Water Industry (Third Party Access) Amendment Bill

Second Reading

Adjourned debate on second reading.

(Continued from 19 March 2015.)

The Hon. J.M.A. LENSINK (17:13): I rise to make some remarks in relation to this particular piece of legislation, which will provide a legislated regime for third party access to water and sewerage infrastructure in South Australia. In reality, what that means is third party access to SA Water infrastructure, given that they are a vertically integrated monopoly provider of potable water and sewerage services for metropolitan Adelaide households, the majority of industry, and a significant number of country SA customers, and historically have been the provider of these services and also have built the infrastructure to take those services to their customers.

A third party access regime should be designed to enable other players in the water industry to utilise, for a price, an existing supplier's infrastructure (that is, SA Water's) to supply services and therefore provide some level of competition.

In theory, bulk water has been able to be purchased through trade since the liberalisation of water licensing. The most notable scheme that exists is that run by Barossa Infrastructure Ltd., or BIL, which provides approximately 6,000 megalitres of untreated river water to irrigate wine grapes. This scheme was driven through SA Water by the former water minister, the Hon. John Olsen. I am advised that, had it not been for his determination, SA Water would have resisted it and it would not have happened.

Other examples that people mention, which actually are not third-party access, include the Salisbury council wetlands, through aquifer storage and recharge. It is not actually third-party access because SA Water was so intransigent that it led to Salisbury council installing its own pipe network system to service customers. Similar situations exist in and around the River Murray where there is private infrastructure which is also not third-party access because that has been built specifically for those customers and not through SA Water.

Support for a robust third-party access scheme has been a key platform of the Liberal Party over successive elections and continues to be so. Labor has had sort of latent support for third-party access. Competition in the water industry is a requirement under national competition principles, and it was first mooted by the Labor Party through Water for Good, which anticipated that a scheme would be in place by 2015.

The Water Industry Act of 2012 made some minor progress by requiring that a report be undertaken prior to a bill being drafted. The Department of Treasury and Finance report was published in February 2013, with a further round of consultation on the draft bill taking place in November 2013. This bill was tabled again late last year and, most recently, in February 2015.

I will discuss the contents of the DTF discussion paper in a bit more detail because I think it is a bit telling about the government's intention with third-party access. The discussion paper that was released in February 2013 was entitled 'Access to water and sewerage infrastructure'. It raises the option of ESCOSA's—that being the Essential Services Commission of South Australia—regulatory role being extended to include a state-based third-party access regime and how that may occur, from maintaining the status quo, which is negotiation on a case-by-case basis at SA Water's pleasure, to a state-based access regime with oversight by ESCOSA.

In my opinion, the options in the DTF paper are skewed to the outcome that the government was seeking; that is, a replication of the rail scheme, which ESCOSA subsequently argues against. Essentially, there is not the same vertical integration, competition is available through other modes of transport and the ACCC can make binding price determinations, but the rail scheme is the model contained in the bill.

The DTF paper describes a legislative scheme as a 'safety net' which confers, I quote, 'rights on the access seeker in relation to negotiating access and imposing obligations on the infrastructure owner when the access seeker exercises those rights'. Options proposed include setting pricing principles which, I note in the bill before us, only takes place once the issue has gone to arbitration, and also keeping separate accounts, which is contained in the bill.

In my view, the bill before us skews the balance too far towards the infrastructure owner; that is, SA Water. The bill also allows for flexibility for parties to negotiate outside of the access regime. The DTF paper discusses options for light versus heavy-handed regulation, and says the following:

A state-based access regime can provide guidance to the infrastructure owner about the terms and conditions of access, including price.

While light handed models of access regulation generally do not impose on the infrastructure owners or an arbitrator binding guidance on terms and conditions of access, some measures could be included in such a state-based access regime for water and sewerage infrastructure to ensure that sufficient information is made available to the access seeker and arbitrator to assist in negotiation and arbitration.

The paper suggests that a light-handed regime would consist of monitoring commercial negotiation and arbitration yet, even in these elements, my reading of the bill is that ESCOSA's role is quite limited.

In my view, the DTF paper only covers what the government had already predetermined is significant infrastructure, which it defines as: 'not easily duplicated and has a natural monopoly'—which is listed in a table on page 14 of that document—that is, water distribution transport, bulk water transport, local sewage transport and bulk sewage transport. It excludes other areas such as retail services and bulk water supply. The DTF paper also argues for an independent arbitrator.

