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Focus: ERA final report into pricing of recycled water in WA

1 May 2009

In brief: In our September Focus, we reported that the Economic Regulation Authority of Western Australia had commenced its inquiry into the pricing of recycled water. Partner Andrew Mansour (view CV), Senior Associate Robyn Glindemann, Lawyer Jessica D'Souza and Law Graduate Joseph Freeman summarise the final report, and give an overview of recent key developments in water regulation in Western Australia and the Murray-Darling Basin. 

How does it affect you?

  • If the recommendations in the Economic Regulation Authority of Western Australia (the ERA) Final Report on recycled water pricing are implemented, water customers in Western Australia will be able to purchase wastewater directly from households, businesses and treatment plants, opening up competition in the recycled water industry.
  • New rules will make it easier for irrigators in the Murray-Darling Basin to 'transform' their right to receive water from an irrigation infrastructure operator into a separate, tradeable water entitlement.
  • Mining companies that operate in the Pilbara are to receive guidance on the regulator's expectations for the standard of water management in the region.
  • A new inquiry by the ERA into water resource management and planning charges will be of interest to all major users of water in Western Australia.

ERA Final Report: Inquiry into Pricing of Recycled Water in Western Australia

The Inquiry into Pricing of Recycled Water in Western Australia was established on 8 July 2008. Under its terms of reference, the ERA was required to 'undertake an inquiry into, and make recommendations on, pricing and other relevant factors affecting the adoption of recycled water and other alternative water supplies.' The scope of the inquiry did not extend to water recycling by mining operations.1 The ERA published its final report on 6 February 2009. 

The report's key recommendation is that purchasers who wish to buy recycled water should be able to gain access to wastewater under the same terms and conditions as does the Water Corporation. The idea is to open the door to competition in the provision of recycled water in Western Australia.

Specifically, the ERA recommended that a customer should be able to purchase:

  • wastewater directly from households and businesses that produce it;
  • wastewater from a wastewater treatment plant; or
  • recycled water from a wastewater treatment plant.

The ERA recommended that third parties should be given access to the wastewater network, in order to provide recycled water. The ERA recommended against requiring such third parties to contribute to the 'joint costs' of the broader wastewater network, noting that '...recycled water customers would generally reduce costs to users of the network.'2

The ERA recommended against regulating the price of recycled water. However, where wastewater is acquired from a wastewater treatment plant, the ERA suggested that the following pricing principles apply:

  • the price of wastewater would be the cost of delivering the wastewater, minus costs avoided by selling the wastewater; and
  • where demand for wastewater exceeds supply, there should be a scarcity premium 'determined by a neutral tendering process'.

These pricing principles are driven by the need to ensure that there is a level playing field.

The ERA also concluded in its report that:

  • there should be voluntary targets for water recycling;
  •  rebate products are an expensive way to bring about water savings; and
  • water supplies should not be reserved for specific purposes.

Water Market Rules 2009 (Cth) and Water Charge (Termination Fees) Rules 2009 (Cth)

On 11 February 2009, Penny Wong, the Federal Minister for Climate Change and Water, announced a decision to adopt the Water Market Rules and Water Charge (Termination Fees) Rules,3 drafted by the Australian Competition and Consumer Commission (the ACCC) pursuant to the Water Act 2007 (Cth) (the Water Act). One of the objects of the Water Act is to facilitate optimal environmental, social and economic outcomes from the use of the Murray-Darling Basin's water resources.4

Under the Water Act, an irrigation infrastructure operator is a person who owns or operates water service infrastructure (ie infrastructure for the storage, delivery or drainage of water) for the purpose of delivering water for primary use in irrigation.

The Water Market Rules will allow an individual irrigator to request that an irrigation infrastructure operator 'transform' all or part of the irrigator's right to receive water from the operator into a separate, tradeable water entitlement.

Once such a request is made, the Water Market Rules will prohibit operators from doing (or failing to do) something that prevents or unreasonably delays transformation. As described by the Minister, the idea is to '...ensure that irrigators in regulated systems cannot be unfairly prevented from trading water entitlements out of their irrigation districts.'5

In certain circumstances, the Water Charge (Termination Fees) Rules (the Water Charge Rules) will allow irrigation infrastructure operators to impose a fee on an irrigator where the irrigator's right to access the operator's irrigation network is terminated. Under the Water Charge Rules, the maximum termination fee will generally be 10 times the yearly infrastructure access charge.

