In brief

The Water Industry Competition Amendment (Review) Act 2014 (NSW) (WIC Amendment Act) was passed by the NSW Parliament on 23 October 2014.

Upon its commencement (which will take place on a date yet to be proclaimed), it will introduce important amendments to the Water Industry Competition Act 2006 (NSW) (WIC Act). We anticipate proclamation of the changes once new regulations under the WIC Act are in force.

The key changes to be introduced by the WIC Amendment Act include:

  • narrowing the scope of the licensing and approval regime so that it will apply only to specified categories of water industry infrastructure,
  • licensing will be entity-based, enabling licensees to provide retail or operational services under a single licence throughout New South Wales,
  • design and operational approval will be required for new infrastructure schemes,
  • the ‘last resort’ provisions (which currently only apply to retailers) will extend to operators, and
  • the penalty system will be given increased clarity, with more significant penalties for serious offences under the WIC Act.

Background to the changes

The WIC Act (which came into force in 2008) introduced, amongst other things, a licensing and access regime, administered by the Independent Pricing and Regulatory Tribunal (IPART), which:

  • requires private operators to hold a licence in order to construct, maintain and operate water industry infrastructure (a network operator’s licence) and supply water, or provide sewerage services, through water industry infrastructure (a retail supplier’s licence), and
  • establishes a mechanism through which a private operator may obtain access to water infrastructure services (either through a coverage declaration or a voluntary access undertaking).

Between 2012 and 2014, the NSW Government undertook the Urban Water Regulation Review, inquiring into the effectiveness of this regulatory regime through a stakeholder consultation process.1 The WIC Amendment Act aims to address the key issues identified by the Urban Water Regulation Review, including:

  • to remove unnecessary regulatory duplication between the WIC Act and the Local Government Act 1993 (NSW) (LG Act),
  • to streamline the different standards imposed by the WIC Act and the LG Act on public utilities and private entities undertaking similar activities, and
  • to adopt more targeted risk-based requirements so as to protect public health while avoiding unnecessary regulatory costs (particularly for low-cost schemes).

An outline of some of the key changes to be introduced by the WIC Amendment Act is set out below.

Narrowing the scope of the licensing and approval regime

Current regime

The scope of the current licensing regime is broad. A licence is required to:

  • construct, operate, or maintain any water industry infrastructure, and
  • supply water, or sewerage services, by means of any water industry infrastructure.

There are specific exemptions from the licensing requirement, including exemptions for water industry infrastructure that is:

  • operated or used by (or for or on behalf of) public water utilities,
  • regulated under the Water Management Act 2000 (NSW), or
  • excluded by the regulations.

New regime

The scope of the new licensing and approval regime will focus on regulating larger-scale, higher-risk, water industry infrastructure. The new regime will apply only to the following limited categories of water industry infrastructure:

  • integrated systems providing water or sewerage services to 30 or more small retail customer premises (e.g. residential premises and small businesses) (a Category A Scheme),
  • facilities for the production of drinking water with a design capacity of more than 500 kilolitres each day that is not part of a Category A Scheme (e.g. a water filtration, treatment or desalination plant),
  • facilities for the treatment of sewage with a design capacity of more than 750 kilolitres each day that is not part of a Category A Scheme, and
  • water industry infrastructure prescribed by the regulations.

The new regime will preserve the existing exemptions from the licensing and approval requirements for:

  • public water utilities (however, metropolitan councils within the area of operations of Sydney Water Corporation and Hunter Water Corporation are no longer exempt under the new regime and are now treated identically to private providers), and
  • water industry infrastructure prescribed by the regulations.

The WIC Amendment Act also introduces a new exemption for existing water industry infrastructure that, prior to the commencement of the WIC Amendment Act, has been approved by a local council under s 68 of the LG Act while that approval remains in force, or a new approval, obtained by a purchaser of the land on which the relevant infrastructure is located, is in force. This means that existing schemes regulated under the LG Act will remain under the LG Act and will not be regulated under the WIC Act.

By way of example, activities for which an approval may be required under s 68 of the LG Act include:

  • ‘water supply work’ (e.g. the construction, maintenance or cleaning of water pipes connecting to a council water main), and
  • ‘sewerage work’ (e.g. the construction, maintenance or cleaning of sewerage pipes which connect to a septic tank or a council sewer),

that takes place outside the area of operations of Sydney Water Corporation, Hunter Water Corporation or a water supply authority constituted under the Water Management Act 2000 (NSW)(e.g. Gosford City Council, Sydney Olympic Park Authority, Wyong Council and Essential Energy).

Changing from scheme-based to entity-based licensing

Current regime

The current licensing regime is scheme-based. Private providers are required to hold:

  • a network operator’s licence to construct, maintain or operate the particular water industry infrastructure specified in the licence, and
  • a retail supplier’s licence to supply water or provide sewerage services by means of water industry infrastructure to the persons or class of persons specified in the licence.