The submissions to that paper closed in March 2013 with an expectation that a draft bill was to be released 'by mid 2013 for further public consultation' and introduction into parliament in September 2013. There were only six submissions to that paper in total with a preference for light-handed regulation. None of the submissions advocated full retail contestability. ESCOSA's submission argued that the regulatory model should be strengthened, and Treasury said that it anticipated that third party access may lead to greater competition for non-household water users. I quote:

…the connection of the pipelines means that access to these services could stimulate competition in the market for River Murray water entitlements. For larger commercial, industrial and agricultural users, access to SA Water’s bulk water transport infrastructure could also facilitate competition between alternative water sources.

SA Water's submission to that discussion paper was interesting. It contained quite a few reasons why it would be hard in practice to implement third party access and argued that an internal access regime is the cheapest option. I note that it also stated that the private sector already provides 90 per cent of SA Water's capital projects and more than half of its operating expenditure, with a Productivity Commission report placing that at 65 per cent. It had some interesting comments in relation to bulk water prices. I quote from page 5 of their submission:

The availability of water from access to a large active water market satisfies a very important condition for the development of competition in water supply as substantial quantities of bulk water are readily accessible, and subject to competition.

My comments in relation to that are that, yes, that is correct when the Murray-Darling Basin is not subject to restrictions but, when it is subject to restrictions, that matter is certainly quite different. Continuing the quote from SA Water's submission:

SA Water has no strategic advantage in this area and there are no competitive barriers in the SMDB [southern Murray-Darling Basin] market.

I disagree with that comment, given that SA Water already has existing access to all those assets. It certainly has the market share and historical advantages, so I believe it does actually have advantages in that area.

ESCOSA's submission to the February 2013 DTF discussion paper certainly disagreed that initial regulation should not be very light-handed. There is a nuance between 'light-handed' and 'very light-handed' in terms of regulation. I take it that ESCOSA took the view that the proposed model was very light-handed rather than just light-handed.

When we are talking about these matters it is not just whether it is an internal access regime but also how much of the determination is placed with the regulator. Through its submission, ESCOSA clearly believes that further reform is required and that a 'strong, comprehensive and effective state-based access regime is imperative' in order to fulfil the objects of the Water Industry Act.

It also compares SA Water as a vertically integrated monopoly provider to the situation that we saw several years ago with Telstra which was a monopoly provider of telecommunications, stating that the access regime for the latter—that is, Telstra—was in fact stronger than that contained in this proposed regime. I think we are all aware of the legal disputes that took place over several years where I think it was Optus which was trying to gain access to Telstra's infrastructure.

Continuing with ESCOSA's submission, it presents the view that DTF's report should have gone further and focused on two main matters, firstly the scope of assets and to the light-handedness, specifically criticising DTF's argument of the use of the natural monopoly test as the only criteria for access and that this had indeed been struck down by a High Court ruling in 2012.

In relation to the assets, ESCOSA said that it only covers those four components of the supply chain—that is, bulk water transport, water distribution network, bulk sewer transport and local sewerage transport—and clearly believes that more infrastructure services should be included within the access regime. I will quote from page 3 at paragraph 210 of ESCOSA's submission:

No reasons are given for exclusion of other supply chain elements, other than the suggestion that a 1997 report prepared by Tasman Asia Pacific identified only four elements of the supply chain as meeting the criteria for declaration of access.

It was also critical of the rationale for the proposed model. It said that the market analysis for that had not been released and one of my questions for the government is: will it actually provide the market analysis? It also criticised a lack of reference for access to other resources, specifically a lack of requirement to negotiate bulk supply agreements and also to enable sewer mining.

Again, sewer mining has been something that the Liberal Party has advocated for. ESCOSA's submission also advocates that the regulator should have the discretion as to whether it sets prices directly or whether negotiations are the first step, as is contained now in the legislation, with ESCOSA stepping in to arbitrate or appoint an arbitrator if this fails. As ESCOSA noted:

While a negotiation model is the ideal, it may be unlikely to work without at least a credible threat of regulatory escalation to very strong levels.

ESCOSA also argued that it should be the arbitrator rather than the appointer of an independent arbitrator given its complex and specialist knowledge. It also argued that the minister should not be involved in arbitration because of conflict of interest and the fact that arbitration may provide the minister with access the commercial information of SA Water's competitors.

In my view, the DTF discussion paper asks a number of leading questions such that respondents who are not deeply familiar with the issues would not suggest changes outside of the scope of those questions. There was a low number of submissions. I note that most in the water industry in South Australia are customers of SA Water and bid for work, and therefore do not want to jeopardise their opportunities, and that is certainly the off-the-record advice that I have received from several people within the industry.

