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Focus: The National Water Initiative

30 June 2004

In brief: On 25 June 2004, the Council of Australian Governments (COAG) agreed to implement a National Water Initiative that is intended to result in greater compatibility between the state water regulatory regimes and in the adoption of best-practice approaches to water management nationally. Partner Grant Anderson and Senior Associate Robyn Glindemann outline the details of this important initiative.

National Water Initiative

The objective of the National Water Initiative (NWI) is the development of:

a nationally-compatible, market, regulatory and planning based system of managing surface and groundwater resources for rural and urban use that optimises economic, social and environmental outcomes.

Attaining this objective will take some time, and the NWI is therefore to be implemented in a number of stages, with the final reforms being put in place by the end of 2014 (although substantial progress in implementing the reforms is to be made by 2010). Nonetheless, this objective is clearly an important and worthy one and so the refusal of Western Australia to sign up to the NWI is unfortunate.

Set out below is a description of the NWI's key elements.

Definition, security and recording of water access entitlements

Water access entitlements are generally to be defined as perpetual shares of a water resource that is available for consumption as specified in a water plan (although it is recognised that there may be some special circumstances that justify a different approach, eg in the case of the minerals and petroleum sectors). Such entitlements are to be separate from land and not tied to the use that may be made of the water (water use is to be regulated by a separate approval). The intention is to develop water access entitlements that have nationally compatible characteristics (eg that are defined by reference to reliability and quality), that are tradeable, and that can be dealt with like property rights (eg leased, mortgaged, subdivided and amalgamated). Moreover, the security of tenure of the water access entitlements is to be such that they can generally only be cancelled by the government where the entitlement holder has breached the obligations associated with the entitlement, and can only be varied by agreement.

By the end of 2006, all water access entitlements and trades (both temporary and permanent), including the prices of those trades, are to be recorded on publicly accessible water registers. These registers will also provide for the protection of third-party interests (eg security holders) by requiring the registration of encumbrances over the water access entitlement, and by requiring the registered security holder to be notified of any proposed dealing in relation to the entitlement (the consent of the security holder will be required before the entitlement can be transferred or before a subsequent interest is registered).

A number of jurisdictions have already implemented at least some of these kinds of measures.1 Most recently, the New South Wales Parliament passed the Water Management Amendment Bill 2004 that provides for perpetual water access rights and a water register that is similar to the Torrens title land register. Similarly, in its White Paper2,  the Victorian Government has indicated that it will unbundle water entitlements into a (tradeable) water share, a share of delivery capacity and a site-use licence, and that it will also improve Victoria's register system. However, the implementation of these measures in a nationally consistent manner will obviously improve investment certainty, reduce transaction costs and enhance the ability of water access entitlement holders to raise capital.

Environment

The NWI requires that there is to be statutory recognition of the use of water to meet environmental objectives, as well as other public benefit objectives (eg indigenous and cultural values, recreation, fisheries and tourism). This may, for example, be achieved by granting water access entitlements to meet these objectives or through a rules-based system. For this purpose, environmental water managers are to be established to manage the environmental water provisions and the achievement of environmental and other public benefit outcomes.

Water planning

The states and territories are to adopt transparent, statute-based water planning regimes that allow for the clear articulation of the trade-offs between the achievement of ecological and consumptive water uses (informed by best available science, socio-economic analysis and community input).

While each state and territory will be left to develop its own planning regime (including determining whether a plan should be prepared for a particular water source), the intention is that such plans should at least be prepared by the end of 2007 for water resources that are overallocated (ie where the total volume of water able to be extracted under water access entitlements exceeds the environmentally sustainable level of extraction) or that are overused (ie where the total volume of water actually extracted for consumptive use exceeds the environmentally sustainable level of extraction). In these cases, the water plans are to set out a pathway to correct the overallocation or overuse, and there is to be substantial progress made towards addressing these issues by at least the end of 2010.

The water plans that apply for water sources are to be developed in consultation with all relevant stakeholders so as to enable the identification and consideration of consumptive uses and environmental, cultural and other public benefit issues in an open and transparent way. Importantly, the performance of these water plans is to be monitored and they are to be subject to change to accommodate improved scientific knowledge about the water source.

The NWI also recognises that particular land uses (eg dams, bores and plantation forestry) have the potential to intercept significant volumes of surface and ground water. Accordingly, by 2011, each jurisdiction is required to identify such activities and to require additional interception activities of this kind to hold a water access entitlement where the interception exceeds a threshold level (which will vary depending on the circumstances). This initiative is necessary to ensure the integrity of water access entitlements and environmental outcomes. Indeed, the more inclusive the water management system, the more effective it is likely to be – and, on these grounds, stormwater and recycled water could also usefully be included in a comprehensive water management scheme.

