Regulation has often been the tool of choice when it comes to managing water given its status as an important natural resource in Australia. Over the coming years water regulation in Australia is set to continue on a path of further reform, with a wide range of Federal, State and Territory reforms recently announced in a bid to shape the regulatory landscape, provide fresh market opportunities and see new infrastructure projects delivered.
This alert provides an overview of current water reforms and initiatives across Australia. For more information or to discuss any of the items mentioned in this alert, please contact any one of our KWM water contacts.
Reform and Privatisation of Urban Water Supply
Infrastructure Australia (IA) recently released its “Reforming Urban Water – A national pathway for change” report (IA Report), which focuses on the state of urban water supply across Australia. The IA Report calls for proactive reform to achieve a more efficient and sustainable urban water supply sector across Australia. The proposed five-year plan focuses on the transfer of State-owned metropolitan water utility businesses to private ownership and the establishment of an independent national body to deliver a national water reform plan and drive market reform.
IA’s initial goal focuses on the development of a new national urban water reform plan between the Federal, State and Territory Governments. The plan is proposed to replace the urban water reforms set out in the National Water Initiative, which have stalled nationwide. It will focus on the long term interests of users of urban water, including promotion of the independence, transparency and accountability of the urban water sector.
To oversee the implementation of the reforms, IA recommends the establishment of a new independent national body. This new body is proposed to oversee Federal incentive payments in the form of additional funding, to States and Territories that implement urban water reform in the initial stages of the reform plan. IA recommends this phase be completed by the end of 2018.
The IA Report proposes several goals be achieved in the five-year period following initial reform in 2018. Key objectives include:
Federal oversight of services pricing and market rules in the urban water sector
Development of plans outlining future funding allocations by State and Territory governments and urban water utilities;
Promotion of competition, innovation and investment opportunity in the urban water sector; and
Collaboration between industry water regulators nationwide.
Following the implementation of nationally consistent reforms, IA recommends Australia transition to a national framework for urban water regulation. A national regulation framework is proposed to decrease State and Territory government involvement in regulation and allow for the increased privatisation of Australia’s urban water sector.
IA’s recommendations provide support for the privatisation of Australia’s urban water supply. The continued privatisation of utilities and private sector partnerships is expected to promote innovation, efficiency and customer-focused service delivery in the water supply market. Such initiatives are expected to capitalise on the commercial expertise of the private sector while avoiding the restrictions on competition present in the current urban water supply market. However, it is clear from the way in which the States are approaching their own water industries that harmonisation has some way to go.
Increased Focus on Foreign Investor Presence in Australia
Federal Government scrutiny of foreign investment has intensified over the last 2 years. In particular, the Treasurer has taken the agriculture sector to heart and has increased Foreign Investment Review Board (FIRB) scrutiny of foreign investment in agricultural land and agribusiness. This has been compounded by the addition of foreign-held water right entitlements to the Government Agricultural Land Register.
The increased focus on foreign investment has affected the water industry in two ways:
Required Australian Opportunities – The Federal Government has expressed a need for Australians to have an opportunity to participate in acquisitions of agricultural land. From 1 February 2018, agricultural land holdings meeting FIRB thresholds will need to be marketed in Australia prior to opening-up opportunities to foreign investors. Generally, approval will not be granted for any acquisition of agricultural land that was not offered for sale and ‘marketed widely’ for a minimum of 30 days. This is to ensure Australians have sufficient opportunity to bid in any sale.
Water Entitlement Acquisitions – Any acquisition of a water entitlement now requires registration with the Australian Taxation Office under the Register of Foreign Ownership of Water or Agricultural Land Act 2015 (Cth). This includes acquisitions by foreign investors.
Foreign investment will be further affected by the management procedures set to be introduced in the Security of Critical Infrastructure Bill 2017 (Cth). The Bill aims to introduce a framework for managing national security risks relating to critical infrastructure by improving the transparency of ownership and operational control of critical Australian infrastructure. This is set to be achieved through:
Critical Infrastructure Centre – The establishment of the ‘Critical Infrastructure Centre’ (CIC) as an overseeing body. While not directly overseeing foreign investment, the CIC will engage with FIRB when FIRB assesses relevant applications made by foreign investors.
