. Water entitlements are not required for petroleum operations in Queensland or for mining and petroleum operations in the Northern Territory. There is a risk that these alternative arrangements may undermine parallel NWI-consistent arrangements for other sectors by reducing transparency and eroding confidence in the capacity of water entitlement and planning systems to effectively manage water for all users. This issue is further explored in Section 3.1.9.

With regard to bulk water entitlements, concerns remain over the degree to which shares of bulk entitlement held by Irrigation Infrastructure Operators (IIOs) are mortgageable. The establishment of water market rules developed by the Australian Competition and Consumer Commission (ACCC) under the Water Act 2007 (Cwth) to improve transformation of shares into entitlements in a cost effective and efficient manner is intended to address these concerns.

Unbundling of water entitlements from land has mainly occurred in regulated river systems, with the exception of New South Wales which has also unbundled entitlement arrangements for groundwater systems covered by water sharing plans, and Queensland, where there is provision to unbundle groundwater in two water resource plans subject to resource operation plan amendments. Groundwater trading has been established in the Condamine through its declaration as a groundwater management area.

Unbundling of water entitlements—both from land title and into tradeable water and delivery share components—has provided flexibility for entitlement holders in the way they manage water assets. This includes the ability to manage entitlements to deal with variability in a water resource and accessing the full value of an entitlement. An unbundled water share becomes an asset which can be mortgaged, providing the ability to leverage an entitlement in a similar manner to any other property right.

Unbundling entitlements has progressed slowly since 2011 as governments continue to consider the merits of entitlement options. While recognising there are some catchments and aquifers in which the level of current use is so low that unbundling is not cost effective at this time, the Commission has observed:

  • Surface water rights in regulated systems are generally unbundled from land, although only Victoria, New South Wales and Queensland have water rights unbundled into tradeable and delivery components.
  • South Australian entitlements are unbundled from land, but South Australia's Implementation of the Unbundling Water Rights policy, which applies to unbundling the entitlement into its functional components, is yet to be applied outside of the River Murray prescribed water course. The policy proposes unbundling in each water plan area on a case-by-case basis at the point of water plan review, and reviews have not yet occurred.
  • While the Northern Territory's Water Act 1992 provides for statutory water licences that are a share of the consumptive pool, they are only issued at the point of extraction (bore or river pump) and are usually issued for only 10 years at a time although they can be renewed. In October 2013, the Northern Territory announced the development of a new blueprint for water resource management, which includes a review of the Northern Territory's Water Act5.
  • Under Western Australia's Rights in Water and Irrigation Act 1914 entitlements are restricted to 10 years and water take requires legal access to land. In September 2013, Western Australia released the position paper Securing Western Australia's water future (DoW 2013a). The reform framework outlined will transition existing administrative plans to statutory allocation plans and unbundle entitlements, although provision is made for some licensing arrangements to be retained.

While the cost effectiveness of unbundling entitlements is clearly a consideration in smaller systems, or those with minimal consumptive use, unbundling has not occurred for all areas of high use. In particular, this is the case for entitlements to groundwater and some unregulated surface water systems.

The Commission welcomes the work undertaken by the Northern Territory and Western Australia to develop their respective policies. Business and economic benefits will be constrained until such proposals are formally adopted and recognised through legislative processes and subsequently implemented.

3.1.2 Water planning

All Australian governments have demonstrated a long-term commitment to water planning and each jurisdiction has developed its own framework, reflecting different priorities and challenges across the country. Water legislation in all jurisdictions prescribes a process for developing water planning instruments, with the exception of Western Australia. In Western Australia a water reform process has begun which, if implemented, will enable legislatively based water planning arrangements.

NWI parties agreed to consider the necessity of water plans for different areas and also to include a set of key elements within their water planning and entitlement frameworks6. Broadly NWI-consistent water planning arrangements have been put in place for the main areas of intensive water use across Australia and most jurisdictions have more than 80 per cent of water use managed under water plans (NWC 2014a). While some remaining areas need to be addressed as a matter of priority7, relatively few areas that experience intensive use of water lack adequate water planning arrangements.

Figure 2: National map of water planning areas included in the National Water Planning Report Card 2013

Figure 2: National map of water planning areas included in the National Water Planning Report Card 2013

Source: NWC 2014a

In most cases, the legislation governing water planning requires community engagement, the transparent development of water management arrangements and water plans that incorporate the best available information. Water plans draw on community input, socio-economic analysis and scientific information to establish the size of the consumptive pool and rules for extractive and environmental use. Importantly, water plans articulate the trade-off decisions made between economic, social and environmental values. Hydrological, environmental, social and economic assessments are now undertaken routinely at the plan development stage to inform water planning arrangements. Likewise, engagement processes ensure stakeholders have the opportunity to provide informed input to planning arrangements, and this is considered in the development and review of planning objectives and arrangements to meet those objectives.

More recent water plans generally contain clearer and more measurable objectives and there has been a marked improvement in our knowledge of water system function and response (NWC 2013a). However, monitoring, evaluation and reporting on progress in achieving stated social, cultural and environmental water planning objectives are rarely done well in practice – which can result in lost opportunities to improve water management (NWC 2013a). As a result, the transparency of decision-making in the prioritisation process for adaptively managing water planning arrangements has not been clear for most jurisdictions.

Water planning is not a static one-off process; it relies on scheduled reviews to be adaptive and relevant. An issue noted for the second and subsequent iterations of water plans is delays to reviews specified in legislation or the plan itself. Many jurisdictions have plans which have not been reviewed despite being many years past their original intended life (NWC 2014a). The resource requirements for the development, implementation and review of water plans can be a limiting factor and a cause for delay. Recent and proposed legislative changes in several jurisdictions are intended to streamline water planning arrangements and reduce the costs involved.

Changes to legislation in Queensland allow greater ministerial discretion to simplify water resource plan development processes, increase the plan reporting interval from annual to five-yearly, extend the life of plans from 10 to up to 20 years and exempt certain forms of take from requiring an entitlement. South Australia's Natural Resources Management (Review) Amendment Act 2013 (SA) increased the maximum review period of water plans from five to 10 years. Victoria has reviewed the Water Act 1989 (Vic) and the Water Industry Act 1994 (Vic) with a view to reducing duplication and streamlining management. In Western Australia the Department of Water has shifted to internal annual evaluations and will only publish evaluation statements on plan performance every three years unless a significant change in water availability or management arrangements occurs.

These changes will require plans to be designed with adaptable management using sound monitoring arrangements and the use of review triggers to ensure that changing circumstances do not produce adverse outcomes under outdated management arrangements.

3.1.3 Environmental and other public benefit outcomes

The NWI established the environment as a water user that should be granted access to water and have at least the same level of security as other users, including consumptive users. This section describes the water entitlement and planning arrangements that provide water for the environment. Further information about environmental water in water markets is in Section 3.2, and the management and use of environmental water is discussed in Section 3.4.

Water for the environment is provided through a mix of rules—based and held planning arrangements. Rules—based provisions constrain the volume and timing of water extractions and are specified in water plans, or set as conditions on water access entitlements. Held environmental water is available as a water access right, a water delivery right or an irrigation right for the purpose of achieving environmental outcomes. Jurisdictions use different terminology to describe these provisions. For example, in New South Wales held environmental water is termed adaptive environmental water. This assessment attempts to use terminology consistent with national usage, but maintains the terminology used by a jurisdiction in discussion.

Under the NWI, water sources and dependent ecosystems are identified and protected through environmental objectives in water planning arrangements and the implementation of arrangements to meet those objectives, including the timing and volume of environmental flows. The NWI also requires that environmental water entitlements have at least the same level of security as those for consumptive purposes.

The security of environmental water has improved under the NWI, demonstrated by rules in water plans, the creation of environmental entitlements with the same level of security as that for most consumptive purposes and through the recovery of substantial quantities of water for the environment.

Within the Murray–Darling Basin, the Basin plan sets new long-term average diversion limits called Sustainable Diversion Limits (SDLs), which in most cases increase the water to be made available for environmental purposes. The Basin plan requires jurisdictional water plans to identify planned environmental water and associated rules and arrangements relating to that water, as well as to establish and maintain a register of held environment water. Annual environmental watering priorities for each jurisdiction consistent with the Basin plan have been identified since the start of the 2013–14 water year, with long-term watering plans due to be developed by November 2015. Further detail is provided in Section 3.4.

Outside the Murray–Darling Basin, there has also been progress towards articulating clear and measurable environmental objectives, supported by water planning arrangements. But monitoring, evaluation and reporting against these objectives is often insufficient or poorly targeted, hindering effective assessment of whether these objectives are being achieved.

3.1.4 Addressing overallocated and overused systems

Parties to the NWI agreed to return systems identified in National Competition Council-endorsed implementation programs to sustainable levels by 2005. It was also agreed that any other systems found to be overallocated and/or overused would be addressed in accordance with the relevant water plan to determine the precise pathways by which those systems would be adjusted to address the overallocation or overuse, and meet the environmental and other public benefit outcomes8.

In both the 2009 and 2011 assessments, the Commission found that this commitment had not been fully achieved and that many NWI parties remained reluctant to identify overuse or overallocation explicitly. In addition, the mechanisms used to manage systems that appeared to be at or above full allocation were often short term and put at risk the capacity to manage change into the future.

The Commission again notes that while all jurisdictions have made progress in the implementation of water plans that identify extraction limits, relatively few plans clearly identify overallocation or overuse. In systems identified as overallocated or overused, pathways to recovery have been established and there is evidence of extraction returning to more sustainable levels (NWC 2013b). However, in some areas the pathways have remained at the formative stage, and delays of several years have occurred in implementing identified reductions. There are also a small number of cases with clear evidence of overuse that are without specific planning or management arrangements.

The finalisation of the Basin plan has made the sustainable levels of extraction within the Murray–Darling Basin clearer, as well as the intended timeframes for achieving reductions in water use where required. The implementation of the Basin plan's SDLs will limit all surface water and groundwater use in the Murray–Darling Basin to environmentally sustainable levels, with the enforceable SDLs taking effect from 1 July 2019. Several Murray–Darling Basin catchments have been among the most overallocated systems in Australia, and these will now have strong pathways to sustainable levels of extraction to be implemented by 2019.

At the individual jurisdiction level, in some overallocated systems (e.g. the Gnangara groundwater areas allocation plan area and Lower Gascoyne in Western Australia), progress has been made in closing the gap between entitlement volumes and actual use levels by reducing sleeper or dozer entitlements (i.e. entitlements that are not used or are underused). South Australia has also made progress in reducing potential overallocation through the conversion of area-based to volumetric entitlements by assuming efficient levels of water use to determine the volumetric entitlement.

In New South Wales, several intensively used groundwater systems where overuse was identified have seen progress in establishing pathways that implement water recovery mechanisms through water plans (e.g. Upper and Lower Namoi, Lower Macquarie, Lower Lachlan, Lower Murray, Lower Gwydir and Lower Murrumbidgee). These mechanisms include the reduction of entitlements over a 10-year period supported by a $135 million joint program of the New South Wales and Australian governments, Achieving Sustainable Groundwater Entitlements, which offers financial assistance to eligible licence holders to help them adjust to the changes.

In Western Australia provisions under Statewide Policy No. 11 (DoW 2013b) have been applied (e.g. in the Lower Gascoyne) and progress is being made in reducing overallocation in some areas by bringing entitlement levels closer to usage levels.

Arrangements outside existing water plan processes, such as government infrastructure or compensation programs, have often been used to achieve more acceptable social and economic outcomes than would otherwise result from reduced consumptive use. Timeframes have been determined by the level and timing of available government funding and the willingness of water users to sell their water entitlements.

3.1.5 Assigning risks for changes in allocation

The NWI requires risks arising from changes to the consumptive pool other than those identified for the purpose of addressing known overallocation and/or overuse to be clearly assigned. The NWI allows for jurisdictions to adopt a specified NWI framework or an agreed alternative risk-sharing formula.

The NWI framework assigns risk between users and the government for reductions in water availability resulting from a range of circumstances, such as climate change and variability, bushfire, new knowledge and policy change. The risk assignment framework was important in gaining the irrigation sector's support for the NWI in 2004.

The framework was intended to apply in a context where the share-based water access entitlements framework had been established, water plans had been transparently developed, regular reporting of progress implementing plans was occurring and a pathway for dealing with known overallocation and/or overuse had been agreed. Under the NWI the risks of any reduction or less reliable water allocation under a water access entitlement, arising as a result of bona fide improvements in the knowledge of water systems' capacity to sustain particular extraction levels, were to be borne by users and the framework to establish these arrangements was to be in place by 2014. Risks arising under comprehensive water plans commencing or renewed after 2014 were to be shared over each 10-year period according to a prescribed formula.

While all jurisdictions have arrangements in place to deal with reduced water availability, adoption of the specific NWI framework has been minimal, limited to Queensland and New South Wales. This is perhaps because it is considered to be difficult to interpret and apply, and jurisdictions have generally reached other arrangements. Some jurisdictions seek to enable water users to manage risk through flexible market arrangements, such as the use of carryover or temporary trade, rather than through specific risk assignment. In the largest of the government water recovery efforts—under the Murray–Darling Basin Plan arrangements—the Commonwealth has accepted risk obligations resulting from reductions or changes in reliability based on the difference between the 2009 baseline diversion limits and the SDLs, which will come into effect from 2019.

The risk assignment framework was intended to ensure water access entitlements established through transparent processes were respected and could not be arbitrarily eroded to any significant extent without compensation, while also recognising that agribusiness is subject to a range of natural and climatic risks that are a normal part of doing business in that sector. The Commission considers that the poor uptake of the NWI framework is unlikely to change but that the alternative mechanisms which have been agreed are largely delivering the intended outcome for irrigators. A watch point is ensuring that water users outside of the Murray–Darling Basin do not receive less equitable arrangements with respect to risk compared with those within the principal area of Commonwealth investment.

3.1.6 Indigenous access

Before the NWI was established, Indigenous access to water resources was hindered by a lack of culturally appropriate mechanisms for Indigenous people to actively participate in water planning and management processes. Governments agreed that NWI-consistent water planning frameworks would provide for Indigenous access to water resources through Indigenous representation in water planning processes; water planning arrangements which included Indigenous social, spiritual and customary objectives; and strategies to achieve these.

Most jurisdictions have improved the amount and quality of consultations with Indigenous communities in water planning and management, but have generally failed to incorporate effective strategies for achieving Indigenous objectives in water planning arrangements. While recognition of Indigenous cultural values and associated water requirements has progressed, implementation of practical change remains variable, with most jurisdictions as yet not making specific provision for water access for Indigenous people.

In New South Wales, cultural access licences and the Aboriginal Water Initiative aim to ensure that Indigenous cultural and economic requirements are identified and built into water planning processes. The Basin plan provides for water planners and environmental water managers to have regard to Indigenous values and uses, and water resource plans must take into account the views of Indigenous people concerning cultural flows. Several Queensland water resource plans also include Indigenous water reserves, signalling the intent to provide for future Indigenous water use.

The development of a module on Indigenous engagement in water planning and management to supplement the NWI National Water Planning and Management Guidelines is due for completion in 2014. The module is intended to help jurisdictions develop and implement NWI—consistent water planning and management practices that support Indigenous social, spiritual and customary objectives.

In 2007 Murray Lower Darling Rivers Indigenous Nations (MLDRIN) developed a definition of cultural flows, which was later endorsed by the Northern Basin Aboriginal Nations (NBAN). A National Cultural Flows Research Project has been established which aims to 'secure a future where Indigenous water allocations are embedded within Australia's water planning and management regimes'. The project draws on scientific research methodologies and cultural knowledge to:

  • provide a greater understanding of Indigenous values relating to water and other natural resources
  • provide Aboriginal people with information to ensure that Aboriginal water requirements and preferences are reflected in water planning and management policy
  • inform the development of new governance approaches to water management that incorporate aspects of Aboriginal governance and capacity building.

The project is supported by the NBAN, MLDRIN, the North Australian Indigenous Land and Sea Management Alliance (NAILSMA) and National Native Title Council, as well as the Commission and the Murray–Darling Basin Authority (MDBA).

Leadership on Indigenous water issues by bodies such as the Indigenous Water Advisory Committee, the former First People's Water Engagement Council and organisations including MLDRIN, NBAN and NAILSMA has been important to facilitate the inclusion of Indigenous interests into national and state water policy frameworks.