The Water Market Rules will commence on the day after they are registered, together with Part 1 and rule 8 of the Water Charge Rules. Part 1 of the Water Charge Rules deals with preliminary matters (eg commencement, definitions, etc) while rule 8 empowers the ACCC to approve certain termination fees that the Water Charge Rules would not otherwise allow. The early commencement of rule 8 will allow operators to seek advance approval from the ACCC, so that they can begin charging the fee when the remainder of the Water Charge Rules takes effect on 1 July 2009. As at 15 April, both sets of rules had yet to be registered. 

Separately, on 6 April 2009, the ACCC released its draft advice on water infrastructure charge rules for irrigation infrastructure operators and bulk water operators within the Murray-Darling Basin. The release of the advice follows two issues papers that were released in 2008. Recognising that member-owned and non-member-owned infrastructure operators will have different incentives to distort the market, the ACCC has recommended a three-tiered approach to regulation of operators, having regard to the type of market failure and how material the resulting inefficiency is. The ACCC has sought public comment on the draft advice and the accompanying draft Water Charge (Infrastructure) Rules 2009. Submissions are due by 8 May 2009.

Draft Pilbara water in mining guideline

In February 2009, the Western Australian Department of Water (DoW) released a draft Pilbara water in mining guideline (the draft guideline) for public comment, following consultation with mining industry stakeholders. 

The draft guideline acknowledges the substantial impact that mining can have on groundwater and surface water in the Pilbara, especially where mining is carried out below the water table. The purpose of the document is to provide guidance to mine operators who must deal with the complexities of water management in the Pilbara.

The draft guideline sets out the DoW's water management requirements for the duration of a mining project. The requirements are split into five stages corresponding to pre-feasibility studies, mine planning and development.

In stage 1, an outline of the project concept should be produced by the project proponent, and critical issues that may prevent approval of the project identified. The project outline required at this stage will be similar to a referral under Part IV of the Environmental Protection Act 1986 (WA).

In stage 2, the proponent should identify the regulatory requirements, studies and investigations needed to support an application for a section 5C licence to take water pursuant to the Rights in Water and Irrigation Act 1914 (WA). A thorough approach at this stage is likely to reduce delays in stages 3 and 4. At the conclusion of stage 2, a plan for undertaking the necessary investigations, including a timeline for their completion, should exist.

In stage 3, the agreed studies and investigations should be carried out and an application for a s5C licence submitted, along with relevant supporting information and, if necessary, a draft water management plan. If the Environmental Protection Authority of WA (the EPA) requires a water management plan to be developed as part of its assessment and approval, the DoW will align its own process with the EPA's to avoid duplication. By the end of stage 3, the proponent and the DoW will have an agreed final water management plan.

In stage 4, the proponent submits a detailed operating strategy for the DoW to assess, with changes negotiated as necessary. Stage 4 concludes with the DoW making a licence decision, including an agreed operating strategy and licence conditions.

Stage 5 covers the construction and operation of the mining project. The draft guideline states that adaptive management practices and annual reporting will be employed to adapt and improve the operating strategy and water management plans for the life of the mine.

The deadline for submissions on the draft guideline is 29 May 2009. Submissions can be made by email to allocation.planning@water.wa.gov.au or by post to PO Box 836, Karratha, WA 6714.

ERA Inquiry into Water Resource Management and Planning Charges

The WA Treasurer, the Hon Troy Buswell MLA, has requested the ERA conduct an inquiry into water resource management and planning charges. This inquiry is significant because the imposition of resource management charges has the potential to increase substantially operating costs for mining companies and other large users of water who source their own supply.

Under the terms of reference for the inquiry, the ERA is to present the State Government with a suite of options and recommendations for imposing cost recovery charges. Among other things, the ERA has been requested to make findings about what kinds of water resource management costs incurred by DoW should be recoverable from water users, what proportion of costs should be recovered, and the most appropriate allocation of costs between different licence holders and other water users.

In developing its recommendations to the State Government, the ERA is to have regard to the principles of cost recovery set out in the National Water Initiative, and to the Government's social, economic and environmental policy objectives.

The ERA will publish an issues paper as soon as possible and will subsequently release a draft report to facilitate public consultation. It is due to provide its final report to the State Government by 2 January 2010.

Footnotes
  1. Page 5.
  2. Page v.
  3. Penny Wong, 'New Murray-Darling Water Market and Termination Fee Rules' (press release, 11 February 2009).
  4. See section 3(c) of the Water Act. 
  5. Penny Wong, op.cit.

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