Download Public submission to water market rules issues paper by the

Public submission to water market rules issues paper by the
State Government of Victoria on 23 May 2008
Introduction
The Victorian Government is committed to ensuring that policies and administrative
requirements of Victorian operators of irrigation infrastructure encourage free and
open water markets and do not represent a barrier to trade. Water market rules are
an important element of this framework and can have a significant impact on the
ease, cost and timeliness of trade.
Victoria considered the following when addressing questions in the issues paper:

what should be the scope and role of water market rules;

are there any lessons from current practice in Victoria that could inform the
development of these rules; and

given this framework are there any comments or insights Victoria can provide on
the specific issues raised in the ACCC issues paper.
The role and scope of water market rules
As is recognised in the issues paper, water market rules are one component of the
regulatory and administrative framework that covers water trading. The issues paper
refers to the Water Act 2007 to note that:
Water market rules may relate to an act that an operator does, or fails to do, in
a way that prevents or unreasonably delays transformation arrangements being
made.
And defines transformation arrangements as:
Processes by which an irrigator permanently transforms their entitlement to
water under an irrigation right against an irrigation infrastructure operator into a
water access entitlement held by the irrigator (or any body else), thereby
reducing the share component of the operator’s water access entitlement.
Victoria agrees with these definitions and believes that they should limit the scope of
the water market rules. It should be noted that the process for transforming irrigation
entitlements is conceptually distinct from subsequently trading that water entitlement
(and any of the conditions on that trade) even though in some cases the two
processes are managed concurrently by the same organisation.
Water market rules should, therefore, focus on the processes for transforming
entitlements and any constraints or rules that affect those processes, but not the
processes for trading a transformed entitlement or rules that may affect that trade.
Victoria agrees that the purpose of water market rules is to ensure that entitlements
can be traded, and considers that surety will be maximised through consistent
arrangements across the Murray-Darling Basin.
Given this definition of the scope of water market rules, Victoria considers that a
number of matters raised in the issues paper, while important to effective water
Public submission to water market rules issues paper
State Government of Victoria
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23 May 2008
trading, are beyond the scope of water market rules. This is discussed in more detail
below.
Transformed entitlements should be subject to the same trading rules as other
entitlements. As such, general trading rules are not considered relevant to setting
water market rules.
Victoria’s approach
Victoria supports national efforts to create a level playing field, and presents its
framework of unbundled entitlements as an effective model for achieving this.
Victoria’s commitment to (and success in) establishing an effective water market is
illustrated by the following:

permitting trade out of water systems (with a yearly limit of 2%) when it was
banned by other jurisdictions, with the attraction of such trade to water users
illustrated by the increased limit of 4% being reached in most Goulburn-Murray
areas in 2006-07 and 2007-08;

extensive transfer of water shares between Victorian authorities in 2007-08;

tagged trading of water shares (replacing the previous exchange rate method)
established in 2007-08 between Goulburn and Murray water systems; and

significant allocation trade both intrastate and interstate.
Victoria already recognises the importance of resting water rights with individual
irrigators, or other bodies, and the limitations when such rights are held jointly by
infrastructure operators. This principle is already reflected in the rights applying in all
major Victorian irrigation districts so there is no need for a further process to
transform these entitlements in Victoria. This process has been facilitated by the
unbundling of Victoria’s water entitlement framework, which, effective from July 2007
in northern Victoria, established a system whereby:

water entitlements are separate from delivery entitlements;

entitlements are held by individual irrigators rather than irrigation corporations or
authorities and are publicly listed as such on the Victorian Water Register;