Until its conclusion in 2012, the First Peoples' Water Engagement Council provided advice on national Indigenous water issues to the Commission. The Indigenous Water Advisory Committee, established in 2012, provided advice on Indigenous water issues to the federal Department of the Environment, but was abolished on 30 June 2014. In this context continued and renewed support for Indigenous representation in water planning and management decisions is important so that Indigenous voices can continue to be heard in the national water debate.

Case study 1

Aboriginal Water Initiative

The Aboriginal Water Initiative (AWI) program is an important partnership between the New South Wales Government and Aboriginal communities to progress the incorporation of Aboriginal water needs in water planning and management processes. The AWI will establish monitoring arrangements to determine the success of water sharing plans in meeting Aboriginal-specific statutory requirements. These include the provision of water for native title rights and recognising the spiritual, social, customary and economic values of water to Aboriginal people.

The AWI commenced in 2012 and is being undertaken by the New South Wales Office of Water. It has received Australian Government funding of $1.69 million per year for four years. Building on Aboriginal community consultation that the New South Wales Government has conducted since 2011, a key objective of the AWI is to ensure ongoing and effective statewide and regional engagement with Aboriginal communities in the development and implementation of water sharing plans. The program also aims to ensure that measurable Aboriginal water outcomes for both environmental and commercial use are achieved and appropriately reported under water planning processes.

Aboriginal communities play a crucial role in providing the knowledge required by the Water Management Act 2000 (NSW) to monitor and review water sharing plans and this information will be collated in the Aboriginal Water Initiative System (AWIS) database. The database builds on previous work undertaken by the New South Wales Government to gather information on water-dependent cultural values and will make a valuable contribution to state water planning processes. This information is directly relevant to Aboriginal water access licences for cultural purposes, water for economic development of communities and rules to protect Aboriginal water-dependent cultural values. To respect Aboriginal customs, the data are appropriately secured through login protection and restricted access.

The AWI seeks to improve the cultural understanding of New South Wales Office of Water staff and develop the capacity of its Aboriginal staff. It also aims to consolidate business between the New South Wales Government and Aboriginal communities to underpin consistent points of engagement and identify clear Aboriginal water-specific environmental, social, cultural and economic opportunities and priorities for inclusion in water sharing plans, and to report on these objectives.Our Water Our Country by Worimi Artist Krystal Hurst commissioned for the NSW Office of Water

Our Water Our Country by Worimi Artist Krystal Hurst commissioned for the NSW Office of Water and reproduced with permission from the Aboriginal Water Initiative.

3.1.7 Managing water—intercepting activities

Changing land use has the potential to intercept significant volumes of surface water and/or groundwater. Under the NWI, jurisdictions agreed to plan for and regulate interception activities to maintain the integrity of water access entitlements and achieve environmental objectives for water systems.

While progress has been made in interception management across Australia, no state or territory has fully implemented interception arrangements that meet the requirements of paragraph 57 of the NWI. This is partially attributable to the prescriptive nature of the paragraph, which requires considerable effort to assess and manage interception in all catchments.

Interception management should be fit-for-purpose. If the risks to a water resource are assessed as low, the monitoring of risk level is likely to be sufficient. However, the management of interception activities in catchments which are assessed as overallocated, fully allocated, or approaching full allocation should be comprehensively implemented where interception has been identified as significant. Progress in this has been slow in many jurisdictions and the aggregate impacts of various intercepting activities on a catchment are not always accounted for.

Progress in interception management can be seen through advancements in planning and regulation. There is a broad acceptance of the need to manage intercepting activities, demonstrated in water plans that contain provisions for the management of significant interception or provide for plan amendment if interception becomes significant. Thresholds are gradually being introduced, although they are not always specific and their hydrological basis can be unclear.

Where such arrangements are in place, monitoring of interception activities is generally not comprehensive, even for systems that are identified as fully allocated, overallocated or approaching full allocation. One example of assessments included at the planning stage is in Western Australia, where a surface water and groundwater modelling system—the Planning and Allocation Tool—is used to incorporate interception by farm dams into setting allocation limits for catchments in the state's south-west. Diversions and interception scenarios are modelled to support planning and assess how the reliability of supply for existing and future users will be affected under different scenarios.

South Australia has made substantial progress in implementing clearly defined, secure and tradeable water licenses for plantation forestry. Interception by plantation forestry is being progressively regulated through the water allocation framework and will be subject to use limits and provisions in relevant plan areas through the requirement for declared plantation forestry operations to obtain a water access entitlement. This can be seen in the Lower Limestone Coast and the Eastern and Western Mt Lofty Ranges water allocation plans which were adopted in 2013.

In New South Wales, the 2012 Aquifer Interference Policy uses the criterion 'minimal impact considerations' to assess aquifer interference projects and determine their potential impacts on water resources. The assessment includes consideration of the potential impacts on connected systems, water-dependent assets and groundwater-dependent culturally significant sites. The impacts of individual activities and cumulative impacts are considered.

In Queensland, floodplain harvesting is the most developed form of interception management in the state, and storages generally require a water licence and development permit if they are over a threshold volume specified in the relevant water resource plan.

3.1.8 Integrating surface water and groundwater management

There has been substantial progress towards aligning groundwater and surface water management since 2004, despite management arrangements still being effectively separate in most areas. Improvements have been driven by a growing public awareness of groundwater and its importance during the Millennium Drought; steady advances in groundwater information, research and conceptualisation; legislative or policy changes in most jurisdictions; and investment by the Australian Government.

Since 2004, major improvements to foundational information requirements for better groundwater management have included:

  • a better understanding of connectivity mechanisms and the science of hydraulically connected systems through published research. Examples include investigations into novel measurement methods for groundwater/surface water exchange and advances in geophysical techniques for groundwater exploration and characterisation
  • a National Groundwater Information System (NGIS), developed by NWI parties in partnership with the Commission and the Bureau of Meteorology (BoM), which provides access to nationally consistent groundwater information for all states and territories
  • the National Aquifer Framework which supports the NGIS by standardising hydrologic units throughout Australia for national consistency – important because groundwater systems often span jurisdictional boundaries
  • the National Atlas of Groundwater-Dependent Ecosystems (the Atlas), completed in 2012, which is a tool to support consideration of ecosystem groundwater requirements in natural resource management, including water planning and environmental impact assessment. The Atlas represents substantial progress in mapping groundwater-dependent ecosystems but progress in determining their water requirements remains a priority.
  • several national standards, guidelines and frameworks that provide nationally consistent and sound references for groundwater-related activities, such as the Australian Groundwater Modelling Guidelines, the revised Minimum Construction Requirements for Water Bores in Australia and the National Framework for Integrated Management of Connected Groundwater and Surface Water Systems.

Water planning arrangements in most states have enlarged the areas within which groundwater/surface water interactions are accounted for. The sophistication of water plans has also improved in recent years, with an increasing number of mechanisms employed to prevent cross impacts from occurring, and manage impacts if they do occur. There are several recent examples, particularly in Queensland, Western Australia, New South Wales and South Australia, of water plans that limit groundwater extraction explicitly to ensure minimum flow requirements are maintained in connected surface water systems. In Western Australia, where groundwater is a major source of water supply, groundwater-to-groundwater connectivity between aquifers is also a significant consideration in establishing appropriate allocation limits and monitoring impacts.

On an individual user or enterprise level, users holding both groundwater and surface water entitlements generally manage both parts of the resource together to maximise individual benefits, such as using whichever source has least pumping costs in times of plenty or has higher availability in dry times. This represents 'unplanned conjunctive use' which may not take into account cross impacts between groundwater and surface water or third-party impacts. Behavioural and water use drivers are limited to the individual's benefit rather than the whole-of-system level. In contrast, 'planned conjunctive management' takes account of the whole system and aims to manage cross impacts between groundwater and surface water resources, third-party impacts and potential impacts on groundwater-dependent ecosystems or rivers. Planned conjunctive management can and should allow individuals to optimise their use, and can involve setting extraction limits on both surface water and groundwater resources that account for cross impacts and provide mechanisms to link groundwater and surface water take. This can be achieved either through an integrated water plan or through linked groundwater and surface water plans, where management at the whole-of-system level optimises productivity, equity and environmental sustainability.

While the number of water plans that recognise connectivity between groundwater and surface water is increasing, the number of plans that fully integrate groundwater and surface water resource management remains relatively small. Additionally, the uptake of new policies or new information depends on water plan review timeframes in each jurisdiction. In most jurisdictions, there is currently a significant uptake lag.

Case study 2

Water management in the Werribee Irrigation District

The Werribee Irrigation District is an important vegetable—growing area on the western fringe of metropolitan Melbourne. Using water from the Werribee River, the aquifer below and a recycled water scheme, more than 400 growers produce lettuces, broccoli, cabbages and many other vegetables for local consumption and export.

The Werribee Irrigation District benefits from one of the largest recycled water schemes in Australia. The scheme was designed to help overcome drought—related water shortages and to secure water for greater production in the future. Growers received the first deliveries of recycled water under the scheme in January 2005. Southern Rural Water delivers the recycled water (supplied by Melbourne Water) to participating growers through its existing irrigation channels and pipelines (Southern Rural Water 2014). The recycled water is treated through the standard wastewater treatment system and two additional disinfection systems – chlorination and ultraviolet light. The Victorian Department of Health has classified the Class A recycled water as safe for irrigation of food crops, including those eaten raw.

Melbourne Water is working to reduce the salinity of the recycled water, which at present needs to be mixed with water from the Werribee River. Water is also available from coastal aquifers, which supply about 10 per cent of demand towards the end of summer when surface water availability is lower. This situation creates a risk of vulnerability to seawater intrusion in the dry times at the end of the season, so more reliable, alternative surface water supply (i.e. recycled water) allows better management of the groundwater system to manage the risk of seawater intrusion.

The scheme also delivers an efficiency benefit: the recycled water used in this scheme would otherwise be discharged into Port Phillip Bay.

The scheme at least partially contributes to each of the major water management objectives that integrating groundwater and surface water can hope to achieve. It improves security of supply by providing an additional constant-volume source, maintains water quality by mixing water from different sources, manages groundwater drawdown and seawater intrusion (which manifest as third-party impacts), conserves resources and improves efficiency by minimising waste outfall, and allows groundwater of a suitable quality to be available when it is needed most.

Location map – Werribee Irrigation District, Victoria Source: Southern Rural Water website: www.srw.com.au (accessed 21 August 2014)

3.1.9 Water use impacts of mining and unconventional gas

The nature of the water extraction requirements of the mining, petroleum and unconventional gas sectors—particularly for mine dewatering and depressurisation of coal seams—can lead to difficulties in predicting takes and managing impacts. While paragraph 34 of the NWI recognises flexible management arrangements may be required to deal with the specific circumstances of mineral and petroleum sectors, the Commission has previously called for the integration of mining into NWI-consistent water planning and entitlement arrangements to ensure that impacts on water resources, including cumulative impacts, are explicitly addressed (NWC 2011a). Different interpretations of paragraph 34 in various jurisdictions have, in some cases, resulted in water assessment, allocation and management for these industries which are inconsistent with NWI principles.

Since 2004, water reform in the minerals and petroleum sectors has led to improved management of water resources overall. Some jurisdictions have integrated the minerals and unconventional gas sectors' water use and management into water planning and entitlement frameworks, although legislative and regulatory barriers remain.

Mining operations are legislatively required to obtain a water access entitlement or a licence to take water in all jurisdictions, except the Northern Territory. In the Northern Territory mining operations continue to be exempt from water licence and permits provisions under Section 7 of the Water Act 1992 (NT). A 2003 memorandum of understanding seeks to clarify the operational relationship between relevant agencies with the aim of ensuring water resource usage for mining purposes does not impinge on existing allocations for other uses and vice versa. However, this document does not require mining and petroleum proponents to obtain water entitlements or transparently account for water take within water plans.

The Commission considers that this agreement does not replace the need for transparent accounting for extractive industries through requirements to obtain water entitlements, which should be explicitly accounted for within statutory water plans.

Where there is the potential for significant impacts, project and water use assessment and approvals for coal seam gas (CSG) and large coal mining operations are now done on a state and Commonwealth level. Additional legislative and policy arrangements have been developed to identify and manage impacts to other users and the environment, on an ongoing basis.

In Queensland, where most CSG mining occurs, amendments to the Water Act 2000 (Qld) were made in 2010 to manage CSG impacts on water resources using 'make good' arrangements for affected bore owners and monitoring and impact management strategies for springs. However, 'underground water rights' that are provided for tenure holders under the Petroleum and Gas (Production and Safety) Act 2004 (Qld) are not volumetrically controlled and remain outside Queensland's water planning and entitlement processes. The Regional Planning Interests Regulation 2014 requires proposed CSG and other mining activities to have a strategy for the net replenishment of regionally significant water sources before they are approved, however at present this applies only to the Condamine Alluvium area.

Conversely, arrangements for the industry in New South Wales are NWI-consistent: minerals and unconventional gas operations are required to hold a volumetric licence for any water taken, regardless of its quality unless an exemption applies. Where systems are fully allocated, licences must be obtained through the market. New South Wales' Aquifer Interference Policy (2012) sets out a system of triggers for watertables and groundwater pressures. Where triggers are exceeded, additional studies, contingency plans and 'make good' arrangements are required.

Case study 3

Excess water solutions at Marandoo mine

Marandoo iron ore mine is located 45 km east of Tom Price in Western Australia's Pilbara region, adjacent to Karijini National Park. Commissioned in 1994, the mine is operated by Rio Tinto under a state agreement. The area will revert to national park after mining ceases.

In July 2010, following environmental impact studies, the Western Australian Minister for Environment gave approval for mining below the watertable with mining operations allowed to 2030. Hydrogeological modelling shows peak initial dewatering volumes to be about 100 ML/day, falling to 80 ML/day towards the end of the mine's life. An average of more than 80 ML/day is surplus to mine requirements. This meant that large volumes of good quality water required disposal.

Challenges

Historically, excess water from dewatering in the Pilbara was regarded as a by-product to be disposed of through discharge to surface water systems. In the case of the Marandoo mine, its sensitive location and the ephemeral nature of surface water flows means that surface water discharge is increasingly viewed as inappropriate by environmental regulators.

Further, uncertainty existed about the ability to adequately use surplus water as a beneficial use under the Rights in Water and Irrigation Act 1914 (WA) and the Mining Act 1978 (WA). The final scheme design also required approvals outside traditional mine management frameworks; for example, pastoral diversification permits and drinking water source protection plans.

Solution

Rio Tinto investigated numerous disposal options. Because of the proximity of both Tom Price town and Rio Tinto's Hamersley Pastoral Station, the following integrated surplus water management scheme resulted in:

  • supply to the mine operations up to 7 ML/day
  • supply to Tom Price town and Tom Price mining operations—replacing water currently taken from the Southern Fortescue borefield—of up to 18 ML/day. This allows the Southern Fortescue borefield aquifer to replenish naturally, although the option to reinject with surplus water is available should supply and demand circumstances on the system require it
  • supplying water to the Hamersley Agricultural Project (HAP) growing hay and oats from 40 ML/day in winter to 120 ML/day in summer
  • contingency discharge into a nearby creek.

Under the scheme, Tom Price town and mine are prioritised for water, with remaining water available to the HAP. This provides the flexibility needed to respond to supply variability and ensure the mine plan.

Benefits

The dewatering of the mine enables safe operation and avoids discharge to the environment in a naturally ephemeral surface water system. The value of the resource is maximised through a range of beneficial uses. Supply to Tom Price town and mine, takes pressure off the Southern Fortescue borefield, which had been drawn down by up to 40 meters after 40 years of continuous use as the previous water supply. The water provided for fodder production at the HAP also supports the region's pastoral industry. The Western Australian Department of Water has since developed Strategic Policy 2.09: Use of mine dewatering surplus policy to clarify that surplus mine dewater can be used for beneficial and third party use, except where specific state agreements expressly prevent it.location-map-marandoo-mine-wa

Location map — Marandoo mine in Western Australia

In South Australia, under the Natural Resources Management Act 2004 (SA), water allocation plans may be tailored to provide for unconventional gas and other unique circumstances, such as the ability to allocate additional water resources that may not already be accounted for within the plan's extraction limits. Volumetric constraints are not necessarily applied to unconventional gas operations, for example the Lower Limestone Coast plan has no volumetric limit on extraction for petroleum purposes.