Risks associated with changes in allocation

The NWI sets out a risk-sharing regime that is to apply where there are reductions in the availability of water for consumptive use that are in addition to those necessary to address known overallocation or overuse as described above. This was potentially one of the most politically contentious aspects of the NWI, although an acceptable compromise appears to have been brokered. Under the NWI, the party that bears the risk depends on the cause of the reduction in the consumptive pool:

  • where the reduction is caused by seasonal or long-term climate changes or periodic natural events (eg bushfires or droughts) – water access entitlement holders are to bear that risk;
  • where the reduction is caused by improvements in the knowledge of the water source's capacity to sustain a particular extraction level – water access entitlement holders are to bear that risk up to 2014 and, where a 'comprehensive' water plan commences or is renewed after 2014 (and entails a reduction in the availability of water for consumptive use), that risk is to be shared over each subsequent 10-year period as follows:
    • water access entitlement holders are to bear the first three per cent reduction in water allocation; and
    • State/Territory Governments and the Commonwealth Government are to bear any further reduction in water allocation (sharing it one-third/two-thirds for the first such three per cent reduction and half/half for any greater reduction); and
  • where the reduction is due to changes in government policy (eg new environmental objectives) – the relevant government is to bear that risk.

Where such a risk is to be borne by a government, that government will be required to effectively resource the reduction (eg by investing in more efficient water infrastructure, purchasing water from consumptive users on market, or investing in more efficient water management practices etc).

Water markets and trading

In order to facilitate the development of effective water markets both within and between the states and territories, the NWI requires the establishment, by the end of 2007, of compatible institutional and regulatory arrangements (eg to manage differences in entitlement reliability, supply losses, supply source constraints, inter-system trading and cap requirements). This will entail:

  • the establishment of trading rules that are based on a common set of principles;
  • the establishment of exchange rates and/or tagging systems;
  • the immediate removal of barriers to temporary trade; and
  • the immediate removal of barriers to permanent trade out of irrigation areas where those barriers take the form of trading limits that are less than four per cent per annum – it is intended to remove all such barriers by the end of 2014.

Of course, barriers to trade can take the form, not just of limits on outward trade, but also of arrangements for addressing stranded assets (eg exit fees). These kinds of barriers are also to be subject to review.

The removal of barriers to trade in the Southern Murray-Darling Basin is to be fast-tracked, although in that case there is no guarantee that the four per cent interim limit on outward permanent trade (which is to be implemented by June 2005) will be lifted further (this is a matter to be considered in 2009).

Water pricing

Under the NWI, the states and territories agree to the use of consumption-based pricing that entails full-cost recovery for water services (including storage services and water planning and management services). In particular, metropolitan users are to continue to be moved towards upper-bound pricing by the end of 2008 and rural users are to continue to be moved towards upper-bound pricing 'where practicable' but over an unspecified timeframe (with any subsidies to compensate for less than full-cost recovery being publicly reported).

Institutional reform

There is to be institutional separation, as far as possible, of water resource management (which includes water resource regulation, standard setting and enforcement functions) from service provision. Further, water service providers will be subject to annual public benchmarking of prices and service quality, and independent regulators are generally to be used to regulate the prices charged by government water service providers for water storage and delivery.

Other measures

By the end of 2007, nationally compatible water accounting systems, which include accounting for environmental water, and nationally compatible metering standards are to be implemented.

The states and territories have also agreed to develop a range of demand management initiatives, such as water efficiency labelling, permanent low-level water restrictions, and guidelines for water sensitive urban development.

National Water Commission

A new commonwealth statutory body, the National Water Commission (NWC), is to be established to assist in the implementation of the NWI and to provide advice to COAG on national water issues (including the progress of the jurisdictions in implementing the NWI). This body will be funded by the Commonwealth but will comprise federal and state/territory appointees. In addition, the NWC will assume the role of the National Competition Council in undertaking the 2005 assessment of the compliance of the jurisdictions with their National Competition Policy water-related reform commitments.

Murray-Darling Basin

At the COAG meeting, the Commonwealth, New South Wales, Victorian, South Australian and Australian Capital Territory Governments also signed an agreement dealing with the expenditure of the $500 million, which had previously been committed by those governments over a five-year period, for returning water to the Murray-Darling Basin system and restoring the health of that system. Under this agreement, the first priority will be water recovery for six significant ecological systems that are supported by the Murray-Darling Basin (by the end of the five-year period, the amount of the water recovered is targeted to be around 500GL per year). The governments are to be able to discharge their funding commitments by undertaking water recovery projects that are nominated by any interested person (including the governments) and approved by the Murray-Darling Basin Ministerial Council. These proposals may, for example, include investment in water infrastructure, the purchase of water on the market, and changes to river or wetland management. Moreover, the recovered water is to be permanently secured (eg as a water access entitlement or in water sharing plans) for the benefit of the Murray-Darling Basin system through statutory instruments (although such water may be temporarily traded, with the proceeds applied for the purposes of the agreement, where this is not inconsistent with achieving the environmental objectives for which it is held).

This initiative has been criticised as merely a 'rehash' of previous commitments and as falling well short of the requirement to return 1500GL per year of water to the Murray-Darling Basin system so as to restore the health of that system to an acceptable level.

However, further federal funding for the Murray-Darling Basin and other water initiatives (such as the Wimmera-Mallee pipeline) may well be forthcoming in the lead-up to the federal election this year.

If you would like any further information about these COAG initiatives, please contact any of the people below.

Footnotes
  1. A summary of the water regulatory frameworks that apply in each of Victoria, New South Wales, Queensland and South Australia is contained in 'Building a National Water Market', a paper delivered by Grant Anderson at the 9th Annual National Water Conference on 16 June 2004.
  2. The major initiatives contained in the White Paper 'Securing Our Water Future Together' are outlined in AAR Focus: Water of 24 June 2004.

For further information, please contact:

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