access fees and termination fees are in place (and no exit fees exist); and

transaction fees have been set in an open and transparent manner through a
Regulatory Impact Statement.
Victoria believes that similar reforms should be adopted across the southern
Murray-Darling Basin. This would form the basis of a robust and transparent set of
property rights that would provide clarity to water users and ensure that the potential
gains from water trade are realised.
Comments on specific sections of the issues paper
The comments below are limited to a discussion of water market rules, noting the
difference between water market rules and water trading rules outlined above.
Based on the definition reflected in the issues paper, the Victorian submission
focuses on rules that relate to transformation (i.e. permanent conversion of water
Public submission to water market rules issues paper
State Government of Victoria
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23 May 2008
rights into independent access entitlements) and does not comment on general rules,
processes and constraints applicable to trading entitlements.
While it is important to have some understanding of trading issues in order to design
effective water market rules, detailed questions relating to water trading should be
reserved for discussion as part of the ACCC’s future consultation processes. In the
discussion below Victoria focuses on issues relevant to the water market rules. It
also notes, however, that issues that are relevant to water trading should not become
a barrier to the transformation process.
Victoria, therefore, considers that the water market rules should specify those issues
that an irrigator can take into account in making a transformation decision and
prohibit the consideration of issues outside that list, including:

to whom the water can be sold;

compliance with or setting of constraints on the trade of water out of an irrigation
district;

compliance with or setting of constraints on how and where water can be traded
out of an irrigation district;

compliance with or setting of conversion rates for subsequent trades;

cut-off dates and trading seasons; and

the use of specific brokers or exchanges to affect any subsequent trade.
All of the issues above are relevant to the rules that govern water trading but should
not be considered by infrastructure operators when processing the transformation of
an entitlement.
3
Water market and trading objectives
There are two broad objectives that Victoria considers are important to effective
water market rules: (1) well-defined property rights; and (2) consistency in the
treatment of operators in different jurisdictions, different irrigation districts and who
hold different types of water rights (for example transformed and other individually
held rights).
The issues paper correctly recognises the importance of well-defined property rights.
These form the critical link between the market and trading objectives as well as
desirable and effective water market rules, and are essential to providing appropriate
protection of third parties. Victoria has achieved this through unbundling, where
water entitlements are separate from delivery entitlements, and notes a clear need
for similar action in other jurisdictions.
While it is possible to transform a bundled right, Victoria considers unbundling to be
an important facilitator of effective trade processes and ideally would be dealt with at
or before the transformation process. Therefore, Victoria considers that processes
for separating water entitlements from delivery entitlements should form part of the
market rules.
Unbundling separates the right of access to the infrastructure that delivers water from
the right to a share of the available water. It allows the separation of concerns about
Public submission to water market rules issues paper
State Government of Victoria
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23 May 2008
infrastructure protection from decisions to rest the right to a share of the water in the
hands of an individual. If these rights remain bundled several problems arise:

There is less clarity in the obligations of holders of these rights, for example it is
difficult to retain clear terms and conditions on the delivery of water if the
transformed right is subsequently traded.

The transformation process is significantly more complex and difficult because it
must address changing the entitlement and infrastructure protection issues
simultaneously. This adds to information requirements, complexity of the process
and slows the process. It creates a barrier to easy transformation, which has flow
on costs because it reduces the certainty and bankability of water rights, for
example reducing its mortgageabilty.