Consistent with the NWI principles of efficient water use, jurisdictions have also implemented policies to enable beneficial use of co-produced water from CSG operations and excess water produced from mine dewatering. Queensland's Coal Seam Gas Water Management Policy (2012) prioritises, where feasible, the beneficial use of co-produced water by promoting supply to existing water resources, for example injection into deep aquifers, or supply to new water-dependent industries such as supplementary water for existing irrigation schemes. If other management options are not suitable, then co-produced water must be treated and disposed of in a manner that avoids or mitigates impacts to the environment. Recent water plans in Queensland have started to include beneficial use of co-produced water.

Western Australia has developed Strategic Policy 2.09: Use of mine dewatering surplus (DoW 2013b) to promote the appropriate use of dewatering surplus from mining operations for other purposes. Western Australia has also developed the Western Australian water in mining guideline, which aims to facilitate the licensing of mine proposals and ensure alignment with other approvals processes.

Water management is primarily a state and territory responsibility; however, ongoing community concern over large coal mines and CSG coupled with a lack of social licence for the CSG industry has resulted in several Australian Government initiatives including:

  • the National Harmonised Regulatory Framework for Natural Gas from Coal Seam (2013) endorsed by the Standing Council on Energy and Resources
  • the Department of the Environment's Bioregional Assessment program for understanding the impacts of large coal mines and CSG operations
  • establishment of the Independent Expert Scientific Committee on Coal Seam Gas and Large Coal Mining (IESC) through the 2012 amendment to the Environment Protection and Biodiversity Conservation Act 1999 (Cwth) (EPBC Act). The IESC provides scientific advice to state and Commonwealth governments about relevant CSG and large coal mining approvals where they have significant impacts on water
  • the EPBC Act now includes 'a water resource, in relation to CSG development and large coal mining development' as a matter of national environmental significance. This requires the Commonwealth to assess and approve developments which may have significant impacts on the water resource (commonly known as the 'water trigger'). At the time of writing, a bill before the Senate proposed amendments to the EPBC empower each state and territory to undertake this assessment and approval process under 'one stop shop' bilateral agreements and Commonwealth accreditation processes.

As of July 2014, bilateral agreements for assessment had been established with Queensland and New South Wales, and a draft assessment agreement with Western Australia is being developed. In addition, bilateral approval agreements with Queensland and New South Wales have also been released for public comment and are pending finalisation (DotE 2014a).

A more detailed discussion of water for mining and unconventional gas can be found in the Commission's Water for mining and unconventional gas under the NWI (NWC 2014b).

3.1.10 Concluding remarks

A robust statutory-based entitlements and planning framework is in place in most jurisdictions. This has established extraction limits, improved security of access to water resources and provided greater confidence in resource sustainability and security of entitlement to allow water trade. In systems identified as overallocated or overused, pathways are being established and implemented and there is evidence of extraction returning to more sustainable levels. A continued reform effort focused on fit-for-purpose water planning will ensure sustainable management of water resources across jurisdictions.

The areas where the Commission considers further progress is required are:

  • legislative reform in Western Australia and the Northern Territory to support NWI-consistent entitlements and statutory water planning arrangements
  • further unbundling of entitlements in unregulated surface water as well as groundwater systems subject to an evaluation of cost effectiveness
  • the conduct of scheduled water plan reviews based on a transparent process involving monitoring, evaluation and public reporting on progress towards achieving water planning outcomes, including community input
  • specific pathways to achieve Indigenous objectives through water planning
  • in jurisdictions where this is not the current situation, the incorporation of all water uses, including that for extractive industries, within the one water planning framework.

3.2 Water markets and trading

Parties to the NWI agreed to create and facilitate efficient water markets, within and between states and territories. The agreed mechanisms to achieve this are the establishment of compatible entitlement, registry and regulatory arrangements that provide information to the market, and the provision of an appropriate mix of products based on water access entitlements. The NWI also requires markets to protect the needs of the environment and provide appropriate protection for third parties. The Commission's 2014 assessment focuses on progress that has been made against the following key areas:

  • compatible entitlements, registry and regulatory arrangements
  • removing barriers
  • carryover
  • water market rules
  • an appropriate mix of water products.

3.2.1 Compatible entitlements, registry and regulatory arrangements

There has been improvement in the functionality of state registers since 2004. Victoria, New South Wales, Queensland and South Australia have online registers that have improved the efficiency of transactions and access to market information – with the Victorian Water Register currently the benchmark in this area. In other jurisdictions limited market information can be accessed online but it does not allow interrogation or processing of trades. There is still work to be done to improve public access to jurisdictional registers and to facilitate data searches within these registers. The obligation on those trading water to collect and report price information to the relevant jurisdiction across the Murray–Darling Basin is contained in the Basin plan water trading rules. These rules became operational in July 2014, and are expected to increase the accuracy and coverage of information reported on water market prices.

At present, the availability and quality of water market price and volume data is less than optimal in all water market sectors. Market participants must gather information from various sources to inform their trading decisions.

In 2008 COAG endorsed the development of a National Water Market System (NWMS) to improve the efficiency and effectiveness of water markets by increasing the transparency of market information, reducing transaction costs and improving interoperability of state registers where water can be traded interstate. The NWMS was due to be completed in June 2012 and was allocated $56 million from the Sustainable Rural Water Use Infrastructure Program (SRWUIP) managed by the federal Department of the Environment.

While development of the NWMS has provided support to jurisdictions to improve register interoperability, established a national portal for water market information and designed a common registry system, the project has fallen well short of its intended outcomes. Despite investment of more than $30 million, there has been a lack of transparency in reporting on progress and it is unclear which actions have been implemented and what, if any, objectives have been achieved. Given the recent decision to terminate the project, it is also unclear whether the investment to date will improve market information and whether risks of significant duplication in relation to data collected by BoM will be addressed.

The Water Act 2007 (Cwth) placed obligations on BoM to make water information collected under the Water Regulations 2008 publicly available, including on water rights and trade. BoM has performed this function to date within the capacity of jurisdictions to provide data. However, Commission assessments have highlighted that, in some cases, the data reported or provided to agencies by BoM is inconsistent with data held on state registries.

In the absence of a fully implemented NWMS, private water brokers are filling a gap in market information, providing a combination of publicly available data, and disclosing limited price and market information. This is having a significant positive impact on the availability of information in the marketplace as at least 60 per cent of trades occur through private water brokers.

3.2.2 Removing barriers to water trade

States and territories agreed in the NWI to the immediate removal of barriers to permanent trade out of irrigation areas, up to an annual threshold limit of four per cent of the total water entitlement of each area. The four per cent limit was established as an interim measure to allow irrigation communities time to adjust to the potential for water access entitlements to be traded out of irrigation areas.

Victoria's four per cent limit on the annual entitlement trade out of irrigation districts has been restrictive in the past, although less so recently with only one area affected in 2012–13 (NWC 2014c) and none in 2013–14. The Victorian Government removed the limit on 1 July 2014.

In January 2013 the New South Wales Government imposed a 10-year, three per cent per decade per valley limit on further buybacks of water licences for environmental purposes in the Murray–Darling Basin. The three per cent limit in New South Wales constituted a departure from commitments to remove impediments to trading in order to promote more open and efficient water markets. This limit was not reached and was removed when New South Wales signed the National Partnership Agreement on Implementing Water Reform in the Murray–Darling Basin in February 2014.

3.2.3 Carryover

Carryover allows water entitlement holders to take their unused water allocation in the following season. Carryover arrangements have been established in each of the Murray–Darling Basin jurisdictions to allow entitlement holders to maximise the value of annual allocations. A diversity of arrangements across jurisdictions and frequent changes to provisions has resulted in allocation trade to pursue the best carryover opportunities. It is widely accepted that the relatively favourable Victorian carryover arrangements were an important driver of water market behaviour in 2010–11 and 2011–12, which saw substantial late-season transfers of water allocations into Victoria. The Victorian arrangements were established to help irrigators manage the impact of drought when there was sufficient space in storages to accommodate the carryover provisions. Recent wet years reduced the air space capacity in dams which, coupled with the attractive carryover provisions available to Victorian entitlement holders, led to third-party impacts on allocations held in storages shared with Victoria.

Recent changes to Victoria's carryover provisions that limit carryover to 100 per cent of entitlement, use Hume Dam as the Murray spill trigger, and limit net trade from New South Wales to manage the risk to third parties. The third-party impacts (and subsequent trade suspensions) which resulted from different operating conditions act as a reminder for jurisdictions to consider the full range of scenarios, including across state boundaries, when introducing new arrangements.

3.2.4 Water market rules

The water market rules developed by the ACCC under the Water Act 2007 (Cwth) aimed to reduce barriers to trade in the Murray–Darling Basin by providing clear rules to open trade into and out of supplied irrigation areas managed by IIOs. IIOs are the entities that operate water service infrastructure to deliver irrigation water. The rules can be summarised as follows:

  • water market rules 2009: known as transformation rules, these were established to allow irrigators to transform their holding of an irrigation right in an IIO's bulk licence to an individual holding and, in doing so, prevent any unreasonable delays to the process
  • water charge (termination fees) rules 2009: determined the pricing structure for the setting and implementation of termination fees when an entitlement holder terminated their delivery arrangements with an IIO
  • water charge (planning and management information) rules 2010: requires IIOs to provide each licence holder with a breakdown of costs and charges for water planning and water management activities and how they were calculated
  • water charge (infrastructure) rules 2010: requires the IIO to set out all regulated charges and how they are established – this varies depending on the volume of the bulk licence each IIO holds (ACCC 2014).

The ACCC is responsible for regulating the implementation and enforcement of these rules. While these market rules were established to apply in the Murray–Darling Basin there is no barrier to their application in non-Murray–Darling Basin jurisdictions.

The Basin plan water trading rules that came into effect on 1 July 2014 aim to establish a broader framework for trading across jurisdictions. The water trade rules will operate alongside the market rules and will set a consistent framework for water trading of surface water and groundwater across the states that will apply to all water market participants. The MDBA is responsible for the implementation and regulation of the Murray–Darling Basin trading rules.

The objectives of the water trading rules are consistent with the NWI and are set out in Schedule 3 of the Water Act 2007 (Cwth):

  • facilitate the operation of efficient water markets and create opportunities for trading within and between Basin states
  • minimise transaction costs through good information flows and compatible entitlement, regulatory and other arrangements across the Murray–Darling Basin states
  • enable the appropriate mix of water products to develop
  • recognise and protect the needs of the environment
  • provide appropriate protection of third parties.

The Commonwealth Environmental Water Holder (CEWH) is responsible for managing the Australian Government's water holdings, and there have been concerns that the CEWH's behaviour has the potential for considerable impact on the water market. The Commonwealth Environmental Water Trading Framework, which includes operating rules, procedures and protocols, governs Commonwealth water transactions. The trading framework is underpinned by the Water Act 2007 (Cwth) and the Murray–Darling Basin Plan trading rules and seeks to ensure the CEWH considers impacts on the market when undertaking trading activities, is transparent in its dealings and meets all legislative requirements. Commission assessments have found no evidence of allocation trades by environmental water holders distorting market prices.

3.2.5 Appropriate mix of water products

The NWI allowed for the development of water products where a market might reasonably exist. Water access entitlements and allocations remain the foundational and most widely traded products. As some water markets have matured and trading has expanded to allow greater flexibility in water use, there is growing interest in the potential for even more flexible arrangements through the development of secondary markets.

Regulation enacted in 2014 ensures the trade of products such as allocations and entitlements is not considered a derivative under the Corporations Act 2001 or a financial product under the Australian Securities and Investments Commission Act 2001. The new regulation also provides water traders with clarity as to what secondary market products are exempt from financial product regulation. This clarity has allowed for the expansion of certain secondary market products. For example, traders have now started to offer forward contracts for water products that result in settlement at the time of trade, enabling a more sophisticated market for water to develop.

3.2.6 Concluding remarks

Action to establish contemporary water markets and trading arrangements in Australia have been largely successful—especially within the Murray–Darling Basin—with the deepening of water markets delivering real benefits to irrigators, regional communities and the environment. Water trading has become a vital business tool for many irrigators in providing flexibility to respond to variable water availability and other market factors.

While the foundational elements of water markets are embedded in many areas, further refinement of entitlement, regulatory and market information frameworks are required to underpin effective water markets. While much of this is in place within the Murray–Darling Basin, there is still a need to bed down regulatory frameworks and improve information flow. In the development of new and emerging markets, particularly in northern Australia, the Commission calls on governments to ensure appropriate entitlement, regulatory and information frameworks are in place to maximise the benefits to all users.

3.3 Best practice water pricing and institutional arrangements

Pricing and institutional reforms have been major components of the national water reform agenda since the establishment of the Water Resources Framework in 1994.

In 2004, NWI parties agreed to implement enhanced arrangements that expanded the 1994 Water Resources Framework, to ensure sustainable revenue for service delivery, facilitate water markets and implement pricing reform. The purpose of pricing reform is to ensure that the cost of water, including the provision of services for its supply, is as economically efficient as possible. The NWI arrangements to achieve these outcomes include:

  • the institutional separation of water resource management from regulation to allow for independent price setting and monitoring
  • full cost recovery in price setting including lower-bound pricing mechanisms as a baseline and upper-bound pricing which includes the opportunity cost of capital in price 1
  • the use of market-based mechanisms for the release of unallocated water
  • using regulation and where feasible markets and/or pricing to manage environmental externalities
  • developing pricing policies for recycled water and stormwater, and policies to manage sewerage and trade wastes.

The reform arrangements have underpinned the progress towards achieving the economically efficient and sustainable use of water resources in Australia. However, implementation of these reforms has been inconsistent across Australia and there continues to be evidence of government interventions that weaken or reverse reforms.

In 2010, the Natural Resource Management Ministerial Council endorsed the NWI pricing principles. These principles provide a set of guidelines for pricing practices and allow jurisdictions to implement best practice water pricing commitments in a consistent way. The NWI pricing principles comprise four parts:

  • recovery of capital expenditure
  • setting urban water tariffs
  • cost recovery for water planning and management activities
  • pricing for recycled water and stormwater reuse.

A COAG review of the NWI pricing principles began in 2012 and was expected to be finalised in 2014. At the time of writing the review had yet to be finalised and its status as a COAG review remains unclear.

3.3.1 Urban

Most jurisdictions have made significant progress towards achieving full cost recovery. Increasing community concerns about 'cost of living' in response to recent price rises have caused several governments to respond with changes to regulatory and policy processes. Increases in water prices have arisen because of the significant investment in new water infrastructure to provide security. At the same time customers who are generally more efficient in their use of water find it difficult to reconcile low use with rising bills. Recent regulatory price paths to 2011–12 and 2012–13 suggest typical residential bills will continue to increase but not at the rate seen in recent years. In 2012–13, the typical residential bill increased for 56 utilities and decreased for three utilities. The national median increased from $1097 to $1184 per residential property per year, an increase of nine per cent.

All jurisdictions have committed themselves to independent economic regulation, although the models and maturity of the regulators differ across jurisdictions. The Commission remains concerned that economic regulation of price is not effective in all jurisdictions as governments continue to blur their roles as owner, policy setter and regulator. This issue is further explored in Section 3.7.

3.3.2 Rural

Bulk water

Pricing of bulk water is consistent with lower-bound pricing practices across the country. While the NWI makes a call for bulk water managers to move to upper-bound pricing where practicable, this is yet to be widely adopted. Though bulk water operators are predominantly state owned and regulated it is difficult to identify the degree to which pricing is moving to upper-bound pricing, or whether price increases are reflecting a more comprehensive approach to cost recovery.

The transition to lower-bound pricing in some smaller systems has at times revealed a cost to the entitlement holder significantly higher than the previously subsidised price. The bulk water price path that the ACCC set in 2014 for regulated surface water in Peel Valley of New South Wales highlights the challenge for operators and regulators in managing the adjustment to avoid price shock and for governments to maintain their commitment to full cost recovery. The ACCC price path capped increases at 30 per cent over three years and committed the government to continue a significant subsidy. The submission from State Water indicates that full cost recovery will not be achieved without price increases of this magnitude over subsequent price determinations.

Distribution schemes

Approaches to pricing across distribution schemes vary according to the location, ownership arrangements and size of the scheme. The move to lower-bound pricing is largely complete in the Murray–Darling Basin; transparency around pricing arrangements monitored and reported by the ACCC in accordance with the water market rules established under the Water Act 2007 (Cwth) (s92) have accelerated this process (discussed in 3.2.4). Across the rest of rural Australia, information about water pricing and the degree to which it recovers the costs associated with activity is generally poor and lacks transparency with a small number of exceptions including Harvey Water and Tasmanian Irrigation.

Cost recovery for planning and management

Rural water pricing in Australia generally applies to the cost of infrastructure operation and renewal, as well as water planning and management charges. There are no specific charges for the water itself (except for traded water which has a market price).