National Register – A requirement for owners of critical infrastructure to provide full ownership and control details, including identification of any offshore owners. This will be retained on a register maintained by the CIC.
Last Resort Powers – The provision of a “last resort” power to Federal Government. This will allow orders to be made if the Minister considers there is a risk to Australia’s security and no State or Territory framework can address the risk.
The Bill relevantly defines a ‘critical water asset’ as:
“a water or sewerage system or network that is used to ultimately deliver services to at least 100,000 water connections or 100,000 sewerage connections under the management of a water utility.”
It is unclear which services will fall under this definition. Single infrastructure pieces, such as a city desalination plant or water treatment plant, are likely a “critical water asset”. However, there is uncertainty regarding assessment of water flows in larger distribution networks. The Bill is currently before the Australian Senate and is likely to receive further consideration in the first half of 2018.
The National Water Infrastructure Development Fund
The National Water Infrastructure Development Fund (NWIDF) implements the Australian Government’s prior commitment to the detailed planning required to build or augment existing water infrastructure nationwide. Key infrastructure set to be affected by the fund include dams, pipelines or managed aquifer recharge points. The NWIDF will help secure the nation’s water supply routes and deliver regional economic development benefits while also protecting the Australian environment.
The fund was established with $440m of capital funding and $59.5m of feasibility funding. At present, only States and Territories are able to apply for funding. Fund reports indicate promising uptake by the various State and Territory Governments, with over 40 investigations across Australia currently approved.
A National Water Infrastructure Loan Facility
The National Water Infrastructure Loan Facility (NWILF) provides concessional loans to co-fund the construction of water infrastructure across Australia. Currently, only State or Territory Governments can apply to receive funding. To be eligible for loans, projects must exceed $100m but applications are able to be made under both the NWIDF and NWILF.
Since its inception, the facility has been administered by the Department of Agriculture and Water Resources but is to now be administered and managed by the Regional Investment Corporation (RIC). The Bill to establish the RIC was passed on 6 February 2018, indicating that transfer of management to the RIC will be formalised shortly.
The Future of the Murray-Darling Basin Plan
The Murray-Darling Basin Plan (MDB Plan) continues to be a contentious issue at both State and Federal level. Recently, the following developments have gained traction:
South Australia Royal Commission – In late 2017 the South Australian Government announced a royal commission into the water use from the Murray-Darling Basin Project. The commission intends to investigate the impact of the MDB Plan in South Australia and assess the impact of upstream States on the plan’s viability.
Federal Review of NSW Performance – On 28 November 2017 the Commonwealth Auditor-General tabled an Assurance Review in Federal Parliament under section 19A(1) of the Auditor-General Act 1997 (Cth). The review analysed the Department of Agriculture and Water Resources’ assessment of the performance of New South Wales under the National Partnership Agreement on Implementing Water Reform in the Murray-Darling Basin for the 2014–15 and 2015–16 financial years.
The findings of the Auditor-General contain a useful synopsis of the arrangements between the Commonwealth, New South Wales, South Australia, the ACT, Queensland and Victoria and the operation of the Murray-Darling Basin Partnership Agreement.
It is expected that recent reviews will lead to further scrutiny by regulators (such as FIRB) of transactions which involve water extraction rights and the valuation of those rights. The MDB Plan looks to continue as a prevalent discussion across the early 2018 period.
Essential Services Commission
In 2016 the Essential Services Commission (ESC) published a paper setting out a new pricing framework and approach for water price reviews conducted from 2018. This approach is expected to provide increased incentives for water businesses to improve efficiency and offer better outcomes for customers and increased accountability for service providers that fail to engage with customers. It does this by introducing a new incentive called PREMO.
The 2016 paper summarised the following main changes to the pricing approach:
Customer Engagement – A greater emphasis on the role of customer engagement to inform and influence the price submissions of water businesses.