Retaining bundled rights in some jurisdictions and unbundled rights in others has
implications for the efficiency of trade. If trading decisions in only some
jurisdictions are influenced by infrastructure protection issues, this would not only
reduce trade overall but artificially distort the distribution of trade between
jurisdictions.
Ideally these issues should be addressed for all entitlements regardless of whether
transformation is sought. Where this is not the case, Victoria considers that water
market rules should require the separation of water entitlements from delivery
entitlements as an initial part of the transformation process. Consistency between
jurisdictions is important for effective water trading, and not requiring consistency up
front will only result in the need for ongoing bandaid solutions to address problems as
they arise.
In addition, water market rules should ensure that once entitlements have been
transformed they are treated in the same way as all other individually-held
entitlements.
4.1
Constraints on the parties to whom water can be sold
Restrictions on water use within an unbundled system are not an issue for the
transformation of rights and do not impose a barrier to trade through the
transformation process. There are good reasons to restrict water use on land (e.g.
environmental and third party impacts) but this is best managed through water use
licenses. Trade can proceed independently of such management controls.
While being a jurisdictional requirement that is not imposed at operators’ discretion
(and is therefore beyond the scope of the issues paper), it is worth noting that
Victoria considers it appropriate, at this stage of water market establishment, to
prescribe a limit on who may hold water shares. Amendments to the Water Act 1989
(Vic) introduced in July 2007 set a limit on the amount of water shares that can be
held by non-landholders, being 10% of a supply system’s entitlement. This was
established in response to community concern that water market speculators could
manipulate the price of water through purchase of large amounts of water shares.
The 10% limit has only been in place for a short time, and has not been reached in
any water system (levels are currently around 2-3%). The limit can be reviewed
under the Water Act 1989 (Vic) if required.
Public submission to water market rules issues paper
State Government of Victoria
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23 May 2008
4.2
Constraints on water exports
Constraints on water exports affect water trading and should be excluded from any
consideration of the transformation of water rights, as noted above. While the issues
raised in this section of the issues paper should be reserved for discussion as part of
ACCC’s forthcoming consultation process on water trading rules, Victoria notes that
the 4% limit on permanent trade out of water systems is the subject of review by the
Council of Australian Governments’ Working Group on Climate Change and Water.
Victoria has serious concerns regarding the imposition of exit fees, which are
discussed in our response to Section 5.2 of the issues paper.
4.3
Other constraints on trade and transformation
Victoria has set certain constraints on how and where water can be traded, not only
for hydrological and environmental purposes but also to prevent third-party impacts.
These constraints were developed by the Department of Sustainability and
Environment in consultation with Goulburn-Murray Water in its role as resource
manager for rivers in the Murray-Darling Basin, and approved by the Minister for
Water. They are a clearly documented jurisdictional requirement, having been set
out in water trading rules available to the public via www.waterregister.vic.gov.au.
The constraints are largely accepted by market participants as being necessary.
Victoria believes that all such constraints should be reviewed. Any new provisions
should be developed and approved at the jurisdictional level, and not by individual
operators. Constraints should also be reviewed periodically to ensure that they are
still relevant or whether changing circumstances warrant their revision or removal.
Such constraints, however, should not impact on the decision to transform a water
entitlement as they are again a trading issue not a transformation issue.
4.4
Security for future payment of fees
While the appropriateness of requirements for security is a legitimate concern, these
concerns can be satisfactorily addressed through proper adoption of the existing
Schedule E Protocol for interstate trade, as well as development of principles
consistent with that protocol for intrastate trade. Application of free market principles
would suggest that security should only be sought when absolutely necessary.
Victoria considers that the water market rules should ensure that any requirement for
security against future payments should be commercially balanced and the minimum
needed to protect the legitimate business interests of the infrastructure operator. It
should be possible to challenge the level of required security on the basis that it does
not meet these principles.
4.5
Administrative fees and charges
In Victoria, fees for transactions relating to water entitlements and the Victorian
Water Register are based on cost recovery principles, and are prescribed in the
Public submission to water market rules issues paper
State Government of Victoria
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23 May 2008
Water (Resource Management) Regulations 2007 (Vic). These were set in an open
and transparent manner through a Regulatory Impact Statement process.
Victoria considers that it is appropriate for charges in all jurisdictions to be based on
cost recovery. Therefore, the water market rules should require governments or
infrastructure operators to set such fees based on cost recovery principles. If the fee
is set internally by the infrastructure operator it should also be possible for the fee to
be challenged on the basis that it does not reflect cost recovery principles.
Transaction processes and fees should be regularly reviewed and best practice
standards identified.
5.1
Terms and conditions for transformation and/or trade
Terms and conditions should be straightforward and transparent so that individuals
may quickly and simply obtain title to their entitlements. Victoria notes that a lack of
clarity and availability of terms and conditions can contribute to low rates of
entitlement transformation.
The water market rules should require that each infrastructure operator publish on its
website the terms and conditions for transformation and that these terms and
conditions should not present a barrier to trade. There should also be a mechanism
to challenge those terms and conditions if they do not meet the above requirements.
5.2
Enabling transformation separate to trade
Victoria agrees that transformation and trade are two distinct processes and that the
process for transforming water entitlements should not be automatically linked to
trading those rights. The holders of an irrigation right should be entitled to seek to
have that right transformed as a separate process to trade, if they choose. This right
should be reflected in the water market rules as an obligation on infrastructure
operators to respond to all applications for transformation and apply the appropriate
criteria to considering those applications. These criteria should not include issues
related to any subsequent water trade.
Many of the matters raised in the issues paper about the practical difficulties of
setting terms and conditions of delivery once the entitlement has been separated
would be dealt with by requiring delivery rights to be separated from water rights.
In addition, the water market rules should specify that operators cannot apply
different terms and conditions for either individual entitlement holders or for different