The application of water management and planning charges varies across the jurisdictions. New South Wales provides detailed information about the costs required to deliver water planning services, including a description of the resources required. These inputs have been reviewed and endorsed by the New South Wales Independent Pricing Regulator (IPART).

Victoria, South Australia and the Australian Capital Territory provide information on planning and management charges as required by their respective legislation, however there is no independent regulatory oversight of these charges. The remaining states and territories do not provide reports or information about the status of water planning and management charges.

The Water Charge (Planning and Management Information) Rules commenced in the Murray–Darling Basin in July 2010. They aim to ensure transparency in respect of cost recovery for water planning and management. As there are no enforcement provisions, the ACCC has monitored and reported on these activities since 2011 and found compliance with the rules.

Economic regulation

State economic regulators apply some level of control in New South Wales, Victoria and Queensland for rural water pricing. The ACCC administers the Water Charge (Infrastructure) Rules that apply within the Murray–Darling Basin.

In New South Wales IPART sets rural water prices for bulk water, although changes to the Commonwealth Water Act require the ACCC to undertake the next pricing determination (2014–15 to 2017–18) for valleys within the Murray–Darling Basin. As discussed in Section 3.2.4, the ACCC requires all IIOs be transparent in reporting on pricing arrangements subject to the volumes managed. IPART will continue to regulate bulk prices in non-Basin areas. The Essential Services Commission of Victoria (ESC) independently sets and reviews prices for all water providers in Victoria. (The ACCC has accredited the ESC to determine the regulated charges of infrastructure operators in Victoria). The Essential Services Commission of South Australia (ESCOSA) governs all water industry entities providing 'retail services' to South Australian customers. It is responsible for the economic regulation of water and sewerage including industry licensing, consumer protection and retail pricing. The first review of rural South Australian prices is due for completion in late 2014.

The independent regulator in both Western Australia and Queensland review and recommend prices for bulk water and government-owned schemes but the government sets the prices. Rural prices in the Northern Territory, Australian Capital Territory and Tasmania are not set or reviewed by an independent regulator.

Investment assessment

NWI parties agreed that any investment in new or refurbished water infrastructure must be assessed as economically viable and ecologically sustainable before being approved. While there has been progress, this remains a contentious issue in some respects (see also Section 3.7).

The past decade has seen a significant wave of capital investment in irrigation infrastructure modernisation, as a drought response, to recover water for the environment and for irrigation refurbishment and renewal. The cost implications of those investments will continue to be felt through price rises and there has been substantial debate about the cost effectiveness and viability of specific investment decisions. It is important that lessons from these investments are not lost; they should be taken into consideration when assessing new proposals, including for northern Australia.

Unallocated water

In some areas, recently completed or revised water plans can define a volume of water that is unallocated and available for consumptive uses. Parties to the NWI agreed that the release of unallocated water should be managed in a way that ensures sustainable and efficient use and does not undermine the value of existing property rights and market integrity. The release of unallocated water should only occur when alternative methods of meeting water demand have been fully explored, and to the extent practicable should be undertaken through a market-based mechanism. Where unallocated water continues to be made available for production at no or minimal cost it can lead to sub-optimal investment and allocation decisions.

Progress towards achieving this outcome has been made in New South Wales, Queensland and Victoria, which now use market-based mechanisms for releases of unallocated water. However, other jurisdictions deal with these issues in an ad hoc and inconsistent manner. Additionally, there is little evidence that alternative methods of meeting demands are being explored before releases occur. COAG's National Water Reform Work Plan 2013–2017 committed jurisdictions to developing a common approach on water resource development through a national framework, but at a recent Interim National Water Reform Committee meeting (April 2014) jurisdictions agreed to discontinue this work.

3.3.3 Environmental externalities

NWI parties agreed to measures that accounted for environmental externalities, including regulatory instruments, conducting feasibility studies into market-based mechanisms and implementing reforms that included externalities as part of an overall pricing structure (NWI paragraph 73).

The primary method adopted to manage the environmental costs and benefits of water use has been regulation, noting that some jurisdictions are beginning to use or explore pricing as an alternative.

In Victoria, an environmental contribution fee is levied on all water users and salinity management charges are levied on users where applicable. The Victorian Auditor-General's office reviewed the environmental contribution levy in 2014 and concluded that while there was sound project management and some good environmental results from the projects funded by the levy, the process for selecting projects was not robust due to a lack of criteria, guidelines and strategic priorities. They also found limited transparency due to minimal public reporting.

Similarly, the Australian Capital Territory collects water management funds through its Water Abstraction Charge, although the setting and regulation of this charge are not transparent.

New South Wales has established a regulatory system to manage externalities that sets costs transparently and is subject to independent review. South Australia applies levies for natural resource management regions and a River Murray levy, and recognises that work is required to quantify the externalities behind the levies. Queensland has also adopted a regulatory approach, but its setting of fees and charges lacks transparency. There has been no progress made in the Northern Territory, Tasmania or Western Australia towards understanding and setting costs for environmental externalities. These jurisdictions continue to use planning and regulation to manage any negative outcomes that arise.

3.3.4 Benchmarking efficient performance

Under the NWI states and territories agreed to the performance benchmarking of pricing and service quality, including undertaking annual public reporting of performance for all urban, regional and rural water delivery agencies (NWI paragraph 75). This benchmarking is to occur in the context of the development of a nationally consistent reporting framework. The production of National Performance Reports (NPRs), using a nationally consistent framework with benchmarking information supplied by each jurisdiction, has largely delivered on this outcome to date.

The Commission has coordinated jurisdictional reporting. The urban water utilities NPR has been produced annually from 2005–06 and represents all utilities with more than 10,000 connections, providing water to about 18.7 million Australians. The rural water providers NPR has been produced since 2006–07, covering the supply of almost 10,000 GL of irrigation water in 2012–13.

At the time of writing the future of reporting is uncertain. Jurisdictions and the urban water industry body, the Water Services Association of Australia, have identified that the urban NPR is considered to be an example of national and international best practice in performance reporting with benefits exceeding costs, and have expressed strong support for the continuation of a coordinated national urban performance report. However among jurisdictions and stakeholders there is relatively less support to continue a nationally coordinated rural report, with concerns expressed that despite the rural water sector accounting for about two-thirds of Australia's water use and being a beneficiary of significant government investment in irrigation efficiency upgrades, the current indicators and approach to reporting are not delivering material benefits.

Case study 4

National performance reporting

Under the NWI governments agreed to prepare annual independent public reports on urban water utilities and rural water service providers, to benchmark pricing and service quality. The reports are produced jointly by the National Water Commission, state and territory governments, and in the case of the urban national performance report (NPR), the Water Services Association of Australia. The reports span all critical performance areas of water resources, including pricing, finance, customer service, asset management, environment indicators and health.

In 2014 the eighth urban water report (for 2012–13) in the NPR series covered 81 reporting urban utilities including all capital cities, major regional cities and many smaller water utilities. Combined, these utilities supply water services to about 18.7 million Australians. The utilities reported on about 150 performance indicators spanning critical performance areas including water resources, health, customer service, asset management, environment, finance and pricing.

During the past eight years the urban water industry has had to respond to high variability in climatic conditions: from extreme drought—resulting in many activities to curb demand, coupled with large-scale investment for new supplies of water—to extreme wet weather conditions. While the urban NPRs have identified the continuing increase in a typical residential water bill and, despite a push for greater efficiency, rising operating costs, they also reveal utilities have improved their service levels – particularly in the areas of security of supply, supply reliability, customer responsiveness and water quality.

Conversely, the rural NPR is hampered by the apparent reluctance of some jurisdictions to actively participate, which is in marked contrast to the level of engagement in urban reporting. Rural water use represents two-thirds of Australia's total consumptive water use and many hundreds of millions of dollars of Commonwealth and state funds have been spent on improving on farm water efficiencies, and the delivery of water to the 'farm gate'. Communicating the impacts and benefits of that funding to the tax payer, through reporting on the performance of rural water service provision in the rural NPR should have been, and should continue to be, an important aspect of program management at the Commonwealth and jurisdiction level.

During the past seven years of rural NPR reporting, the rural water service providers have had to respond to the same high variability in climatic conditions as their urban counterparts. The rural NPRs indicated greater delivery efficiency in 2012–13 even though the volumes delivered increased significantly. The increase in delivery efficiency from the conversion of open channel deliveries (paid for through the public purse) has netted results. The rural NPRs have also revealed the increased revenues—even in the face of increased operating costs—enjoyed by rural water service providers.Coverage of urban National Performance Reports

Coverage of urban National Performance Reports

3.3.5 Concluding remarks

Pricing and institutional reforms based on NWI pricing principles continue to encourage efficient water use. Progress in implementing these principles with appropriate transparency has been uneven for rural water pricing across the jurisdictions. Movement towards full cost recovery has seen the widespread adoption of lower-bound pricing, while the move to upper-bound pricing has been less complete and the application of all NWI pricing principles has been inconsistent. Price differences between areas are exacerbated by differences in scale and the mix of fixed and variable charges.

All jurisdictions now have in place some form of economic regulation. For urban water there are rising concerns about pricing for service efficiency and customer value. Concerns about affordability are also emerging. Transparent information on the pricing of water charges is lacking in several jurisdictions. The transparency of information affects all components of pricing, especially environmental externalities, and more effort is needed in the setting of appropriate and transparent costs and regulation to address environmental externalities.

While some progress has been made towards better management of unallocated water potentially available for production, many jurisdictions still use ad hoc or inconsistent allocation practices, with evidence of little investigation into possible alternative methods. Best practice pricing principles should continue to be used to encourage economically viable developments, while the use of market—based mechanisms for allocating new water should be applied where possible.

3.4 Water for environmental and other public benefit outcomes

The NWI sought to improve the security and cost-effective management of water for the environment, as well as the identification of environmental objectives in water plans. NWI parties agreed to introduce effective and efficient arrangements to deliver environmental outcomes. In cases where water needed to be recovered to do this, it was agreed that a mix of methods would be considered, including infrastructure, water purchase, investment in water management practices and through changing consumer behaviour.

All jurisdictions have made progress in implementing accountable environmental water arrangements with a range of legislative instruments and policies to give state and Commonwealth agencies responsibility for managing environmental water. Jurisdictions have well-established environmental water management arrangements for most of their high-risk resources and are moving into the development of second-generation plans in many areas.

Jurisdictions commonly establish annual allocation limits and access rules so as to 'leave behind' enough water to meet the desired environmental objectives. The volume and timing of water extractions are specified in water plans, or set as conditions on water access entitlements. Planned environmental water management provisions include cease-to-pump rules, flow sharing arrangements, passing-flow releases from water storages and environmental water allowances. The vast majority of significant water extractions in Australia are now undertaken within areas covered by water plans that specify extraction limits and environmental water management rules.

While environmental water objectives are primarily implemented across Australia through planned environmental water provisions in water plans, in some jurisdictions environmental water requirements are met through a combination of planned and held environmental water entitlements.

Environmental entitlements may be established under water plans, purchased on the water market or created through water savings. They are usually held by governments on behalf of the environment. Water available under environmental entitlements is delivered to achieve environmental objectives identified on an annual basis. Held environmental entitlements are predominantly being used to contribute to achieving environmental objectives for specific systems or sites in the Murray–Darling Basin, where there has been a need to recover water to address overallocation.

At present environmental water in the Northern Territory, Western Australia, Tasmania and the Australian Capital Territory is provided through rules-based provisions only. Environmental water in Queensland is predominantly rules-based with the exception of environmental water entitlements held by the CEWH in the Murray–Darling Basin. New South Wales and South Australia implement rules-based environmental water provisions within their water plans and manage held environmental water entitlements within the Murray–Darling Basin. Victoria achieves environmental objectives through a combination of rules-based provisions and held environmental water entitlements.

The Northern Territory, Western Australia and Victoria are reviewing their water management legislation with the intention of consolidating their environmental water management arrangements. Longer-term security for environmental water provisions is intended for Western Australia through the progressive introduction of statutory water allocation planning and the transition of the current non-statutory plans to statutory plans (DoW 2013a). The Northern Territory has committed to developing a clear framework for water planning through the development of a Territory-wide water policy and progressing the development of water plans in high-risk areas10.

3.4.1 Identification of desired environmental and other public benefit outcomes

For rules-based environmental water, the development of environmental water management arrangements within water plans is usually informed by technical assessments that identify water-dependent ecosystems and their critical water requirements. Where such information is lacking, jurisdictions have usually taken a precautionary approach in setting provisions for environmental water. Generally, jurisdictions have put useful monitoring programs in place to ascertain which plan actions have been implemented and the extent to which the targeted water regimes and levels of entitlement security have been achieved, but assessment of progress towards high-level outcomes is often lacking (NWC 2013c). Ecological outcomes are often broad and cannot be achieved through management of flow regime alone. Jurisdictions such as Queensland, New South Wales, South Australia and Victoria are moving towards identifying ecological assets that have critical links to flow: this will allow assessment of progress towards outcomes to be better attributed to the effectiveness of the environmental flow management strategies in water plans. Greater focus on a subset of species that can be used to indicate the ecosystem's overall condition will also allow more targeted, cost-effective monitoring.

For held environmental water, water use options are developed on an annual basis in accordance with longer-term management plans that identify environmental assets and their water requirements. In some jurisdictions policy direction for considering held environmental water use options is evolving to explicitly include consideration of social and cultural outcomes that can be supported by environmental watering. The Victorian Waterway Management Strategy and Murray–Darling Basin Plan both stipulate that environmental watering should be undertaken with regard to opportunities to achieve complementary social, cultural and economic outcomes where they are consistent with environmental objectives.

3.4.2 Cross-jurisdictional arrangements in the Murray–Darling Basin

The finalisation of the Murray–Darling Basin Plan (Basin Plan) in 2012 represents a significant step forward in the management of environmental water at both the catchment and whole-of-Basin scales. It identifies environmentally sustainable levels of take for both surface and groundwater which are to be achieved through a combination of rules-based provisions in water plans and held environmental water entitlements. As at March 2014, 1899 GL of the 2750 GL required to be recovered for the environment under the Basin plan had been acquired under Australian and state government recovery initiatives.

The Basin plan's environmental watering plan provides high-level environmental objectives and targets to guide the management of environmental water in the Basin, as well as a common set of principles to be applied in environmental watering. The principles include, among other matters, the need to coordinate environmental watering between all holders and managers of environmental water and with existing flow events, including those regulated for consumptive use. The environmental watering plan also provides a common framework for determining environmental water needs at both the local and Basin scale, and on annual and longer-term timeframes. This includes the preparation of Basin and catchment annual environmental watering priorities, catchment long-term watering plans and a Basin-wide environmental watering strategy.

Further progress in the Murray–Darling Basin has been achieved through the maturing of environmental water portfolio management by the Commonwealth and Victorian Environmental Water Holders (CEWH and VEWH respectively), the NSW Office of Environment and Heritage and the MDBA (as manager of The Living Murray portfolio). These environmental water holders collectively hold around 20 per cent of all entitlements (by volume) in the Murray–Darling Basin and coordinated delivery of environmental water is occurring through the preparation of annual water use plans and publicly available frameworks for decision-making on environmental water. Annual priorities, water use plans and environmental watering actions are developed in consultation with the relevant state government agencies, river operators, regional natural resource management authorities, the MDBA, local governments, local environmental water advisory groups, irrigator groups, Indigenous communities and relevant landholders.

3.4.3 Monitoring, reporting and evaluation

The agencies responsible for held environmental water management typically publish reports that show how the water was used and, in some cases, the effect of its use on the targeted ecosystems (NWC 2013c). Examples include South Australia's annual River Murray environmental watering reports, the New South Wales Department of Planning and Environment's annual water use reports and annual publications by the CEWH and VEWH that describe watering activities and observed outcomes.

Other initiatives aimed at improving the rigour of ecological response evaluations include the Queensland Environmental Flows Assessment Program, Victorian Environmental Flows Monitoring and Assessment Program, the New South Wales Integrated Monitoring of Environmental Flows Program (now ceased), the Commonwealth Environmental Water Long-term Intervention Monitoring Program, the Murray–Darling Basin Ecological Outcomes of Flow Regimes Project, and CSIRO's Ecological Responses to Altered Flow Regimes Collaboration Cluster.