I believe that we need transparency in pricing. One of the other things that people who work in the industry tell me is that SA Water are masters at obfuscation and delay. I believe that this bill keeps ESCOSA further away than at arm's length and with an even less significant role than it has in setting of water and sewerage prices. I also note that the Water Industry Alliance in 2011 in relation to comments on the draft of the Water Industry Bill of 2010 stated that a third party access regime inclusive of access pricing should be operational from the time of ESCOSA's first price determination which is now long gone, that being 2013.

The draft bill was tabled in November 2013. At that stage DTF said, 'It was not considered necessary for the regulator to set access prices as explicitly as it does when regulating SA Water's retail services.' I am not sure what the validity or rationale is for those comments, because they were not justified in any way; they were just left there as a statement.

ESCOSA was disappointed (I think that would be an understatement) that there was no change from the previous comments made earlier that year, and in response said, 'the nature, strength and scope of the proposed regime is so limited as to materially impede the delivery of those benefits to South Australians.' On that basis ESCOSA recommended that those provisions be revisited.

ESCOSA also said, 'This provides no certainty to potential access seekers or the community at large.' ESCOSA also noted that in a negotiate/arbitrate model the transaction costs may be increased and transparency decreased. Those are certainly concerns that the independent regulator has had in relation to this piece of legislation.

Turning to other matters in the bill, the process, as I read it, appoints ESCOSA, in a limited role, as the regulator of a negotiate/conciliate/arbitrate model, and the following are steps in the process for what is defined as an 'access seeker', or applicant, to apply for access to a regulated operator—that is, SA Water in most instances.

First, a regulated operator has 30 days to provide an applicant with a brochure (86F of the bill), and the brochure information must contain the terms and conditions on which it is prepared to make its infrastructure available, the procedures it will apply and the information about prices and costs associated with access.

The second step is that, on application, a regulated operator must provide technical information to an applicant regarding current utilisation, the 'likely' price, or reasons why access cannot be provided. I note that in this particular clause at 86G there is no time frame and no penalty for failure. The regulated operator can also charge the applicant for providing this information. I have quite strong concerns about these particular provisions. I think they continue to place a lot of power within the hands of SA Water without any independent or transparent process to provide access seekers with that information.

The third step is that the applicant writes to the regulated operator to outline the access they are seeking and their proposed terms and conditions (so at this stage we are still in the negotiate phase). The regulated operator then has a right to seek more information. The regulated operator has one month to notify the applicant and ESCOSA of its decisions (this is the first reference we have to ESCOSA in the process, and this is clause 86I).

The fourth step, which is 86K, is that if, after two months, the regulated operator and applicant cannot agree, a dispute is seen to exist, which may be referred to ESCOSA by either party. In the fifth step, a dispute which is referred to ESCOSA must, in the first instance, be subject to voluntary or compulsory conciliation (86M of the bill). In step six, if, after six months after referral to ESCOSA for conciliation the dispute is not resolved, ESCOSA can refer the matter to independent arbitration. ESCOSA's role is to appoint an independent arbitrator but it may not appoint itself as arbitrator. If the matter is still not resolved ESCOSA can direct a fresh round of the same (86M).

Clause 7 relates to arbitration, and has long list of matters which must be taken into account. I have some concerns with those, which I will address at a later date (that is 86P of the bill). I also note that the minister can be party to the arbitration (86S). We have a pretty long drawn out process. For those in the industry who say that SA Water are masters of obfuscation, they certainly have plenty of opportunities in this process before us at which they can delay. They can charge the applicant things and they are not subject to penalties for not providing things on time at 86G, so some seven months down the track, when the matter has gone to arbitration, there still may be no resolution.

The point of going through all of this in so much detail is just to say, why would an applicant bother? That is what has been put to me: why would applicants bother? Their preference is for a transparent scheme where SA Water does not have all the cards in its pack, which is certainly the way that this piece of legislation has been designed.

There are key issues. There is the matter of arbitration and the process, which I have just spoken about in detail, and also the key issues, being the scope of assets, which is 86B, which I have spoken about already, and the limited role of ESCOSA, which does not set the access charges for applicants up front. In the initial process of application, it is SA Water's role to send out brochures, set its own prices and report to ESCOSA when it has made a decision about whether to grant access.

ESCOSA has its first dib at this if a dispute arises leading to mediation or arbitration, although it cannot appoint itself as the arbitrator. As I have said, my understanding of this is that ESCOSA's role is even less significant than that it plays in setting water and sewerage prices. With those comments, the Liberal opposition welcomes the debate. We are pleased that the bill has been tabled again, but I will be bringing forward a number of amendments which are still under discussion with a number of stakeholders. I will obtain those for honourable members and for the government at the first practicality and I look forward to the committee stage of the debate.

Debate adjourned on motion of Hon. G.A. Kandelaars.