PREMO – A new incentive mechanism called PREMO, which links the rate of return earned by a water business to the level of ambition in its price submission and to how well a business delivers on the commitments it makes to customers.
Water Business Diversity – New flexibility mechanisms to help ensure the pricing approach accounts for the diversity of the water businesses and their customers, and to allow for streamlined price review processes.
The 17 water businesses regulated by the ESC are now making their submissions and the first determinations should be issued in July 2018. Some draft decisions have been published on the ESC website. The impact on the water businesses through these changes may require new investments in systems facing the customer so as to achieve customer satisfaction in a demonstrable way. Other States may also be monitoring this new approach to water regulation, leading to interstate developments.
New South Wales
Amendments to Water Industry Competition Act 2006
The Water Industry Competition Act 2006 (WICA) was amended in 2014 by the Water Industry Competition Amendment (Review) Act 2014 (Amending Act). However, the amendments are yet to commence many years later as time was needed to formulate corresponding amendments to the regulations. The Independent Pricing and Regulatory Tribunal (IPART) has been conducting public forums to assist with the formulation of the updated regulations and KWM has been involved.
The Amending Act was drafted to implement recommendations of the Urban Water Regulation Review – a statutorily mandated 5 year review of the WICA. Some of the objects of the Amending Act are to:
Provide for separate design and operational approvals for water industry infrastructure;
Provide for separate licensing regimes for operation of water industry infrastructure and sale of water or sewerage services;
Narrow legislative scheme approvals and licensing requirements to particular classes of water industry infrastructure; and
Extend last resort provisions to ensure the continuity of essential services.
We understand that proposed amendments to the regulations, together with further amendments to the WICA, are expected to be released by the Department of Planning and Environment during 2018 in the form of a draft exposure bill for public consultation. We will examine the anticipated amendments when they become available. Commencement of the Amending Act and revised regulations are now expected in 2019.
How will this impact industry?
Following commencement of the Amending Act, design approval will need to be obtained prior to construction of any new water industry infrastructure that falls within the amended WICA.
The Amending Act provides for current licence holders under the WICA to be automatically transitioned into the new regime, although additional conditions may be applied in certain circumstances. Current licence holders under the WICA should keep abreast of changes to ensure the smooth transition of licences into the new regime.
Water industry infrastructure
The amended WICA will only apply to water industry infrastructure that falls within the following categories:
Integrated systems for providing water or sewerage services to 30 or more small retail customer premises in an area or building (Category A Scheme);
Facilities for the production of drinking water with a design capacity of more than 500 kilolitres each day, which are not part of a Category A Scheme;
Facilities for the treatment of sewage that have a design capacity of more than 750 kilolitres each day, which are not part of a Category A Scheme; and
Water industry infrastructure as declared by the regulations.
Change in approval requirements
Under the new regime, design approval will be required prior to the carrying out of works for the construction, installation or alteration of water industry infrastructure. An operating approval will be required prior to the commencement of commercial operation of water industry infrastructure. Applications for design and operational approval will be assessed and approved by IPART on a scheme-by-scheme basis. Approvals will be transferable to qualified transferees.
Change in licensing requirements
The new regime provides that an operating licence will be required to operate water industry infrastructure and a retail licence will be required to sell water or sewerage services to small retail customers. Operators and retailers’ licence applications will be assessed by IPART and approved by the Minister on an entity-by-entity basis, meaning that an operator’s licence would authorise the licensee to operate water infrastructure of a specified class in NSW and could potentially apply across multiple schemes. Licences will not be transferable. This will affect all financing arrangements involving water industry infrastructure as any new owner will need to secure its own licence but if the infrastructure is essential, this could lead to last resort intervention.
Last resort arrangements
The new regime will contain “last resort” provisions for operators who cease to provide an essential service or suffer an insolvency event. Further details on last resort provisions will be fleshed out in the amended regulations.
Service fees charged by licensed operators and retailers to provide services to landowners will be governed by implied contracts, which will contain provisions relating to standard charges and notice requirements for fee increases. The implied contracts will be able to be modified or excluded by express agreement between the licensee and the landowner. The terms of the implied contracts will be distilled in the amended regulations.