The Basin plan establishes several legislated reporting requirements for the MDBA, Basin states and the CEWH in relation to environmental water management. This includes annual reports on the identification of environmental water and the monitoring of its use and five-yearly reports on the achievement of environmental outcomes at an asset scale (Basin states) and Basin scale (MDBA and CEWH). This reporting is intended to support the MDBA's review of the Basin plan's environmental watering plan, which is required to be undertaken every five years. The CEWH is also subject to additional reporting requirements under the Water Act 2007 (Cwth), including an annual report on achievements against the objectives of the Basin plan's environmental watering plan.

3.4.4 Trading environmental water

As noted above, for most jurisdictions environmental water that is provided through rules-based provisions is not tradeable. In jurisdictions where environmental water can be held as entitlements, these may be traded on a temporary or permanent basis subject to revenue being used to support the achievement of other priority environmental outcomes.

Since the entry of the VEWH and RiverBank (New South Wales) to the market, some small-scale state—based buying and selling of allocations by environmental water holders has taken place. In all jurisdictions where environmental water can be traded, the proceeds of disposal must be used to improve capacity to meet future environmental water needs.

As discussed in section 3.2.4, the Water Act 2007 (Cwth) provides authority for the CEWH to trade allocations or entitlements under certain conditions. In early 2014 the CEWH began targeted selling of held water back into the market, guided by the Commonwealth Environmental Water Trading Framework and its associated protocols.

Table 3: Agencies responsible for achieving environmental water management outcomes in each jurisdiction

Jurisdiction Responsible agencies

Australian Government

CEWH, MDBA (The Living Murray and Basin plan), Department of the Environment (environmental water recovery)

New South Wales

Office of Water (planned environmental water), Department of Planning and Environment (held environmental water)

Victoria

Catchment management authorities / Melbourne Water, Victorian Environmental Water Holder, Department of Environment and Primary Industries

Queensland

Department of Natural Resources and Mines

Western Australia

Department of Water

South Australia

Department of Environment, Water and Natural Resources

Tasmania

Department of Primary Industries, Parks, Water and Environment

ACT

Environmental Protection Authority, Environment and Sustainable Development Directorate

Northern Territory

Department of Land Resource Management (Controller of Water Resources)

Source: Adapted from Australian environmental water management: 2012 review (NWC 2013c)

3.4.5 Concluding remarks

Progress in implementing accountable environmental water management arrangements has been achieved in all jurisdictions. However, monitoring and reporting of the outcomes of environmental water use is in its infancy for many jurisdictions, and improvements in this area are needed for a transparent assessment of the return on investment in environmental water holdings and rules—based arrangements. Optimising the outcomes of environmental watering will require cooperation between agencies including cross—jurisdictional coordination for connected systems and shared resources such as the Great Artesian Basin and Murray–Darling Basin. The MDBA in particular has a role in the coordination of environmental watering activities across the Murray–Darling Basin to ensure the maximum benefit is gained through the use of environmental water, both held and planned. Over time, it is expected that these arrangements can be streamlined.

3.5 Water resource accounting

Adequate water information is fundamental to the sound planning and management of Australia's water resources. The NWI (paragraphs 80 to 89) commits parties to develop and improve water resource accounting so that measurement, monitoring and reporting systems are in place across all jurisdictions to support public and investor confidence in water being extracted and traded, as well as recovered and managed for environmental and public benefit outcomes. The Water Act 2007 (Cwth) includes substantial provisions to improve the availability of water information. Part 7 of the Act requires BoM to collect, hold, manage, interpret and disseminate Australia's water information.

Since 2007, BoM has significantly expanded the range of available water information, such as water storage information, water accounts, streamflow forecasts, market information and water resource assessments. These information streams have been developed through the Improving Water Information Program (IWIP), which is funded for 10 years—from 2007–08 to 2016–17—at a cost of $450 million. Following seven years of IWIP implementation, BoM is now the largest holder of Australian national water datasets and information.

The Australian National Audit Office (ANAO) undertook a performance audit of the effectiveness of BoM's implementation of the IWIP11, concluding that 'although not complete, the BoM's current suite of water information products and services provide governments with important data to inform better policy decisions in relation to water services and infrastructure investment' (ANAO 2014). Based on 56 stakeholder responses, the report also noted that 'in general, stakeholders have indicated a positive view of the IWIP. Stakeholders have also suggested a need to increase the coverage and quality of products and services available' (ANAO 2014).

However, some jurisdictions have raised concerns with the Commission that it is timely to consider whether the BoM products are adequately serving the needs of water users and managers. It is clear from jurisdictional comments that concerns about the client benefits of these products exist. There is a need to examine further who are the end users, and how the products can meet user needs. This would direct the particular types and formats of data required, with a view to streamlining jurisdictional reporting. The products need to avoid being seen as an outcome in their own right, with limited functionality at the state and local level.

Case study 5

Audit of the Improving Water Information Program

ANAO published its audit report on the BoM's administration of the IWIP in February 2014 (ANAO 2014). ANAO's key findings are summarised below.

Planning, oversight and reporting:

Management and advisory structures established by the BoM were appropriate and consistent with a collaborative model of service delivery.

An appropriate approach to stakeholder communication and engagement has been established, but some risks, such as failure to develop effective systems for web-based delivery and data management, were underestimated.

Collaboration and compliance management:

The licensing of water data under Creative Commons Attribution licences has been effective in allowing users to freely copy, distribute, transmit and adapt water data. BoM's achievement of high participation (90 per cent as at October 2013) in these licensing arrangements has helped maximise use of BoM's water data by third parties and has increased the availability of water data to the Australian community.

Financial assistance to water data providers:

The monitoring and evaluation program was a key component of IWIP's implementation as it provided grant funding not only to enable data providers to modernise and extend their hydrologic monitoring networks, but also to improve the accuracy and quality of the water data submitted to BoM.

Data systems and collection and management:

BoM is receiving about 10,000 new data files containing time-series observations each day. It has been managing more than 21 million water data files containing more than four billion time-series observations since the Water Regulations came into effect on 30 June 2008.

There have been major challenges and constraints in using the Australian Water Resources Information System (AWRIS) to manage the data to produce new products and services. The development of AWRIS has been problematic, with unclear business and system requirements, inadequate technical solutions, shortcomings in governance arrangements, changes in design and approach, and unanticipated costs and delays that have limited the system's functionality.

The operational requirements for a national information technology system with maximum interoperability and flexibility have not been achieved.

The comprehensive data quality approach originally envisaged for end-to-end water data collection, management and analysis has not yet been realised. Standardising data from a large number of sources, and with considerable variation, has been a significant task even after six years of program implementation.

Extension of the Water Data Transfer Format would help BoM achieve greater consistency. However, an ongoing risk for BoM relates to decisions by data providers to reduce the number of monitoring stations that they maintain. Deterioration in the monitoring network has the potential to affect BoM's capacity to maintain or enhance data quality over time.

Water information products and services:

A broader range of better quality water information is available, although most products have been introduced later than BoM originally planned – with varying degrees of coverage and completeness.

The level of collaboration with many different agencies across Australia reflects well on the BoM's approach and suggests a wide degree of commitment to the program and its products and services.

In general, stakeholders have a positive view of the IWIP. There is, nevertheless, a gap between the expectations of users and BoM's capacity to deliver. Closer consultation with key agencies through established forums would further help manage expectations.

3.5.1 National water accounting

At present the National Water Account, prepared by BoM, covers 70 to 80 per cent of water extractions nationally. Complete geographic coverage is not envisaged or seen as cost effective. BoM is exploring whether a less detailed water account reporting approach can be applied to areas of lower use not currently reported on.

A similar water account at the national level is the Water Account Australia, prepared by the Australian Bureau of Statistics (ABS). The ABS collects, maintains and analyses water data and the Water Account Australia is one of its environmental–economic accounts. It reports on physical and monetary water supply and use within the economy at the state/territory and national level. The account describes who uses water in the Australian economy and for what purpose, how much was used and the monetary value derived from that water use at the state/territory and national level. The Water Account Australia has been produced annually from the 2008–09 reference period and before that was produced every four years from the mid-1990s. It is based on the System of Environmental–Economic Accounts framework, adopted in 2012 by the United Nations Statistical Commission as an international standard. The volume of water extracted from the environment for supply, consumption and production is the report's focus.

An issue for both agencies' water accounts is the lack of agreement between the data reported for the Murray–Darling Basin. As it stands, extraction data for the Basin is collected by both BoM and ABS, and will also be required for compliance purposes by the MDBA. Accounts for the Murray–Darling Basin were produced for 2008–09 and 2009–10 as a proof of concept trial. In the 2009–10 reporting period, BoM's National Water Account also reported on extractions for the Murray–Darling Basin, and the results differed by 500 GL between the two accounts.

Figure 3 below shows the overlap between the BoM's National Water Account and the ABS's Water Account Australia. This overlap encompasses the amount of water abstracted from the environment by the water supply industry and other economic activities.

Figure 3: The aspects of, and intersection between, the National Water Account and the Water Account Australia

Figure 3 showsThe aspects of, and intersection between, the National Water Account and the Water Account Australia

Source: Australian Bureau of Statistics and Bureau of Meteorology, adapted from a paper prepared for the National Water Account Committee, October 2012

All states and territories collect and manage significant volumes of water data and information, which are used for water management within the respective jurisdiction, and provide the basis for the two national level water accounts. This data underpins most national level water data and information reporting. Part of BoM's almost $80 million funding over five years to 2012 for the Modernisation and Extension of Hydrological Monitoring Systems Program was used to modernise and extend jurisdictional water monitoring systems benefiting jurisdictional data collection.

Jurisdictions still largely rely on their own data for management and planning purposes and have made only limited use of BoM products to date. To some extent this may be expected as BoM operates at a national to river-basin scale, which does not align with finer-scale jurisdictional catchments or the scale most relevant for water planning and management activities. The Water Act 2007 (Cwth) and Water Regulations 2008 require data provision where data is collected as part of an organisation's business-as-usual practices, and BoM has provided $12.8 million in project funding to facilitate the automation of data being provided to it. Nevertheless, several jurisdictions have reported that the cost and time spent collecting and providing data both to the BoM and MDBA continues to be an impost. While BoM does not require additional data collection by jurisdictions, it does direct the format in which jurisdictions must provide the data. This data provision format is not what jurisdictions use or require, therefore duplicate systems are maintained.

In its submission to the 2014 assessment, the National Irrigators Council stated a need to examine the reporting requirements 'to ensure that it serves a meaningful purpose, does not restrict the ability of stakeholders to fulfil the NWI objective and outcomes, nor does it become an expensive, and time consuming waste of time, effort and resources' (NIC 2013).

To help address this issue, the MDBA entered into a Commonwealth Heads of Agreement project with BoM (for the period 2013–17) that aims to maximise the reuse of data supplied under the Water Regulations 2008. The need to develop the appropriate metadata and collection systems for compatible datasets has been recognised and implemented with the new Water Data Transfer Format. This format covers about 80 per cent of data that BoM collects.

BoM has improved the timely delivery of its national water accounts, which enhances their value. Similarly the Australian Water Resource Assessment has made substantial progress. Additional value for NWI implementation would be gained if an assessment of the level of water stress in catchments and aquifers were provided – a key requirement for sustainable water management.

3.5.2 Groundwater information

The Commission views the historic and continued underinvestment in groundwater data and information as an area where effort and resources are required to bring the data and information up to an acceptable level, namely comparable with the status of Australia's surface water data and information. As noted in Section 3.1.8 and other Commission work, BoM's efforts in groundwater information are valued and useful. The National Atlas of Groundwater Dependent Ecosystems and the NGIS in particular are robust data sources, but further work is required to improve existing management arrangements using this new information.

Subject to licensing arrangements, groundwater data and analysis produced through the Australian Government's Bioregional Assessment Program will be made publicly available through an information portal.

3.5.3 Environmental water accounting

NWI parties agreed that an environmental water registry would be developed, with annual reports provided. Although the development of standards for environmental water accounting began in 2011, they remain incomplete. Only New South Wales and Victoria have developed environmental water registers. The New South Wales register includes adaptively managed environmental entitlements and non-quantitative descriptions of planned environmental water rules. The Victorian register includes environmental water data with entitlements listed, although rules-based arrangements are not available as a searchable resource.

The CEWH, VEWH, MDBA (as managers of water acquired for the environment under The Living Murray program) and New South Wales Department of Planning and Environment all maintain publicly available registers of their environmental water holdings. All report annually on the total volume of water delivered under these entitlements.

Environmental water provided through rules-based arrangements is reported in some jurisdictions as part of annual reporting on water plans. The delivery of planned environmental water is not often reported in volumetric terms and is generally inferred based on compliance with rules-based provisions for consumptive uses.

3.5.4 Metering and measuring

NWI parties agreed (NWI paragraphs 87 to 88) that metering and measurement should be developed on a consistent basis, and applied in a standardised way. Effective metering is important to improve the information base, market operations, water users' accountability for their consumption and equality among users. The accuracy of metering and metering coverage has significantly improved.

COAG has developed the National Framework for Non-Urban Water Metering (the Framework) (DotE 2014b) to meet NWI objectives, particularly in relation to requirements for national metering standards and a nationally consistent framework for water metering and measurement. The Framework requires that over time meters comply with the national metering standards.

All jurisdictions agreed to develop implementation plans to document priorities and targets for non-urban water metering in relation to areas such as meter deeming, upgrading meters and installations, certified workforce, implementation of national standards for non-urban meters, and review of jurisdictional legislation to ensure compliance. At present, all jurisdictions except Tasmania and the Northern Territory have developed implementation plans, with Tasmania having developed a draft implementation plan. In October 2012, the Queensland Government released a new policy for non-urban water metering for unsupplemented water extractions that assigns responsibility for the purchase, installation and maintenance of a meter to water entitlement holders. In 2014 further changes require holders to read and report on their meter, and the use of the national standards will not be required in some instances. In Western Australia, due to changes in policy since development of the implementation plans by jurisdictions, the implementation plan will be rolled out with a user-pays policy. The Australian Government is yet to finalise its national implementation plan.

Implementation of the Framework has been subject to substantial delays, in part because of difficulties having meters certified to the required standard. Pattern approved meters, which are those approved as suitable for installation under the Framework, have now become available and jurisdictions are looking to replace existing meters with approved meters over various timeframes where this is deemed to be cost effective.

As part of the Framework it was agreed that all NWI parties would report on implementation of the Framework, and non-urban water metering more broadly, and that the data would be collated, analysed and published every two years from 2012. At this time no reporting has been undertaken, and arrangements for this reporting are yet to be finalised between the Department of the Environment and the BOM12.

3.5.5 Compliance

The introduction of the National Framework for Compliance and Enforcement Systems for Water Resource Management (the National Compliance Framework) in 2012 provided an opportunity to establish a nationally consistent approach by strengthening water compliance and enforcement within each state and territory.

The National Compliance Framework is a 2009 COAG commitment, which is being implemented by all states and territories to improve compliance and enforcement and therefore help protect Australia's water resources. A total funding package of $60 million was committed for states and territories to manage improvements to compliance and enforcement capability and capacity, including a range of Commonwealth-led projects in support of its implementation.

The National Compliance Framework comprises six major components which support improvements to:

  • water laws: each jurisdiction has agreed to 'use (its) best endeavours to introduce and pass legislation to adopt consistent offence provisions to minimise unlawful water take'
  • risk assessment: all water resources are assessed according to a nationally consistent risk profile requiring minimum levels of compliance monitoring by the jurisdictions in line with increased risk
  • toolbox: development of new and efficient processes and products to improve the efficiency of compliance activities and the skills of compliance officers
  • stakeholder education: a structured approach to 'provide information to educate the public and the stakeholders on the importance of compliance and enforcement of water resources management to the environment and other water users'
  • monitoring: more compliance officers in the field to 'carry out annual monitoring events equal to 10 per cent of the total number of water entitlement/licence holders of a water resource, using on ground officers'
  • reporting: water agencies publish annual reporting and compliance strategies and statistics.

The Australian Government undertook a mid-term review of National Compliance Framework in 2013. Jurisdictions acknowledged the framework had accelerated compliance programs and capacity, although the review noted some criticism of it assuming a 'one size fits all' approach.

The latest available reporting on the National Compliance Framework was in May 2013, at which time most jurisdictions had made positive progress towards meeting their milestones. In December 2013 Victoria renegotiated its implementation plan by agreement between the state and Commonwealth water ministers due to early administrative issues affecting Victoria's ability to meet initially agreed timeframes. At present jurisdictions and the Commonwealth are in discussions about how to ensure progress made through the National Compliance Framework endures after Commonwealth funding ends.