Under the current regime, the activities authorised by the licence may be undertaken either by the licensee itself, or by other persons specified on the licence (Authorised Persons).

New regime

Under the new regime, scheme specific licensing will be replaced with entity-wide licensing (meaning that licensees will no longer need to apply for a new licence each time they decide to undertake a new scheme in New South Wales). However, the new regime will also introduce a separate approval process which requires design or operational approval (as applicable) for each specific scheme. (see: New design and operational approval regime, below).

There will be two types of licences under the new regime: an operator’s licence and a retailer’s licence.

Operator’s licenses

An operator’s licence will authorise the licensee to operate a specified class of water industry infrastructure anywhere in New South Wales.

In order to operate water industry infrastructure (which falls within the scope of the new regime):

  • the operator will need to hold an operator’s licence in respect of water industry infrastructure of the appropriate class,
  • a design approval or operational approval will need to be in force for the infrastructure, and
  • the operator will need to either hold the approval itself, or operate the infrastructure under an agreement with the holder of the approval.

Retailer’s licenses

A retailer’s licence will authorise the licensee to sell water or sewerage services in New South Wales. The retail licensing regime will focus on those retailers who directly supply ‘small retail customers’ (as defined in the regulations).

In order to sell water or sewerage services provided by means of a Category A Scheme:

  • the retailer will need to hold a retailer’s licence,
  • an operational approval will need to be in force for the scheme, and
  • the retailer will need to either hold the operational approval itself, or sell the services under an agreement with the holder of the approval.

However, a retailer’s licence will not be required where the retailer holds an operational approval or licence for the scheme and sells the water or sewerage services to a licensed retailer or public water utility.

A retailer’s licence will also be required to sell water or sewerage services by means of ‘prescribed water industry infrastructure’ (which is defined broadly to include other water industry infrastructure to which the WIC Amendment Act does not otherwise apply) to small retail customers in New South Wales. However, an exception will apply where the retailer is also the owner or operator of the relevant infrastructure.

Penalties

The maximum penalty for a contravention of these requirements will be $2?million for corporations.

Licence applications

The Minister will determine licence applications, assisted by recommendations from IPART, and each must have regard to the objects of the WIC Act (as introduced by the WIC Amendment Act) when considering an application.

In order to grant a licence, the Minister must be satisfied of several matters, including that the applicant is a ‘suitable corporation’ to be granted the licence. The statutory test for a ‘suitable corporation’ considers the financial, technical and organisational capacity of the applicant in addition to good character and solvency.

Licence conditions

The new regime will impose a range of mandatory conditions on operator’s and retailer’s licences while also providing the Minister with discretion to impose further conditions.

Mandatory conditions on licences will include (amongst other things) obligations on the licensee to:

  • notify IPART if it proposes to commence providing retail services or operating infrastructure,
  • have capacity to provide the relevant services in a manner that does not present a risk to public health or the environment (and, in the case of an operational licence, certify this fact to IPART), and
  • in the case of an operational licence, comply with any applicable design approval or operational approval conditions.

Transferability

Licences granted under the new regime will not be transferrable.

The activities authorised by the licence will only be able to be undertaken by the licensee (as the concept of ‘Authorised Persons’ will no longer exist under the new regime).

New design and operational approval regime

Current regime

Under the current regime, there is no design approval for schemes. Operational approval for schemes is coupled with the network operator’s licensing regime (see: Changing from scheme-based to entity-based licensing, above).

New regime

Under the new regime, scheme approval will be separate to licensing, to streamline better with the existing planning approvals process. An owner of a new scheme which falls within the scope of the new licensing and approval regime (see: Narrowing the scope of the licensing and approval regime, above) will be required to:

  • obtain ‘design approval’ before carrying out any construction, installation, alteration, commissioning or testing of water industry infrastructure, and
  • obtain ‘operational approval’ before operating any water industry infrastructure on a commercial basis.

The maximum penalty for a contravention of these requirements will be $2?million for corporations.

IPART will determine approval applications and must have regard to the objects of the WIC Act (as introduced by the WIC Amendment Act) when considering an application.

Design approval

The person proposing to build the infrastructure (and not the contractor engaged to carry out that work) will make the application.

IPART will grant approval prior to commencement of construction. IPART will only grant approval if it is satisfied that the applicant meets the specified criteria (including, that is a ‘suitable corporation’ (which is the same test as for the new licensing regime, as outlined in Changing from scheme-based to entity-based licensing, above) and that it is a licensed operator).

Design approval will authorise the holder to carry out works for the construction, installation or alteration of water industry infrastructure (subject to the imposed conditions).