2018–2021: Water Pricing in Tasmania
The Tasmanian Economic Regulator has recently released its Draft Report and Draft Price Determination for the Price and Service Plan of the third regulatory period. The reports cover the water pricing and service plans set to cover the period from 1 July 2018 to 30 June 2021. The determination will apply to water services and sewerage services supplied by TasWater.
Status of legislative reform in Western Australia
In February 2015 the State Government approved drafting of the Water Resources Management Bill, which proposes to consolidate the six existing Acts that currently regulate the taking and use of water into one modernised Water Resources Management Act. The drafting of the Bill has commenced, but a formal announcement regarding the current status of the Bill is yet to be made (despite significant drafting progress originally being expected by late 2017).
It is envisaged that the new consolidated Act will reduce red tape and achieve numerous benefits including:
(a) Streamlining of water licence application processes, simplifying the process for renewing and amending existing licences and increase licence tenure (from 10 up to 40 years); and
(b) Facilitating water trading by simplifying the assessment process for trades and transfers, including generic, state-wide trading rules to provide consistency and certainty, making traded volumes and prices publically available and ensuring water allocation plans are a statutory requirement (rather than non-mandatory).
Key Water Projects
Water NSW is continuing its investigations into the a number of significant projects, including water security in the Lachlan Valley and an investigation into raising the Warragamba Dam to assist with flood mitigation.
In May 2017, the Hawkesbury-Nepean Valley Flood Risk Management Strategy (Flood Strategy) was released. It sets out a comprehensive long-term framework to reduce and manage flood risk in the Hawkesbury-Nepean Valley. Water NSW confirmed that the strategy concluded “raising Warragamba Dam by around 14 metres is the best infrastructure option to reduce flood risk from floodwaters from the Warragamba River catchment. The Flood Strategy also includes a range of other infrastructure and non-infrastructure outcomes that must also be part of the solution for managing ongoing flood risk”.
Water NSW is now preparing a concept design and an Environmental Impact Statement to obtain environmental planning approvals with a projected construction phase from 2020 to 2024, should the business case recommend the raising be undertaken.
In November 2017 the Water Corporation acquired land adjacent to the existing Perth Seawater Desalination Plant in Kwinana, which produces 50 billion litres of water a year. It is anticipated the WA Government will soon announce its plans to expand its existing Kwinana facility by an additional 25 billion litres. The project is estimated to cost $500 million and is seen as critical given the WA climate and lack of rainfall to secure drinking water for the Perth region.
The Myalup-Wellington project is a $380 million project to reduce high salinity levels in Wellington Dam and supply extra water for farmers in the Collie River Irrigation District (Collie District) and Myalup Irrigated Agricultural Precinct (Myalup Precinct). The project is being led by private entity Collie Water (a joint venture between Harvey Water and Aqua Ferre) and aims to substantially increase production capacity of the dam to support the under-developed Collie District and Myalup Precinct.
The WA State Government has made a commitment of $37 million to the project. A proposal for a further $140 million funding is currently being sought from the Federal Government under the National Water Infrastructure Development Fund. A further $30 million will be invested by Harvey Water’s members with the balance (of $200 million) to be funded by private investors.
The Burdekin Falls Dam, owned and operated by SunWater, is set to continue to be upgraded to increase capacity and provide extra storage capacity to assist with managing extreme weather events. The project is the latest in a long line of SunWater dam upgrades completed over the last ten years, is estimated to cost $190 million and will continue throughout the 2018 period.
A detailed business case was released by Building Queensland in late 2017, supporting the development of the Lower Fitzroy River Infrastructure Project. The joint proponents, SunWater and the Gladstone Area Water Board, propose to construct a new weir at Rookwood capable of supplying 76,000 millilitres per annum of high priority water to supplement urban water supplies and enhance agricultural and industrial development in the Fitzroy Basin and Gladstone region. Discussions at State and Federal levels continue over funding for the project.