3.5.6 Concluding remarks

Water resource accounting generates the information required to enable water planning and management. While considerable resources have been allocated and effort spent, the impact of scale, incompatible systems, overlapping reporting requirements and limited participant benefits still hamper the collection and use of water data and information. For example, the generation of groundwater data is still significantly underfunded and poorly appreciated and environmental water accounting remains incomplete. In addition, metering and measuring provides the basis for water use accountability and allows water markets to function, but the National Framework for Non-Urban Metering has not been implemented. Development in northern Australia will need a robust data and information basis. While there are parts of northern Australia where significant investment in expanding the knowledge base of water resources has occurred, information frameworks are not at a stage that would support a large development effort.

3.6 Progress of reform in the Murray–Darling Basin

The Basin plan is a major step forward in NWI-consistent water management for one of Australia's most important river basins.

For the first time, there is a set of institutional and governance arrangements intended to deliver whole-of-Basin social, economic and environmental outcomes. These governance reforms are designed to shift the decisions about sustainable levels of extraction in the Murray–Darling Basin from the Basin state and territory governments to a single decision-maker, the Commonwealth Water Minister. In reality, achievement of the intended outcomes still relies on the cooperation of the Basin states and it will be a collaborative effort to give full effect to the Basin plan.

Implementation remains the key to securing the Basin plan's long-term benefits for the environment and for the communities within the Murray–Darling Basin. While good progress has been made with water recovery efforts, there have been delays in other areas. For example, New South Wales and Queensland signed onto the Intergovernmental Agreement on Implementing Water Reform in the Murray–Darling Basin in February 2014, well after the other Basin states.

Implementation of the Basin plan has been designed as a staged process, with SDLs not coming into effect until 2019, providing a seven-year transition period for communities to adapt to the reduced availability of water. Government investment of more than $12.9 billion provides a pathway towards achieving the Basin plan's SDLs within this timeframe. The Australian Government has committed to the recovery of 2100 GL2 of water to meet the SDLs through water buy backs (capped at 1500 GL) and investments in infrastructure. While expensive per unit of water recovered, infrastructure measures such as improvements to on- and off-farm irrigation systems are intended to provide water for the environment without reducing the Basin's productive capacity.

The recovery of water for environmental use constitutes a significant action towards meeting the objectives of the Basin plan. Various programs conducted by the Australian and state governments have delivered a substantial volume of recovered and held water that is available for environmental use. As at 31 March 2014, 1899 GL of water had been recovered as part of 'bridging the gap', which represents 69 per cent of the 2750 GL required (see Figure 4).

Figure 4: Summary of progress towards SDL targets

Figure 4 shows Summary of progress towards SDL targets

Notes:

1. Water recovery volumes quoted as at 31 March 2014, data sourced from Department of the Environment website http://www.environment.gov.au/topics/water/rural-water/restoring-balance-murray-darling-basin/progress-water-recovery.

2. Supply measure equivalents to be determined after development and assessment of proposed project package.

Flexibility in achieving environmental objectives has been included in the Basin plan through an adjustment mechanism for surface water SDLs. SDL adjustment activities can be of two different types:

  • Supply measures that enable the use of less water but can still achieve equivalent environmental outcomes. Supply measures may include environmental works and measures projects or rule changes. Supply measures to reduce water recovery targets by up to 650 GL will be proposed by Basin states, although the final volume will not be known until the entire package of projects has been developed and assessed by the MDBA (DSEWPaC 2012). Several supply measures are currently at the pre-feasibility stage of assessment http://www.mdba.gov.au/what-we-do/water-planning/sdl/proposals.
  • Efficiency measures aim to increase the volume of water available for the environment by up to 450 GL while maintaining or improving social and economic outcomes. Efficiency measures include improving the efficiency of on-farm irrigation and transferring the water savings to environmental use. The Australian Government has committed up to $1.5 billion for efficiency measures.

Achieving optimal environmental outcomes also relies on dealing with constraints within the system that otherwise prevent the periodic release of larger volumes of environmental water. As part of the process to address these constraints, the MDBA released its Constraints Management Strategy 2013 to 2024 in November 2013. This is a high-level strategy document that aims to identify and describe the physical, operational and management constraints that are affecting environmental water delivery. The strategy outlines a staged process for development and implementation of projects to address constraints through until 2024. It also highlights the large amount of work to be done to overcome limitations to delivering the recovered water to maximum effect.

Early implementation activities have progressed since the Commission prepared its initial report on Basin plan implementation in 2013 (NWC 2013d) (see Table 4). While some good progress has been made, much remains to be done and significant public funding has already been invested. The large cost that has been incurred to restore the environmental balance in the Murray–Darling Basin is a salutary warning as to the expensive nature of dealing with overallocation.

For Murray–Darling Basin communities and irrigators, the Commission considers that a period of consolidation and completion of the reforms initiated to date is required. A major objective of the NWI was investment confidence, and the protracted and contested planning process has had mixed outcomes in this regard. Bedding down the outcomes of that process is a high priority for the Murray–Darling Basin.

Table 4: Basin plan work in progress for priority implementation areas in the Murray–Darling Basin

Priority implementation areas

Work completed and in progress

Intergovernmental agreement on implementing water reform in the Murray–Darling Basin to be finalised

  • All Murray–Darling Basin states have signed the intergovernmental agreement, with New South Wales and Queensland signing in February 2014, eight months after the other states.

A whole-of-Basin implementation strategy to be in place, together with attendant agreements, between the MDBA and Basin states

  • The Murray–Darling Basin Plan 2012 Implementation Agreement has been developed. All Basin states have signed the implementation agreement.
  • Establishment of the Basin Plan Implementation Committee and associated working groups.

Water recovery

  • 1899 GL of surface water has been recovered across the Murray–Darling Basin, representing 69 per cent of the Basin-wide recovery target of 2750 GL.

Trading rules

  • Basin plan water trading rules came into effect on 1 July 2014. Guidelines have been published to help Basin states, IIOs and individuals participating in the water market comply with the rules.

A constraints management strategy to be in place by the end of 2013

  • The MDBA published two documents in 2013 relating to constraints. The first, published in July 2013, Preliminary Overview of Constraints to Environmental Water Delivery in the Murray–Darling Basin, includes a review of available technical information on physical constraints across the Murray–Darling Basin and an assessment of priority constraints (termed 'first-order constraints') to the delivery of environmental water for further investigation through the Constraints Management Strategy.
  • The second document, published in November 2013, Constraints Management Strategy 2013 to 2024, is a high-level strategy document that identifies and describes the priority physical, operational and management constraints that are affecting environmental water delivery.

Environmental water management processes have evolved, with annual Basin state priorities developed that take account of the Basin-wide Environmental Watering Strategy

  • In 2012–13, the process to establish the first Murray–Darling Basin-wide annual environmental watering priorities was developed. The Basin states provided their annual priorities for each water resource plan by the end of May and the MDBA published the first Basin-wide annual environmental watering priorities on 28 June 2013. To complement these priorities, the MDBA has also developed a guiding philosophy for environmental water delivery.
  • The MDBA has also commenced work on a Basin-wide environmental watering strategy, due by November 2014.

Monitoring, evaluation and reporting

  • The MDBA is preparing a draft evaluation framework technical document for consultation with stakeholders in 2014. This will describe how the MDBA intends to evaluate the Basin plan's effectiveness against its intended environmental, social and economic outcomes, objectives and targets.
  • The first Basin plan annual effectiveness report has been published which identified implementation activities for 2012–13.
  • The Basin Plan Compliance Strategy was published in April 2014.

Significant progress to have been achieved towards identifying and assessing SDL adjustment proposals

  • The SDL Adjustment Assessment Committee has been established.
  • The MDBA has engaged a consortium, led by CSIRO, to develop an ecological scoring method to help assess projects brought forward by the states.
  • The MDBA, in consultation with Basin states, is also developing a 'benchmark' model to enable adjustment proposals to be assessed.

Scheduled groundwater reviews should be completed within two years

  • Two of the three groundwater reviews have been completed.

The northern Basin work program to be substantially completed by 2015

  • Northern Basin Advisory Committee met regularly during 2012–13 and 2013–14.
  • A Northern Basin Intergovernmental Working Group was formed.
  • The MDBA, in conjunction with the advisory committee, has also consulted with several stakeholder groups across the northern Murray–Darling Basin on issues to consider in developing the work program.

3.7 Urban water reform

The urban water sector underpins public health and wellbeing, contributes to economic development and provides an underlying foundation for the liveability of Australian cities. In the past 10 years the Australian urban water sector has weathered new extremes in drought and flood. The provision of safe, secure, efficient and sustainable water and waste water services remains the primary driver for urban water reform. However the challenges and opportunities to improve nationally significant social, economic and environmental outcomes from urban water have evolved considerably. Jurisdictions, together with the sector, have engaged in a range of reform measures that aim to address these challenges.

The supply of water and wastewater services to most of urban Australia is largely undertaken by government-owned water authorities that operate as regulated monopoly businesses. Services are provided under a variety of industry structures and with different mixes of state and local government ownership.

More recently, the physical water, wastewater and stormwater systems supplying urban centres in Australia are becoming more complex and interconnected. A mixture of sources that are both dependent and independent of rainfall have been rolled out in towns and cities across Australia, linking physical infrastructure and natural waterways to form 'water grids'.

The evolving boundaries of the urban water sector, and greater interactions between natural and man-made systems, present both challenges and opportunities. Nexus issues between water, food security, urban planning and energy are emerging as key issues and, increasingly, liveability outcomes are shaping new urban water partnerships and changing the nature of the urban water sector.

3.7.1 Progress of reform

The 1994 National Competition Policy (NCP) framework for urban water embraced pricing reform based on the principles of consumption-based pricing and full cost recovery, the reduction or elimination of cross-subsidies and making subsidies transparent. Other priorities specific to the urban water sector included the adoption of market arrangements and competitive neutrality in water; institutional reform as it relates to the separation of roles for the owner, regulator and service provision; and improved public consultation and community participation.

The NWI was primarily focused on governance reform in the rural water sector but also included a call for jurisdictions to complete commitments under the 1994 COAG Water Reform Framework and further refined objectives as set out below:

  • provide healthy, safe and reliable water supplies
  • increase water use efficiency in domestic and commercial settings
  • encourage the reuse and recycling of wastewater where cost effective
  • facilitate water trading between and within the urban and rural sectors
  • encourage innovation in water supply sourcing, treatment, storage and discharge
  • achieve improved pricing for metropolitan water.

The following update on activity in the urban water sector addresses progress against NWI commitments including the NCP priorities, investment actions undertaken by jurisdictions in response to the Millennium Drought, regulatory and pricing reforms and the 2012 enhanced COAG urban water reform agenda.

3.7.2 Water efficiency

NWI parties have delivered substantial water efficiency gains through pricing reforms, public education, implementation and monitoring of the Water Efficiency Labelling and Standards Scheme, the Smart Water Mark for gardens, and water conservation rules and incentives (Table 5). While governments will always reserve the right to manage demand through restrictions, the Commission considers it more efficient to balance supply and demand through price signals.

Table 5: Summary of water efficiency measures across Australia from 2004 to 2014
Jurisdiction Summary

NSW

Water Wise Rules have replaced water restrictions and apply to Sydney, the Blue Mountains, the Illawarra and lower Hunter region. Local council water providers also have a range of water restriction measures imposed during water shortages.

Vic.

Permanent water saving rules for the state took effect in December 2011. These form part of each water corporation's permanent water saving plan but do not preclude water restrictions during drought periods. Water restrictions are managed by Victoria's urban water corporations and are only applicable to customers on a reticulated supply. They do not apply to recycled, reclaimed, rain or grey water other than when supplemented by drinking water.

Qld

Water restrictions in place in Queensland during the previous drought period have now been lifted, including the requirement for large water—using businesses to develop water efficiency management plans (WEMPs). The amended Water Supply (Safety and Reliability) Act 2008 allows South East Queensland (SEQ) water service providers to impose restrictions or require WEMPs, although the Act does not specify the circumstances in which these would be imposed.

The government, together with Seqwater and the SEQ council water businesses, intends to develop a long—term restriction framework. Water savings targets for new houses and commercial and industrial buildings, which included rainwater tanks, have been reviewed.

WA

Restrictions are in place throughout Western Australia which prescribe outside water use conditions and limitations. The restrictions include permanent water efficiency measures, and can also include extra efficiency measures and restrictions as required.

SA

Water Wise Measures are in place across the state, replacing water restrictions. Penalties continue to apply for non—compliance. Conditional use is allowed for some areas such as irrigation of domestic gardens and lawns and sportsground irrigation.

Tas.

There are currently no water restrictions. TasWater reserves the option to enact water restrictions when storages become critically low due to unforeseen operational issues or due to drought conditions.

ACT

Permanent water conservation measures are in place when the ACT is not in a drought situation as determined by a range of publicly available criteria, in particular dam storage levels and pending weather conditions. When water supplies are scarce, a four—stage scheme of temporary water restrictions is enacted.

NT

The Northern Territory has programs in place to reduce water consumption rates in Darwin and Alice Springs. The Northern Territory Government, through the Power and Water Corporation, has recently launched Living Water Smart in the Darwin region. This is a five—year water conservation initiative, targeted at residential, business and government customers, with the objective of reducing Darwin's water use by 25 per cent. Alice Water Smart comprises several programs to support water conservation measures within Alice Springs, which aims to save 1.6 GL of water over two years.

3.7.3 Infrastructure investments

The Millennium Drought and the water sector's response raised community focus on the effectiveness of our capacity to meet the water needs of the community, and also the efficiency with which that capacity has been achieved.

During 2009–10 the urban water industry was overseeing water and wastewater projects with a value greater than $14 billion (WSAA 2010). In the period 2007–12 every major city in Australia built desalination plants which are now augmenting drinking water supplies. Perth now has two plants capable of providing half of the city's drinking water needs (Water Corp 2013).

As governments emerge from the wave of capital investment in urban water supply and wastewater systems they have been confronted with new challenges relating to efficient and effective service delivery, institutional and regulatory alignment and community demands for sustainable and affordable supply solutions. Capital constraints, debt levels, asset renewals and an increasingly market—orientated sector are adding national dimensions to the efficiency challenge (Infrastructure Australia 2013).

Under current arrangements, in all states and territories there is dispersed responsibility for achieving safe, secure, sustainable and efficient water services. This has resulted in instances of poor coordination, duplication of processes, and the preparation of plans by water businesses that are not fully consistent with government objectives. Further, not all water supply and demand management options are appropriately considered, and opportunities for achieving greater efficiencies through private participation and innovation are hampered.

The major capital investments and demand management strategies have delivered more secure water supply for our major urban cities. The cost and in some cases appropriateness of those investments remain a key focus of public debate as water users face consequential price rises. Beyond this community discussion, stakeholders have continued to express concerns that existing planning and regulatory structures are not well placed to encourage optimal future long—term infrastructure and service planning decisions. As noted in 2011, planning and investment decisions made under conditions of water scarcity have resulted in several large—scale investments across the country that have not been subject to the same rigorous approaches undertaken through economic regulation of water utilities.

3.7.4 Pricing

In 2008, all jurisdictions agreed to full cost recovery in line with the NWI's pricing principles and most have made progress in this area. A review of the pricing principles began in 2013 to assess the usefulness of the pricing principles and the extent to which the principles meet the intent of best—practice water pricing arrangements under the NWI. The review is to be completed in 2014.

Increases in water prices to pay for new water infrastructure places pressure on living costs and come at a time when customers continue to use less water than before the Millennium Drought. Recent regulatory price paths to 2011–12 and 2012–13 suggest typical residential bills will continue to increase in the coming years but not at the rate seen in recent years.

Figure 5: Typical annual residential water and wastewater bill and water consumption

Figure 5: Typical annual residential water and wastewater bill and water consumption

Source: WSAA submission to NWC Urban water futures discussion paper

Where cost—reflective pricing has been fully implemented there exists some concern around affordability, and government subsidy, as water bills rise.

Independent price regulation provides customers with a level of reassurance that price increases are 'appropriate', while benefiting businesses by allowing sometimes complex and contentious pricing issues to be debated in an expert and objective forum.

Tasmania has embarked on an extensive reform of its governance arrangements across water and wastewater service provision. In response to concerns about poor water quality and the economic efficiency of service provision, the Tasmanian Government created one service corporation and three subordinate regional service provision utilities. In doing so, the related service areas from 29 local council areas were brought together.

While all jurisdictions have implemented reforms to deliver economic regulatory oversight, many governments continue to blur their roles as owner, policy setter and regulator. There is evidence that independence is not always maintained.

