Water Industry (Third Party Access) Amendment Bill

Introduction and First Reading

The Hon. I.K. HUNTER (Minister for Sustainability, Environment and Conservation, Minister for Water and the River Murray, Minister for Aboriginal Affairs and Reconciliation) (17:24): Obtained leave and introduced a bill for an act to amend the Water Industry Act 2012. Read a first time.

Second Reading

The Hon. I.K. HUNTER (Minister for Sustainability, Environment and Conservation, Minister for Water and the River Murray, Minister for Aboriginal Affairs and Reconciliation) (17:25): I move:

That this bill be now read a second time.

I seek leave to have the second reading explanation inserted in Hansard without my reading it.

Leave granted.

Water is our most valuable resource, fundamental to our way of life, our economy and our environment. The millennium drought in the early 2000s challenged our traditional assumptions about the security of our existing supplies and highlighted the need for a longer term strategic approach to water security in South Australia.

In particular, our traditional reliance on a guaranteed minimum volume of flow into South Australia from the River Murray, under an agreement with other Murray Darling Basin States, was found to be vulnerable under severely reduced rainfall. In essence it never occurred to the State, from a water security perspective, that there could be situations where there is just not enough water in the system to allow for a 'guaranteed' level of water.

In response to the unprecedented drought conditions, the Government developed a long term water security plan for South Australia. Water for Good was released in June 2009 outlining its long-term strategy and actions needed to ensure safe, secure and reliable water supplies able to sustain continued economic and population growth. Water for Good is based around a number of core elements:

Diversifying water supplies;

Improving the way we use water;

Improving governance arrangements; and

Modernising the water industry through a new regulatory framework.

Progress with the implementation of Water for Good is reported annually and this report is made public and tabled in Parliament. In the most recent annual review, there had been significant progress in implementing actions, with 30 being completed, 50 on track and only 13 experiencing some minor delays.

A strong legislative base that provides sensible regulatory arrangements for the water and wastewater services sectors is a key foundation of the Government's approach to water sector reform.

The proclamation of the Water Industry Act 2012 (the Act), a key action in Water for Good, marked a significant milestone in the Government's reform of the water industry in South Australia and marked the first major legislative reform for the water and wastewater services sector for decades. The Act provides a new legislative foundation to promote competition and drive more efficient and innovative service delivery.

The Act declared water to be a regulated industry under the Essential Services Commission Act 2002 and appointed ESCOSA as the economic regulator and licensing authority for retail water and sewerage services in South Australia. Other significant reforms to the sector include:

Avenues for future pricing reform;

Streamlining of technical regulation of the sector;

A commitment to ongoing water demand and supply planning;

The formalisation of SA Water's customer service standards through the SA Water customer charter and the standard customer contract;

The requirement for external reporting and monitoring of SA Water's performance and compliance;

The introduction of formal customer consultation requirements for SA Water's future regulatory determinations; and

Requiring audited regulatory accounts for SA Water.

In May 2013, ESCOSA released its first Revenue Determination in respect of water and sewerage retail services provided by SA Water for the 3 years to June 2016. ESCOSA also identified savings of about $300 million in SA Water's operational and capital expenditure over the three years period of the Determination. The Government subsequently reduced water prices by 6.4 per cent in the first year and limited increases to inflation in the following two years. This provided relief for consumers from the recent increases in water prices as a result of necessary investments in water security measures.

To build on these reforms and to satisfy the requirement of section 26 of the Water Industry Act, a process to establish a state based access regime was initiated with the release of a Report on Access to Water and Sewerage Infrastructure in February 2013.

An effective access regime will promote the economically efficient operation of, use of and investment in water and sewerage infrastructure and encourage greater competition in upstream and downstream markets, increase standards of service and security of supply, and provide longer-term downward pressure on prices.

The current policy framework allows SA Water to pursue opportunities, on appropriate commercial terms, arising from spare water transportation capacity within their water infrastructure (eg in the Barossa and Willunga). However, this framework does not apply on an industry wide basis, nor does it include transparent pricing and negotiation principles, disclosure requirements, and provisions for review and arbitration, if an agreement cannot be achieved. A legislated state based access regime will address these shortcomings in the current arrangements.

The Access Report set out a range of issues relating to the amendment of the Water Industry Act to provide a right to businesses to negotiate access to water and sewerage infrastructure services and invited feedback from industry participants and interested community members.