Operational approval

The infrastructure owner will make the application. IPART will grant approval prior to commencement of commercial operation. IPART will only grant approval if it is satisfied that the applicant meets the specified criteria (including that is a ‘suitable corporation’ (which is the same test as for the new licensing regime, as outlined in Changing from scheme-based to entity-based licensing, above) and a licensed retailer).

Changing an application

An application will not be able to be varied if it would substantially change the original application or prejudice any person who made a submission concerning the original application.

Conditions on approval holders

A design approval holder will be required to maintain a suitable agreement with a licensed operator and to notify IPART of any material variations to that agreement. A design approval holder may also be required to provide security and maintain insurance (amongst other things).

An operational approval holder will be subject to a number of mandatory conditions (including that the infrastructure is not operated on a commercial basis except by a licensed operator).

Transferability

A design or operational approval may be transferred with consent from IPART (which must be granted subject to the conditions of the approval) to other parties, including licensed operators.

Introduction of new Operator of Last Resort regime

Current regime

The current regime contains a ‘retailer of last resort’ regime under which last resort providers may ‘step in’ to supply essential services where a licensed retailer has failed to supply that essential service.Last resort providers are pre-appointed. Triggers for failures are not automatic and are prescribed by the regulations.

There are no equivalent last resort provisions for licensed operators under the current regime. So, if an operator fails, the Minister would need to direct a public utility to take over the operation of the failed scheme to ensure continuity of supply.

New regime

The WIC Amendment Act introduces a new ‘operator of last resort’ regime (in addition to the existing ‘retailer of last resort’ regime). Triggers for failures will still not be automatic and will include:

  • ceasing to provide an essential service,
  • appointment of an insolvency official,
  • winding up order or resolution made, and
  • other criteria to be set out by the regulations.

The last resort provider will be deemed to be a party (in substitution for the failed licensee) to any agreement necessary for the essential service.

A failed operational licensee will be required to take all reasonable steps to resolve the failure (and this is subject to biannual review and audit by IPART).

The new regulations (see: Other changes, below) will provide further details.

Penalties

Current regime

Under the current regime, there is little guidance as to the enforcement action and quantum of penalty which applies to different non-compliances.

New regime

Under the new regime, if a condition of a licence is breached, the licensee will be guilty of an offence. The maximum penalty will be $2 million for corporations.

Other changes

  • Regulatory amendments: The Water Industry Competition (General) Regulation 2008, which supports the WIC Act, will be the subject of separate review. Any changes will be subject to further public consultation and will be implemented through amendments to the applicable regulation.
  • IPART’s functions: IPART will maintain a register of approvals and licences and will make the register publicly available on its website. IPART have the same auditing functions and must continue to report to the Minister on the extent of compliance with approvals and licences.
  • Third Party Access Regime: The WIC Amendment Act largely leaves the third party access regime in Part 3 of the WIC Act unchanged. It introduces only minor amendments to the penalties imposed for breaches of the regime.

Transitional arrangements

The WIC Amendment Act also contains transitional arrangements to facilitate the introduction of the new licensing and approvals regime. The key transitional arrangements are set out below.

  • Replacement of existing licences: If there is an existing licence, operational approvals and licences will be granted as appropriate for the operation and retail aspects of the infrastructure without application and without payment of an application fee. Operational approvals will be granted to the owners of relevant infrastructure and licences will be granted to ‘suitable corporations’ (as recommended by IPART and determined by the Minister). Any conditions imposed upon new licences and approvals will, as far as reasonably practicable, reflect the existing licence conditions (however, additional conditions may be imposed on new licences for the purpose of ensuring the licensee has the capacity to be a ‘suitable corporation’).
  • Applications by licensees and Authorised Persons: Current licensed network operators or retail suppliers (and their Authorised Persons) who are not otherwise granted a licence under the transitional arrangements are entitled to apply for an operator’s or retailer’s licence (as relevant) without paying an application fee if they apply within 28 days after the commencement of the new licensing provisions in the WIC Amendment Act.
  • New infrastructure: If construction, installation or alteration of water industry infrastructure has substantially commenced, but has not been completed, before the commencement of the WIC Amendment Act, a design approval will not be required (but the owner will require an operational approval before the infrastructure can be operated on a commercial basis).

Watch this space

Private sector owners, operators and retailers of water industry infrastructure should pay close attention to the commencement of the WIC Amendment Act and any upcoming consultation regarding future changes to the Water Industry Competition (General) Regulation 2008.

We recommend you stay tuned for further developments in this space and take steps to prepare for the introduction of this new water regime.

Endnotes

  • NSW Government, Department of Finance & Services, Report on the five year statutory review of the Water Industry Competition Act 2006 (November 2012), NSW Government, Urban Water Regulation Review – Discussion Paper (November 2012), NSW Government, Urban Water Regulation Review – Position Paper (February 2014). This review led to the development of the package of reforms now enacted by the WIC Amendment Act.