In January 2014 the Victorian Minister for Water announced the introduction of an efficiency program entitled Fairer Water Bills to drive down household water bills. This has raised questions regarding the independent regulatory process. An independent review of economic regulation, governance and efficiency in the Victorian water sector has been commissioned by the Victorian Government. Preliminary findings identify inefficiency across the regulatory framework and propose a revised regulatory framework which includes the government providing a detailed 'Letter of Expectation' setting out utilities' performance objectives against specific economic, social and environmental outcomes; performance monitoring arrangements to deliver greater transparency to both shareholders and customers; and seeking to drive efficiency in service delivery by moving from a cost—based method of regulatory oversight to one based on a price cap.

Conclusions from the Australian Capital Territory Auditor—General's Office Performance Audit Report of The Water and Sewerage Pricing Process found poor process and conflicts in roles.

In Western Australia, legislative arrangements provide that the independent economic regulator's assessments are advisory only, with government making pricing decisions. It is likely that such decisions, when taken by governments, will have regard to matters relevant to their multiple roles – potentially distorting pricing decisions

Notwithstanding concerns in respect to the role of economic regulation in many jurisdictions, the establishment of the Office of the Tasmanian Economic Regulator in 2010 and the first determination of price on 1 July 2012 is a positive commitment to the role of regulator in the urban water sector.

3.7.5 Regional and remote areas

Regional and remote service providers face their own range of economic, demographic and geographic challenges, and there have been incidents of non—compliance with drinking water standards. Boil—water alerts have been triggered in many regional and remote communities across Australia to manage public health during system failures.

The Tasmanian reforms to sectoral governance and regulatory arrangements addressed above are expected to drive significant improvements in regional service delivery. Where structural reform has yet to be achieved, greater collaboration has been found as one favourable avenue for smaller communities to improve the effectiveness and efficiency of service delivery. Several alliance models have proven to generate efficiencies across regional utilities (e.g. the New South Wales Central Region of Councils). This approach had been found to generate economies of scope from the ability to coordinate strategic land use planning and land use development control with infrastructure—intensive services such as water supply and sewerage services.

3.7.6 Water sensitive cities

NWI paragraph 92 particularly references the agreement to promote 'innovation and capacity building to create water sensitive Australian cities'. The emerging concepts of water sensitive and liveable cities recognise the opportunities presented by integrated urban water cycle solutions to enhance the sustainability and liveability of our urban landscapes (e.g. across water supply, wastewater and stormwater).

Different facets of the urban water cycle—such as water supply, drainage, water pollution control, groundwater, water recycling and water conservation and land use planning—are often managed by different departments, making it difficult to plan and implement urban water systems holistically. The segmentation of urban water management runs counter to the needs of sustainability and liveability. It also prohibits the unified management of the urban water cycle. Such a situation has been exacerbated by reduced water availability, climate uncertainty, urban expansion and population growth. While much has been done to capture the principles of water sensitive cities in urban planning and policy instruments common issues have been identified across stakeholders including:

  • the environmental value of water is widely recognised but not yet quantified in a way to drive efficient investment/usage; developers have no incentive to innovate
  • Integrated Water Cycle Management (IWCM) regulatory frameworks are being pursued but are still in their infancy
  • roles and responsibilities in delivering liveability outcomes remain unclear – there is a disjunct between the drivers across the water and planning sector
  • tension between economic regulators and utilities regarding efficient pricing and community value
  • challenges in capturing the costs/benefits of non—financial impacts and benefits such as waterway health
  • to date, there have not been many outcomes to support the NWI outcomes in relation to 'innovation and capacity building to create water sensitive cities'.

While many demonstration and research examples have illustrated the benefits of water sensitive urban design applications, there have not been many outcomes that can be attributed to this approach. Water sensitive urban design provides major opportunities for innovation and change, but there are several challenges associated with its incorporation as core business for the urban water sector. These include:

  • defining the concepts and their application
  • agreeing on objectives and determining how to make trade—offs between costs and benefits that are inherently difficult to measure
  • agreeing on how far urban water policymakers and water businesses are responsible for broader liveability outcomes
  • addressing institutional and regulatory barriers
  • determining who should pay for certain outcomes (CRCWSC 2013).

Utilities are focusing on customers and seek to understand what consumers are prepared to pay, in terms of environmental sustainability and service quality. However tension exists between economic regulators and utilities regarding efficient pricing and community value.

In the pursuit of liveability, future reforms are focusing on:

  • building understanding of the role of water in productive and liveable cities including interface issues between integrated urban water cycle management interactions and urban planning
  • clarifying the roles and responsibilities across urban agencies in driving liveability and productivity
  • supporting national approaches that reduce regulatory transaction costs across the urban water sector and the economy while driving innovation
  • maximising social and economic participation in water to enable greater customer choice in how urban water supports liveability
  • understanding the role of urban water in preparing cities for future extreme events and the relationships with other sectors during emergencies
  • understanding the role of urban fringe areas in the provision for urban growth, water and food security.

In 2011 the Commission released the Urban Water in Australia: Future Directions report that called for a focus on customers, efficient institutional and regulatory arrangements and clarification of the urban sector's role in delivering on liveability outcomes.

This identified the need for the urban water sector to:

  • understand and meet the long—term interests of all water consumers in the price, quality, safety, reliability and security of supply and wastewater services through the efficient use of, and investment in, systems, assets and resources
  • protect public health and the environment by ensuring the impacts of the sector's operations and investments are managed cost—effectively in accordance with society's expectations and clearly defined obligations
  • enhance its effective contribution to more liveable, sustainable and economically prosperous cities in circumstances where broader social, public health and environmental benefits and costs are clearly defined and assessed.

In addition to the Commission's 2011 Future Directions report, the Australian Productivity Commission held a public inquiry into the case for microeconomic reform in Australia's urban water sector. The inquiry identified opportunities for efficiency gains in the structural, institutional, regulatory and other arrangements that govern the sector.

In responding to the Australian Productivity Commission and the Commission's recommendations, the Standing Council on Environment and Water (SCEW) provided COAG with an enhanced urban water reform agenda in 2012 which identified a range of actions intended to improve economic, social and environmental outcomes. These included:

  • review of the NWI Urban and Rural Pricing Principles (began 2012)
  • review of the National Urban Water Planning Principles (began 2012)
  • review of the NWQMS (finalised and considered by COAG in 2012).

Since 2011, governments and industry have pursued urban water reform and embarked on a series of public consultation and regulatory reviews examining new approaches to urban water legislation, regulation and planning.

These reviews seek to address a wide range of issues and reflect a commitment from jurisdictions to progress reforms identified by the Commission in 2011. The Commission has some concern that despite the effort, opportunities have been missed in integrating policy and regulatory instruments across economic, environmental and public health and some reviews have yet to be completed within reasonable timeframes. Table 6 summarises the state and territory reviews of legislation and regulation underway post—2011.

Co

Image: Mal Booth under a creative commons licence

One of the key policy reforms intended to manage the risk of monopoly behaviour by utilities is the establishment of independent economic regulation. While concern has been expressed in relation to the degree of independence afforded regulators by government, the Commission has sought to inform later discussion on this issue by clarifying the role of utilities in the state budget and the tensions managed through regulatory decisions. Essay 1 by Jim Cox, at the end of this chapter, explores these issues. The essay draws on the experience of New South Wales – though the issues discussed are relevant to all jurisdictions.

3.7.7 Concluding remarks

The actions articulated within the NWI for urban water reform are now largely complete. Institutional reforms first identified in the 1994 Water Reform Framework have not been fully resolved. There is a need to clarify, and clearly articulate the role of government and in particular to separate the roles of owner, policy maker, regulator and price setter, and those which sit with the utility service provider.

Where governments look to recycle capital in the urban sector, the need to complete urban water governance reform is crucial to achieving the best return on assets on behalf of their communities and providing confidence that service standards will be protected. We address these issues further in Section 5.3.3 and the Commission's Urban water futures report (NWC 2014d).

Table 6: Summary of urban legislation and regulation since 2011

Jurisdiction Legislation or policy Description Status

NSW

Review of the Metropolitan Water Plan (began 2013)

The New South Wales Government's Metropolitan Water Plan outlines the mix of measures that ensure Sydney, the Illawarra and the Blue Mountains have enough water now and for the future.

The 2010 Metropolitan Water Plan is currently being reviewed and the revised plan is due mid—2014.

Joint review of the Water Industry Competition Act 2006 and regulatory arrangements for water recycling under the Local Government Act 1993 (began 2012)

Key areas of reform to the Water Industry Competition Act 2006 include:

  • refocussing the Act to regulate utility—like services and high—risk schemes
  • introducing entity—wide licensing
  • separating scheme approval from licensing
  • bringing certain metropolitan council—led schemes under the Act
  • strengthening customer protection through last resort arrangements.

On 18 June 2014, the Minister for Natural Resources, Lands and Water tabled the Water Industry Competition Amendment (Review) Bill 2014 into the NSW Parliament.

Independent Local Government Review – strengthening the effectiveness of local government (2012 – present)

The objective of the local government review is to create a revitalised system of local government that will remain sustainable and fit—for—purpose well into the middle of the 21st century.

The panel produced a final report which was open for public comment in early 2014. The NSW Government is preparing its response.

Review of the Building Sustainability Index (BASIX) target

The New South Wales Government is reviewing the BASIX target to ensure that it remains current and delivers household savings.

BASIX policy has been reviewed by key stakeholders and modelled outcomes, proposed targets and cost—benefit analyses were released for public consultation in January 2014. Submissions are now under review.

Vic.

Victorian Government's Living Victoria Policy (2010)

Living Victoria (2010) provides the framework for planning and servicing the urban water cycle – drinking water, stormwater, wastewater, the environment and urban amenity.

Undergoing implementation since 2010

Melbourne's Water Future Strategy: Office of Living Victoria (2013)

Melbourne's Water Future objectives involve liveable and sustainable communities, protect the environmental health of urban waterways and bays, provide secure water supplies efficiently, protect public health and deliver affordable essential water services.

Published 2013 following a period of community consultation

Vic Health Safe Drinking Water Regulatory Review

Survey of drinking water systems to examine current operational performance monitoring practices to determine how much change is needed.

The Safe Drinking Water Regulations 2005 are scheduled to sunset on 19 July 2015. The department has begun planning to determine arrangements post—July 2015.

Vic. (cont)

Review of the regulatory framework for alternative water supplies (Department of Health 2013)

In February 2013, the Department of Health released a discussion paper to seek feedback on the Review of the public health regulatory framework for alternative water supplies in Victoria: Supporting the safe use of sewage, greywater and stormwater.

Feedback from the review is now available on the Department of Health's website.

Department of Environment and Primary Industries Water Law Review

Victorian Government undertook a comprehensive review of Victoria's water laws to deliver a streamlined and effective legislative framework for water management and use in Victoria.

The Bill is now before Parliament. If passed, the new Water Act will come into effect on 1 January 2016. The Government will consult stakeholders and the broader community when implementing changes that affect them.

Victorian Government's independent review of Economic regulation, governance and efficiency in the Victorian water sector.

In February 2014 the Victorian Government appointed Professor Graeme Samuel AC to independently review the economic regulation, governance and efficient operation of the Victorian water sector.

Economic regulation, governance and efficiency in the Victorian water sector: Preliminary advice from the Independent Reviewer published May 2014.

Qld

WaterQ: a 30—year strategy for Queensland's water sector

Deliver an integrated catchment—based, recreation, water supply, sanitation, irrigation and environmental services at the lowest cost.

Phase 1 was the release of the discussion paper in December 2012 for a three—month public consultation period (now closed). Phase 2 is the development of the strategy itself. WaterQ: a 30—year strategy for Queensland's water sector was released on 24 June.

WA

Microeconomic reforms in WA: Economic Regulation Authority

To provide recommendations regarding the most advantageous package of microeconomic reform measures that the Western Australian Government could implement to improve the efficiency and performance of the state's economy.

An issues paper and period of public consultation will take place in 2014.

The final report on the inquiry into microeconomic reform in Western Australia has been delivered to the Treasurer and will be released by the end of July 2014.

Economic Regulation Authority: Review of water service operating licences

The review seeks to strengthen reporting standards and handling of customer complaints for water service providers.

Public consultation occurred end of 2013. Audit and review guidelines finalised 2014.

The Water Services Act 2012

The Act strengthens reporting standards and handling of customer complaints.

Enacted 2012

SA

Essential Services Commission: Economic Regulation of South Australia Water from 1 July 2016 Draft Framework and Approach

The Commission has released its proposed framework for public consultation and approach to regulating South Australia Water's prices and service standards during the Second Regulatory Period, commencing 1 July 2016.

The Essential Services Commission released the framework in November 2013, endorsed by SA Water in August 2014. For Cabinet consideration in 2014.

 

Essential Services Commission Inquiry into Drinking Water and Sewerage Retail Services Pricing Reform

Inquiry into pricing reform for drinking water and sewerage retail services provided by South Australia Water.

The Essential Services Commission has received public submissions in response to a series of issues papers it released as a part of its Inquiry into Drinking Water and Sewerage Retail Services Pricing Reform.

Tas.

House of Assembly Select Committee into the Tasmanian Water and Sewerage Corporations Reform of Tasmania's water and sewerage sector

The Bill provides for the transfer of assets, liabilities and employees of the existing water and sewerage businesses—Ben Lomond Water, Cradle Mountain Water, Southern Water and Onstream—to a new corporation.

Public consultation occurred in 2010–11. The new corporation is scheduled to commence full operations by 1 July 2013.

ACT

ACT Government: Review of regulated water and sewerage service in the ACT

Release of final report and price direction—regulated water and sewerage services in 2013—with the average water and sewerage bill for a typical Canberra household falling by around seven per cent in 2013–14.

The ACT Independent Competition and Regulatory Commission released its final report and price direction for ACTEW's water and sewerage services to apply from 1 July 2013.

ACT Water Strategy 2014—2044: striking the balance

The ACT Water Strategy takes a long—term view (30 years) of water resource planning in the ACT. It considers all water sources and the needs of urban areas, the environment, industry and commercial development.

Community consultation opened 3 July 2013 and closed on 30 August 2013. The strategy was finalised in August 2014.

NT

Northern Territory Government: Reforms to the Power and Water Corporation

The government's reform program for the Territory's utilities supply industry will address financial sustainability of the Power and Water Corporation, the lack of competition and the reliance on government to fund infrastructure to ensure reliability of supply.

From July 2014 the Power and Water Corporation was restructured to separate its monopoly and competitive businesses into standalone government—owned corporations with separate boards.

Table 7: Summary of urban water reform progress in Australia

NWI outcome Supply security Efficient water services Public and environmental health Water sensitive cities
Objective statement Urban water supplies are secure, resilient and deliver customer value Urban water is managed efficiently, delivering maximum environmental and social benefit at least cost Urban water supplies are safe, enhance the environment and fit for use Urban water is managed within sustainable limits, delivering whole—of—water—cycle outcomes

Progress 2004–09

Severe water shortages – high risk with traditional supply options and planning frameworks.

Growth of supply diversification but high level of public debate on supply options.

Limited community engagement and reduction in public confidence in decision—making process.

Restricted demand through severe and prolonged water restrictions – social inequality issues emerge.

Very high costs of new infrastructure – price rises.

Access rights and entitlements for urban water sources unclear – limited competition.

Recycling targets developed by some states.

Legislation, rebates and incentives for conservation and recycling. Significant reduction in per capita water consumption.

Reduced non—revenue water and improvements in metering and billing.

Limited differentiation in services types (i.e. choice in water product).

Assets not well maintained in some areas.

Limited community engagement in policy and regulation.

Limited resource sharing and integrated decision—making.

Insufficient capacity and resources in some regional areas.

Pricing increasingly reflective of cost across much of Australia. Subsidies exist but becoming increasingly transparent, 'postage stamp' pricing limits fully cost—reflective pricing.

New waste streams and interconnected urban systems challenging regulatory approaches.

Poor asset and river conditions in some urban and urban fringe areas.

Prescriptive, inflexible regulation – barriers to innovation and efficient regulation.

Growth in uptake of risk—based regulatory approaches but patchy implementation.

Limited pricing of social and environmental externalities.

Energy/carbon—intensive water treatment.

Regulatory reforms to implement complex risk—based approaches

Emerging but limited application of integrated solutions (water sensitive urban design, stormwater, recycling).

Widely divergent views and approaches across water service providers.

Interface issues not well understood between urban water and other urban sectors.