Following feedback on the Access Report, a consultation draft Water Industry (Third Party Access) Amendment Bill was tabled in Parliament in September 2013 along with an accompanying explanatory memorandum.

Six submissions were received in response to the Access Report. They were from Business SA, ESCOSA, SA Water, Alano Water, the Roxby Council and Adelaide City Council. Business SA, ESCOSA and SA Water also provided submissions to the exposure draft Bill.

Based on the Access Report, and with appropriate consideration being given to the public submissions received, the Water Industry (Third Party Access) Amendment Bill 2014 (the Bill) introduces a further major reform to the water industry. The Bill is the end result of a long and inclusive consultative process. Part of this consultation involved a protracted negotiation with the Commonwealth Government regarding the interaction of the proposed access arrangements and Commonwealth Water Charge Rules.

The Bill amends the Water Industry Act by inserting a new part 9A that provides a light handed negotiate/arbitrate framework for businesses to seek access to services provided by natural monopoly water infrastructure (e.g. transport services via SA Water's bulk water pipelines).

The Bill establishes access arrangements to SA Water's bulk water transport services. The Bill does not relate to retail services or bulk water resources. Given the current stage of development of the South Australian water industry, it would be premature to establish full retail competition.

The Bill amends the Water Industry Act to ensure that access seekers and infrastructure owner are not limited from negotiating commercial agreements outside of the provisions of the access regime. The Bill, as a safety net, confers rights on the access seeker in relation to negotiating access and imposing obligations on the infrastructure owner when the access seeker exercises those rights.

The Bill appoints ESCOSA as the regulator of a state based access regime for water. ESCOSA will be required to adopt a light handed regime of monitoring and enforcing compliance with the access regime. ESCOSA will be required to report to the Minister each year about the work carried out by the regulator under the access regime.

The adoption of a light handed regime that facilitates commercial negotiation and arbitration in a low cost manner is considered appropriate in an environment where access negotiations are likely to be infrequent and specific to the needs of the access seeker. This approach has been adopted in South Australia's certified legislative access regimes for railways (set out in the Railways (Operations and Access) Act 1997) and port services (set out in the Maritime Services Act 2000).

In an environment where access negotiations are likely to be frequent and the needs of the access seekers are common, then an access regime that involves prior determination and approval of access terms and conditions and associated prices is likely to be more cost effective for facility owner and the access seekers. This approach has been adopted for industries that have been vertically separated and subject to substantial economic reform, including the gas and electricity industries, where there is full retail contestability.

While important economic reforms to the water industry have been made in South Australia through the Water Industry Act, the water industry is not at the same stage of reform as the energy sector and such a heavy-handed approach cannot be justified. Interstate and international evidence shows that a gradual transition approach is more appropriate for introducing third party access regimes in an attempt to avoid unintended adverse outcomes and minimise potential costs to industry and general public.

The key to a well-balanced access regime is to promote greater competition while not disadvantaging SA Water customers broadly by, for example, facilitating private providers gaining access to infrastructure in the low-cost / high-revenue sections of the network, leaving SA Water's customers to bear the full costs of the high-cost / low-revenue sections.

The scope of the access regime established by the Bill includes all water infrastructure services that comply with clause 6(3)(a)(1) and (2) of the Competition Principles Agreement (CPA) and are significant to the South Australian economy. At this stage this would include SA Water's bulk water transport services. The access regime may apply to other services, such as water storages and treatment plants, to the extent that they are integral to the operation of the infrastructure services for which access is being sought (e.g. the transport services cannot be provided without passing through the water treatment plant).

The CPA requires that: wherever possible third party access to a service provided by means of a facility should be on the basis of terms and conditions agreed between the owner of the facility and the person seeking access. That is, to the extent possible, governments should avoid intervening in commercial negotiations between providers and access seekers.

The amended Water Industry Act will establish that nothing in the proposed legislation prevents a regulated operator from entering into an access contract with another person on terms and conditions agreed between the parties.

Water and sewerage infrastructure owned by water industry entities regulated under the Water Industry Act range from critical pipelines serving hundreds of thousands of people to local distribution networks serving less than one hundred. While the scope of the access regime should be broad in order to have consistent regulation across the South Australian water industry, it is not considered appropriate for the regime to be fully applied to all water infrastructure services.

The state based access regime will not be applied to community facilities, such as community waste management schemes and small water distribution systems, which are relatively small in scale and are unlikely to facilitate competition in dependent markets. Thus, it is considered that they do not meet the requirement of the CPA that the infrastructure be significant. Applying a formal third party access regime to these infrastructures would impose unnecessary costs and excessive administrative burdens on the owners of the infrastructure without any appreciable benefits being realised.