classes of entitlement holder (i.e. transformed and untransformed). Likewise,
operators should not be able to unilaterally vary terms and conditions.
Finally, exit fees should not form any part of terms and conditions. Exit fees are
defined in the Schedule E protocol as a fee levied by an infrastructure operator on
the transfer of a water entitlement out of the infrastructure operator's network or
irrigation district (excluding any fee associated with the costs of processing that
transfer). Exit fees remain a potent barrier to trade, and are still in use by some
corporations and trusts. For example, the use of de facto exit fees can prevent water
moving to its most economically-efficient use and, by seeking to protect one area
Public submission to water market rules issues paper
State Government of Victoria
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23 May 2008
from structural adjustment, will increase structural adjustment pressures for other
areas. The water market rules should prohibit exit fees.
5.3
Transformation and / or trade administrative processes
The questions raised in this section of the issues paper reflect the need to separate
water entitlements from delivery entitlements, and the inherent recognition of
individual rights that forms part of that process.
The information requirements covered in the water market rules should relate only to
information necessary for transforming an entitlement. Information sought from
applicants by operators should be limited to only that which is necessary to establish
ownership and ensure that security interests (e.g. mortgages) are considered. Much
of the information listed in the issues paper is relevant to trading rather than
transformation.
5.4
Timeliness
Processing of transformation applications should be as prompt as possible,
recognising the amount of work involved and the need to avoid mistakes.
The water market rules should specify that timelines need to be published by the
infrastructure operator and there should be a mechanism to challenge either
excessive timelines or a failure to meet timelines by the operator.
5.5
Operators’ water registers and accounts
Public water registers are valuable information tools for both operators and
applicants for transformation. It will be critical for these registers to be compatible
with one another, and Victoria recommends that the ACCC consider the current work
on compatible registers by the Council of Australian Governments’ Working Group on
Climate Change and Water.
5.6
Market information
Market information is a much broader concept than the information necessary to
provide transparency in the system of transforming entitlements.
Currently,
information in relation to transformed rights appears to be limited. Pricing and
volumetric information is recorded on both Victoria and New South Wales water
registers. There is a lack of clarity on which NSW trades involve transformed rights.
Information on transformed entitlements should be more readily available to aid
monitoring of market effectiveness.
To facilitate transparency in the operation of the market and, as noted below, to
assist in enforcement of the rules, Victoria considers that information should be
publicly available on the number of transformed entitlements in each district and the
proportion of water attached to those entitlements.
Public submission to water market rules issues paper
State Government of Victoria
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23 May 2008
6.1
Mortgageability of irrigation rights
The ability to mortgage irrigation rights allows irrigators to raise funds for purchase of
water to grow their business. This has been an important element of Victoria’s
unbundling of entitlements in northern Victoria. Rules that assist transformation will
also assist the market because transformed entitlements are more attractive to
lenders, thereby allowing buyers to obtain finance to purchase entitlements. This will
provide a more even playing field and encourage buyers to consider diverse sources
of entitlements, rather than being limited to a smaller pool of already-separated
assets.
6.2
Tax implications of transformation and trade
Victoria recognises that unbundling of entitlements in other jurisdictions may have tax
implications, and that the ACCC will need to consider these in developing advice on
water market rules. That being said, Victoria has no specific comments on this
section.
7.1
Coverage of water market rules
Uniform application of water market rules to both large and small operators would
maximise market access.
7.2
Transitional arrangements
The issues paper seeks comment on whether transitional arrangements should be
available to account for contracts entered into between an operator and another
person before the water market rules are made or amended. Victoria considers that
this should not be a basis for transitional arrangements in water market rules, given
that they apply to transforming water entitlements. Pre-existing contracts between
irrigators and operators should be construed as relating to delivery rights and
responsibilities rather than water entitlements. With this in mind, any transitional
arrangements within contracts should address maintenance of and payment for
infrastructure rather than influencing the trade or transformation of entitlements.
While transitional arrangements are to be discouraged, there may be justification for
a brief notice period in order to provide operators with adequate time to ensure
compliance with water market rules.
7.3
Monitoring compliance with water market rules
Monitoring is required and is envisaged by existing bilateral agreements between
Victoria and New South Wales as well as Victoria and South Australia. However,
arrangements have yet to be put in to effect. Water market rules should include
mechanisms to ensure compliance by operators
In many respects, development and enforcement of water market rules will be a prerequisite to reviewing other restrictions on water trading. Unless the transformation
Public submission to water market rules issues paper
State Government of Victoria
Page 8 of 10
23 May 2008
process is working effectively it is not possible to establish efficient water trading and
there is a risk that removing other restrictions on trading could reduce, not improve,
efficiency by exacerbating distortions that arise because of poor transformation
processes.
In this regard, Victoria supports the ACCC taking an active role in monitoring
compliance with the water market rules and enforcing those rules when breaches
occur. Victoria notes that effective compliance monitoring and enforcement rely on
the enforcement body having access to information about compliance and potential
breaches. Such information could be accumulated by requiring infrastructure
operators to report regularly to the ACCC on the number of transformed entitlements
and the volume of water attached to those entitlements, and establishing a
complaints process. The complaints process should deal, in particular, with
complaints in the areas in which Victoria suggested there should be mechanisms to
challenge whether conditions or processes established by an infrastructure operator
are consistent with the water market rules.
Closing remarks
Victoria considers that appropriate water market rules are essential for the
development of effective and efficient water trading. Water market rules should also
encourage a consistent approach among jurisdictions, to ensure they do not lead to
subsequent distortions in trade because of a lack of a level playing field. Such rules
would assist movement towards a free and open water market and, while it is
important to acknowledge concerns regarding the pace of structural adjustment,
these concerns should be addressed by other means (e.g. trading rules or other
government policies) and are beyond the scope of water market rules.
Overall, Victoria considers that the water market rules should cover the following
issues:

Specify the issues an infrastructure operator can take into account in making a
decision on transforming an entitlement and prohibit other issues from being
considered in that decision.

Require operators to separate the delivery entitlement from the water entitlement
at the time of transformation, if this has not already occurred;

Require infrastructure operators to transform an irrigation right into a separately
held entitlement at the request of the holder of the irrigation right (transformation
processes should not be automatically linked to trading processes).

Ensure that any requirement for security against future payments should be
commercially balanced and the minimum needed to protect the legitimate
business interests of the infrastructure operator. It should be possible to
challenge the level of required security on the basis that it does not meet these
principles.

Require governments or infrastructure operators to set administrative fees and
charges based on cost recovery principles. If the fee is set internally by the
infrastructure operator it should be possible to challenge the fee on the basis that
it does not reflect cost recovery principles.

Require that each infrastructure operator publish on its website the terms and
conditions for transformation and that these terms and conditions should not
Public submission to water market rules issues paper
State Government of Victoria
Page 9 of 10
23 May 2008
present a barrier to trade. There should be a mechanism to challenge the terms
and conditions if they do not meet the above requirements.

Specify that operators cannot apply different terms and conditions for either
individual entitlement holders or for different classes of entitlement holder (i.e.
transformed and untransformed). Likewise, operators should not be able to
unilaterally vary terms and conditions.

Prohibit exit fees.

Limit information sought from applicants by operators to that which is necessary
to establish ownership and ensure that security interests (e.g. mortgages) are
considered.

Specify that timelines need to be published by the infrastructure operator and
there should be a mechanism to challenge those timelines or a failure to meet the
timelines if they are excessive.

Require infrastructure operators to report regularly to the ACCC on the number of
transformed entitlements and the volume of water attached to those entitlements,
and require the Commonwealth to establish a complaints handling process.
Victoria invites the ACCC to seek further information on comments made in our
submission, or on matters not addressed in this submission yet still relevant to
ACCC’s preparation of advice on water market rules.
Public submission to water market rules issues paper
State Government of Victoria
Page 10 of 10
23 May 2008