Growth in research and development (R&D), including validation of new treatment systems but barriers to innovation exists.

Inadequate cost—sharing arrangements where social and environmental externalities exist.

Greater integration in the management of the urban water cycle but institutional and policy barriers remain.

Progress 2009–11

Development of planning tools and processes to deal with variability and extremes.

Reliance on central planning but emergence of integrated solutions including centralised and decentralised portfolio planning.

Unclear objectives, including inadequately defined supply security objectives.

Policy and regulatory barriers for some supply options.

Barriers to emerging urban markets.

Stronger institutional frameworks (e.g. independent economic regulation) but competing equity and efficiency objectives tensions.

Insufficient transparency in some decisions – raising questions about the efficiency of expensive investments.

Price rises are raising social equity concerns.

Growing focus on water efficiency and improved customer choice in water services.

Some regulatory obligations lack transparency and are duplicative or inconsistent across departments –focus on 'reducing regulatory red tape'.

Urban waterway stress from pressures of urban sprawl and population growth.

Water cycle systems increasingly interconnected – emerging water quality risks and planning challenges.

Growing application of energy recovery and renewable energy use in water.

Emergence of liveability ambitions but roles and responsibilities not clearly defined.

Costs and benefits unclear lot of R&D looking at economics frameworks for understanding social and environmental externalities.

Strong R&D sector and science, policy, industry coordination/knowledge sharing.

Progress 2011–14

Long—term water security largely achieved in major urban cities—major investments delivered—focus on efficiency and productivity.

Downscaling of water conservation programs – sector efficiency gains have plateaued in some places.

Improved community engagement and scientific evidence to validate recycling.

Reforms to legislation opening up the sector to contestability and competition in service delivery – but access rights and entitlements to urban water products remain unclear, stifling innovation.

Community engagement embedded into pricing policies and economic regulation – but utilities are not fully capturing the individual needs/wants of consumers and responding through tailored services.

Cost recovery now embedded into the pricing structures for utilities. Some exceptions for regional and remote utilities.

Significant capital required to meet greenfield growth and brownfield asset replacement.

Cost recovery embedded into pricing policy but affordability issues emerge as water bills rise.

Maintaining infrastructure, improving operational efficiencies and demonstrating value for money – a key focus and challenge of water service providers.

Innovative tariff choices being explored but limited in scope and uptake.

'Postage stamp' pricing remains in most cases.

Independent economic regulation exists in most places to some degree.

Significant water efficiency gains achieved – some hardwired.

Vast majority of capital delivered is outsourced to the private sector – an increasing focus on leveraging private capital.

Growth in regional alliances, competitive competition models and partnering in service provision – resulting in some economies of scale, particularly for regional councils.

Focus on 'reduce regulatory red tape' and improving productivity.

Risk management is now the central mechanism for water quality regulation – most regulators mandating the ADWG and AGWR.

Most utilities well advanced in the implementation of risk management processes – high quality of drinking water supplies in most cities and towns.

Key developments among regional water providers in managing water quality – but distinct challenges remain.

Focus on reducing regulatory inefficiencies but fragmentation and duplication of regulations still pose challenges for some water providers.

Significant R&D investment to support risk management – National Certification Framework released. National Validation Framework developed.

Many urban waterways continue to show signs of degradation – large investments in point source upgrades and an increased focus on market—based mechanisms to tackle water pollution issues.

Environmental value of water is widely recognised but not yet quantified in a way to drive efficient investment/usage – developers are not incentivised to innovate.

IWCM regulatory frameworks are being pursued but still in their infancy.

Utilities are increasingly engaging with customers to understand what they are prepared to pay, in terms of environmental sustainability and service quality.

Roles and responsibilities in delivering liveability outcomes remain unclear – there is a disjunct between the drivers across the water and planning sector.

Ongoing uncertainty in respect to utility role in delivering liveability outcomes often skews regulatory decisions to short—term, least—cost options at the expense of integrated solutions.

Challenges in capturing the costs/benefits of non—financial impacts and benefits such as waterway health.

To date, there has been growing effort to support NWI outcomes in relation to 'innovation and capacity building to create water sensitive cities' but outcomes tend to be restricted to demonstration sites and case studies at this stage.

Essay 1

Water utilities and state government budgets

By Jim Cox*

Introduction

This essay discusses the importance of water utilities for state government budgets. The discussion focuses on New South Wales, although much of the discussion, and the lessons learned, are relevant to other states.

With some exceptions (e.g. the Sydney Desalination Plant), water and sewerage infrastructure is owned and controlled by state governments and appears on their balance sheets. The water agencies form part of the public trading enterprise sector of the government accounts. Investment by the water agencies adds to the state's assets. Equally, borrowing by the water agencies forms part of the total liabilities of the state. New borrowing by a water agency may affect the rating of its debt by a rating agency on a standalone basis, and may influence the overall credit rating of the state. Moreover, water agencies contribute to the budget of the state government's general government sector by paying dividends and tax equivalents. Water agencies may also receive subsidies from the general government sector.

This paper sets out to do three things. First, it illustrates the importance of water agencies to state government budgets by considering data from New South Wales. Some differences between New South Wales and other jurisdiction are noted. Secondly, it discusses some issues that regulators may need to face arising from the relationship between water agencies and state/territory budgets. Thirdly, it discusses how such tension can best be mitigated or resolved.

Some data

The following data illustrate the importance of the New South Wales water businesses in the total state sector. The relevant water businesses are Sydney Water, Hunter Water, the Sydney Catchment Authority and State Water. The total state sector comprises all entities and activities that are under the control of the New South Wales Government. It comprises the general government sector, public trading enterprises and public financial agencies. It excludes water agencies that are under the control of local government authorities. Water may therefore be a smaller component of the general government sector in New South Wales than in some other states.

Table A presents some indicators of the importance of the water sector in relation to the total public sector in New South Wales. To ensure consistency, the data have been drawn from the 2013 reports of the Auditor-General of New South Wales. The water businesses include both regulated and unregulated activities and the data reported here refer to the total water business. However it is likely that the regulated activities of the water business are a large proportion of their total activities.

Table A illustrates that the water agencies contributed 4.2 per cent of the revenues, 6.0 per cent of the assets and 10.0 per cent of the borrowings of the total state sector. The water agencies contributed 1.3 per cent of the revenue of the general government sector in dividends, income tax and government guarantee fees. This figure increases to 2.3 per cent of revenue if grants and subsidies paid to the state government are excluded from the revenue of the general government sector.

By way of comparison, the electricity industry contributed 12.9 per cent of the total assets and 12.3 per cent of the revenue of the total state sector. Contributions by the electricity industry amount to 3.7 per cent of the revenue of the general government sector.

One is left with the conclusion that the water sector makes an important, but not a major, contribution to the state government budget. While the contribution that the water sector makes is welcome, it would be relatively easy to replace it from other revenue sources were the contribution to be substantially reduced. However, the water sector is more important when considering the assets and especially the borrowings of the total state sector.

Table A: Measures of the importance of the water businesses in New South Wales state sector accounts for 2013
 

Total water
agencies ($m)

Total state
sector ($m)

Water as % total
state sector

Assets

19,422

322,500

6.0

Capital expenditure

817

12,586

6.5

Total borrowing

7640

76,601

10.0

Total revenues

3010

71,228

4.2

Contribution to general
government sector

783

60,131

1.3

Contribution from general
government sector

53

  

Notes

Purchases of non-financial assets: Total revenue excluding grants and subsides is $45,987 million for the total state sector. Revenues from the water agencies are 1.7 per cent of this total.

General government revenues: General government revenues excluding grants and subsidies are $34,724 million. Contribution from the water agencies are  2.3 per cent of this total.

Source: NSW Auditor-General's Reports to Parliament. Volumes Three and Nine, 2013.

Policy issues

The government has a number of roles in the water industry. Typically it determines policy for the industry, owns and operates the industry's assets and regulates prices and standards of service. These roles may sometimes conflict. Low prices may be desirable on policy grounds but may not be consistent with earning a commercial return on assets. High service standards may be passed forward into high prices for customers, which may discourage use of water. A government may sell an asset at a high price because that price takes into account the profits that will be earned in future because (using its pricing powers) the government will set prices to customers too high. Indeed at times it has been argued that different state governments have set prices either too high or too low.

This is a familiar situation: there is a conflict between competing but desirable objectives. Some compromise between objectives is required. Such compromises are never entirely satisfactory and can always be criticised. Moreover, the best compromise may change through time depending on changing community priorities and the cost of meeting them.

Ultimately, it is the task of politics to provide compromise between competing but desirable objectives. So the government must be allowed the last word here. It may help if the separate roles of the government are assigned to separate agencies. This avoids conflicts of interest within the agencies and requires government at the highest level to balance objectives. The techniques of economic regulation can help here too. Economic regulators adopt careful, consultative processes, and provide reasons for their decisions. By doing so they can help to illuminate the trade-offs facing the community and the costs of meeting various objectives. The government may also, if it so wishes, delegate some of the task of balancing objectives to a regulator. In doing so, it may wish to provide some guidance to the regulator on how the task of balancing objectives is to be done.

To illustrate these points I will now consider, very briefly, some of the issues that have arisen in regulating the water industry in New South Wales.

Asset valuation

If prices are to be based on costs, capital costs must first be calculated. Depreciation and the return on assets depend on asset valuation. So assets must be valued. A common way to do this is to estimate the cost of replacing assets with modern equivalents. (However it should be noted that many assets in the water industry, such as dams and sewerage pipes, will be refurbished rather than replaced.) Basing prices on replacement costs of assets would result in a large increase in prices from current levels and has not been followed in the water industry. In New South Wales, existing assets were valued at a level that would be justified by the existing level of prices (line in the sand valuation). New assets are brought into the assets base at cost. This decision was made by the economic regulator. This process tends to increase asset values as new assets replace old ones. However, technological change and efficiency improvements are offsetting factors.

Asset sales

Asset sales are challenging for all concerned. The right to earn future profits based on a regulated price path is a key aspect of the asset being sold. The government, naturally, is concerned to obtain a good price in return for selling the asset. However, too high a price would be unfair to customers and would discourage use of water that is desirable on economic grounds. These issues were considered in the context of the long-term lease of the Sydney Desalination Plant (SDP) to Sydney Desalination Plant Pty Ltd. In this instance the regulator set the price path. IPART set a price that was below the existing component in retail prices for SDP related costs. In the event, the desalination plant was leased for a payment that was 1.15 times the regulatory asset value (in this case, the cost of construction).

Rate of return

Because of the importance of capital cost in the cost structure of a water business (around half of the total), it is not surprising that the rate of return is a contentious issue. Moreover, the correct rate of return for a water business can be known at any one time only with imprecision.

Nevertheless, there seems to be increasing (but not universal) acceptance that the owners of water assets are entitled to receive a return on these assets that is related to risk. The capital asset pricing model is typically used to work out what the return on assets should be. This results in a rate of return that exceeds the interest rate at which the government can borrow. The value of parameters within the capital assets pricing model remain controversial. Even here it is possible that the gradual accumulation of evidence and practice will lead to a resolution of many of these disagreements. The extent of disagreement that now exists should be seen, however, in the light of the agreement on the nature of the approach.

Credit ratings and financeability

If the rate of return is set correctly the water business will be able to recover the cost of its investments over time. Any short-term problems with cash flow can be addressed through borrowing. If longer-term problems exist, this may indicate that the rate of return has been set incorrectly. Having said that, governments have been concerned to ensure that the water business maintains an investment-grade credit rating on a standalone basis. It should be noted that the water agencies' borrowing program forms part of the overall borrowing program of the New South Wales Government and that the debt of the water business is guaranteed by the government. However, regulators have in effect introduced another constraint in their decisions because of this concern to address financeability.

Regulators can address financeability through two approaches. First, they can check their decisions to ensure that sufficient revenue is generated to enable the business to meet its obligations to pay interest, taxation and dividends and to pay for a proportion of capital expenditure.

Secondly, they can estimate the value of the cash flow ratios that are used by credit rating agencies as an input into determining ratings. Because these ratings include qualitative as well as a quantitative components, it is difficult to predict the ratings themselves. Yet the value of the relevant ratios can be estimated and considered by regulators in making their decisions.

Expenditure assessment

Regulators periodically review the capital and operating expenditure of regulated businesses to ensure only the efficient cost of undertaking the activities that the businesses are required to do is passed on to customers. In the case of capital expenditure this involves investigating whether the right projects will be undertaken in the future at the right price. However, operating expenditure is in practice stickier downwards; for example, because commitments have been made to staff. This issue can be handled either by setting a path for operating expenditure that takes account of the rate at which operating expenditure can in practice be reduced, or by moving immediately to efficient operating cost. In this latter case, the owner will experience a lower rate of return during the period when costs are being reduced. Although there are arguments for and against both approaches, the second seems more consistent with the principle that customers should pay no more than the efficient cost of pricing the service.

Circumvention of regulation

As noted earlier, economic regulators exercise the authority that has been delegated to them by government. It follows that governments can take back this authority should they so choose. In New South Wales this has happened in two ways. First, the requirement to undertake certain expenditures (e.g. to construct sewerage in backlog areas) may be a condition of the water agency's operating licence. In this case, the economic regulator can enquire about whether the requirement is being undertaken efficiently but cannot question whether the activity produces benefits to society that exceed the costs. Secondly, section 16 A of the IPART Act enables the relevant Minister to direct IPART to include the efficient cost of a specified activity in prices when it makes a price determination. Once again the regulator cannot enquire about whether undertaking the activity is in society's best interest.

Section 16 A was introduced during the Millennium Drought to deal with government commitments, such as to construct the Sydney Desalination Plant, which were taken to the community during an election campaign. It is perhaps unavoidable that major commitments of this nature should be elevated out of the sphere of economic regulation. However, it is equally important that routine expenditure should be carefully examined by the economic regulator. Recent legislative changes, which require the agreement of the Premier before a section 16 A directive can be issued to IPART, are therefore welcome.

Conclusion

State and territory governments have many roles in water industry: as owner, operator, policy maker and regulator. Tensions arise in undertaking these activities because they are subject to desirable but competing objectives. Ultimately, the resolution of these tensions is the stuff of politics but in practice resolution often falls to economic regulators. Regulators can help by consulting widely and by providing reasons for decisions. In practice economic regulators have been successful in developing acceptable compromises between competing but desirable objectives.

For regulators to play this role all stakeholders (including governments) need to respect the regulator's role. This does not mean that water and sewerage should be taken out of politics. Rather, as far as possible, governments should specify the objectives to be achieved through regulation and allow the regulator to develop the best means of achieving the objectives. This requires stakeholders to have confidence in the ability and objectivity of the regulator. Such confidence should develop through time. Regulators adopt careful, consultative processes and give clear reasons for their decisions. This will help to generate confidence and trust. The quality of the individuals appointed to make regulatory decisions is also important.

* Jim Cox is on the Board of the Australian Energy Regulator. He has previously been a member and CEO of the Independent Pricing and Regulatory Tribunal. He has held positions with the Reserve Bank of Australia, and the Department of Prime Minister and Cabinet, and was Principal Economist with the Office of the Economic Planning Advisory Council.


3 Western Australia and Tasmania signed the agreement after 2004.

4 NWI paragraph 25.

5 Northern Territory Ministerial announcement 9 October 2013, available at http://notes.nt.gov.au/lant/hansard/hansard12.nsf/WebbyMember/D0EE5A2609130A7F69257C78000E451F

6 NWI Schedule E.

7 For example in the Darwin rural area and the Oolloo and Tindall (Mataranka) aquifers in the Northern Territory, where plans have remained in draft form since 2011–12.

8  NWI paragraphs 41–45.

9 Lower-bound pricing reflects the cost of operating, maintaining and replacing capital equipment used to deliver water and upper-bound pricing includes these costs plus the opportunity cost of capital. Refer to the Glossary of terms for a complete definition of these terms.

10 Northern Territory Ministerial announcement 9 October 2013, available at http://notes.nt.gov.au/lant/hansard/hansard12.nsf/WebbyMember/D0EE5A2609130A7F69257C78000E451F

11 The audit did not assess how the IWIP has contributed to policy or decision making.

12 See http://www.environment.gov.au/resource/national-framework-non-urban-water-metering-policy-paper for more detail.

13 To achieve the target reduction of 2750 GL, the Australian Government has committed to the recovery of 2100 GL to meet the SDLs through water buybacks and investments in infrastructure (with buybacks capped at 1500 GL), and  an SDL adjustment of 650 GL through supply measures is assumed.

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