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Focus: Private investment opportunities to enter the NSW metropolitan water industry

15 August 2008

In brief: The private sector can now enter the Sydney and Newcastle water markets, following the proclamation of the Water Industry Competition (General) Regulation 2008 and the formal commencement of the Water Industry Competition Act 2006 (NSW) on 8 August 2008. The Regulation sets up the licensing and supervision tools that give effect to the Act, which is the first legislation of its type in Australia to facilitate private sector involvement in the supply of metropolitan water and associated infrastructure development. Partner Andrew Mansour (view CV), Lawyer Elizabeth Lamaro and Law Graduate Victoria Ho report.

How does it affect you?

  • The legislation creates a licensing structure for the development of infrastructure and the supply of water or provide sewerage services to retail customers. It provides opportunities for developers, operators, retailers and financiers in the water industry.
  • People wanting to participate in the water industry will need to consider whether they require a licence and, if so, must comply with the requirements relating to applicable operating and management plans, and codes of conduct.
  • Retail suppliers will need to ensure that their contract terms comply with the Regulation's requirements for small retail customers. A small retail customer is:
    • in relation to water supply, a person who consumes, in aggregate, at all of its premises, less than 15 megalitres per year; and
    • in relation to sewerage services, a person who discharges, in aggregate, at all of its premises, less than 10.5 megalitres per year.

Background

Until the commencement of the Water Industry Competition Act 2006 (NSW) (the Act) and the Water Industry Competition (General) Regulation 2008 (the Regulation), the public water utilities (Sydney Water Corporation and Hunter Water Corporation) effectively had a monopoly on the provision of potable water and sewerage services in the Sydney and Hunter regions. There was no capacity for a private participant to lay a reticulation network or to transport potable or non-potable water without the assistance of the water utility; nor was there a legislative framework for the retail supply of water by private competitors.

The New South Wales Parliament passed the Act in November 2006 to encourage competition and promote innovation in the water industry, following the Independent Pricing and Regulatory Tribunal's (IPART) inquiry into water and water pricing. The IPART inquiry concluded that an increase of competition in the water industry would also increase efficiency of delivery, encourage innovation and allow for private entry into the industry.

The Act is currently supported by two regulations:

  • the Water Industry Competition (Access to Infrastructure Services) Regulation 2007, established under Part 3 of the Act, which deals with coverage and non-coverage declarations in relation to an infrastructure service1, and access to infrastructure undertakings, agreements and dispute determinations2; and
  • the Water Industry Competition (General) Regulation 2008, which contains provisions for the licensing of network operators and retail suppliers under Part 2 of the Act; the declaration and obligations of retailers of last resort under an order in section 54 of the Act; and other provisions such as the creation of an ombudsman scheme and the establishment of industry and marketing codes of conduct3.

The Act and its supporting regulations commenced on 8 August 2008.

Licensing framework

Network operators

Network operator licences enable private entrants to seek a licence through IPART to operate water industry infrastructure; namely, infrastructure for the provision of potable water, the discharge of sewage, and metering the usage of such infrastructure. The licence also allows certain access rights in order to carry out such tasks.

Clause 6 of the Regulation sets out the information that must accompany a licence application. Upon the granting of the licence, the conditions set out in Schedule 1 are imposed on the licensee. These conditions include compliance with the Environmental Planning and Assessment Act 1979 (NSW) (the EPAA), the Protection of the Environment Operations Act 1997 (NSW) (the PEOA) and the Public Health Act 1991 (NSW), preparation and provision to IPART of infrastructure operating plans and water quality plans, compliance with the Plumbing and Drainage Code of Practice, and public information to be made available on the Internet.

Retail suppliers

A retail supplier's licence authorises private providers to supply water or provide sewerage services by means of water industry infrastructure. An application for a licence for retail supply must include information as to how the licensee proposes to minimise any failure to provide the service, and the arrangements that will apply to deal with complaints and debt-recovery procedures. Retail suppliers are required to conduct their marketing in accordance with the Marketing Code of Conduct. Other general licence conditions that must be complied with are detailed in Schedule 2 of the Regulation.

Importantly, contracts for the supply of water and sewerage services to small retail customers must comply with certain requirements set out in the Regulation, as noted below.

General processes for applications

All applications are to be addressed to IPART for consideration under s9 of the Act and for determination by the responsible Minister under s10 of the Act. Private entrants can submit a single application for both a network and a retail licence if they propose to carry out both functions.

Applicants need to:

  • be incorporated4;
  • demonstrate capacity to carry out the activities for which they seek the licence to carry out; and
  • demonstrate that these such activities do not present a public health risk or significant risk of harm to the environment.

All licensees must also maintain appropriate insurance.

Approval and register

Even if a licence is recommended for approval by IPART, whether a licence is issued is determined by the Minister and ministerial approval must be obtained before the relevant assets begin commercial operations.

IPART is required to report to the Minister annually on licence compliance and has been granted the right to audit and review licences at intervals of not more than every five years (starting from the commencement date), as well as periodic audits as required.

A detailed register of licences is to be maintained by IPART. The information required for inclusion on the Register of Licences includes such things as the names of each person given particular authority under the licence, the kind of licence held and the date it was granted, the licensee's areas of operations granted under the licence and the activities authorised to be carried out, any conditions imposed or variations made to the licence, and details of action taken for any infringements of the licence.

General obligations

Part 4 of the Regulation establishes a framework for consistency in the obligations imposed on the water industry. This includes provisions for the creation of a Water Industry Code of Conduct for arrangements between licensed network operators, licensed retail suppliers and public water utilities; a Marketing Code of Conduct covering such things as the standards of conduct to be observed by marketers and the information that must be provided to customers; and a Transfer Code of Conduct for the transfer of water supplies or sewerage services to, from or between licensed retail suppliers. While the Regulation provides for the creation of these Codes, they have not yet been established.

Part 4 also addresses other matters, including the classes of disputes and complaints to which an ombudsman scheme may be approved, potential exemption from licensing requirements, and the effect of water restrictions in relation to a licensee's area of operations.

Contract compliance

Schedule 2 of the Regulation requires that retail suppliers only supply water to small retail customers under a water supply contract, which must comply with the Regulations. The table of prescribed contract conditions include, for example, notice provisions, set billing periods, charging requirements, and water-use purposes. Contracts for the supply of sewerage services to small retail customers are also regulated.

Conclusion

The legislative structure is a welcome development which should assist in developing competition in the industry.

Footnotes
  1. For the purposes of sections 25, 29 and 33 of the Act.
  2. Explanatory Note, Water Industry Competition (Access to Infrastructure Services) Regulation 2007.
  3. Explanatory Note, Water Industry Competition (General) Regulation 2008.
  4. Under s8(1) of the Act. 

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