There is a range of water and sewerage infrastructure that does not easily fit into either of the categories described above (full application and not applied). Only some sections of Part 9A of the amended Water Industry Act relating to basic information requirements and reporting would apply to this infrastructure.

Over time, the significance of some infrastructure may increase and may then warrant full application of a state based access regime. But, at this stage the cost to the infrastructure service provider of complying with a state based access regime may not be justifiable.

The infrastructure operator will be required to provide information about access seekers to the regulator, and as part of its report to the Minister, ESCOSA will report on whether the access regime in relation to specific pieces of water or sewerage infrastructure should be extended.

ESCOSA will also be required to review the access regime established under Part 9A to ascertain whether the access regime should continue to apply to particular water infrastructure services in South Australia. ESCOSA will be required to conduct the review by 30 June 2019 and every five years thereafter. The report would be provided to the Minister and tabled in Parliament.

In an effective access regime, the right to negotiate will be supported by provisions to enforce that right. The Bill provides the access seeker the right to trigger an access dispute and commence binding arbitration after the regulator has first sought to resolve the dispute through conciliation.

The arbitrator will be appointed by ESCOSA and the decision of the arbitrator will be enforceable as if it were a contract between the parties.

South Australia is well placed in relation to its regulation of public health, environmental and safety standards and the community rightly expects the Government not to compromise these standards.

The Bill does not seek to alter existing frameworks in these areas and includes an explicit requirement that no decision taken by the regulator or arbitrator in relation to access to water infrastructure can override requirements or directions under the Safe Drinking Water Act 2011, the South Australian Public Health Act 2011, the Natural Resources Management Act 2004, the Environmental Protection Act 1993, or other law or other legislative requirement relating to health, safety or the environment.

Charges made by water industry entities in South Australia, including SA Water and South Australian irrigation trusts, may be subject to Commonwealth water charge rules made under the Water Act 2007 (Cth).

The Commonwealth water charge rules appear intended to exclude urban water supply activities from their remit, however, the precise scope of the application of the Commonwealth regime is not easy to determine. There is potential for inconsistency between the state based access regime and the Commonwealth regime where both regimes apply to the same infrastructure operator.

The Bill avoids this regulatory uncertainty by allowing for the use of the provisions of Part 11A of the Water Act 2007 (Cth) to exclude or displace the operation of the Commonwealth water charge rules in the event that any such inconsistency arises. The use of the displacement clause brings with it some obligations to other stakeholders under existing intergovernmental agreements.

Negotiations with the Commonwealth are continuing to find an alternative solution which does not necessitate the use of these displacement provisions.

The use of the displacement clause will not be automatically triggered with the passage of the Bill and will only come into effect if an inconsistency arises. This provides the opportunity for continued dialogue with the Commonwealth.

The Government regards the establishment of a state based access regime for water infrastructure, certified effective, as a necessary further step in the ongoing reform of South Australia's water industry.

Unlike some other industries subject to access regimes, the delivery of water and wastewater services presents some challenging social equity considerations including affordability, health and safety, as well as environmental issues. Careful consideration and incremental application of any access arrangements is necessary to ensure that unintended outcomes are minimised.

The amendments to the Water Industry Act contained in the Bill provide for the establishment of a light-handed access regime the Government considers appropriate given the current stage of development of the State's water industry. The access regime will be monitored and regularly reviewed by the regulator and, where appropriate, it can be adjusted to suit changing circumstances.

While it may take some time to fully realise their benefits, the extensive reforms implemented by the Government establish a foundation for the development of a competitive, efficient, innovative and safe water services sector so crucial to the well-being of the whole South Australian community.

I commend the Bill to Members.

Explanation of Clauses

Part 1—Preliminary

1—Short title

2—Commencement

3—Amendment provisions

These clauses are formal.

Part 2—Amendment of Water Industry Act 2012

4—Amendment of section 3—Objects

An additional object is included in section 3 of the Act for the purposes of proposed Part 9A.

5—Insertion of section 5A

This clause proposes to insert new section 5A:

5A—Provisions related to operation of Part 9A

The Governor may, by proclamation, declare the extent to which Part 9A will apply in relation to specified water infrastructure or sewerage infrastructure (or specified classes of such infrastructure) or specified infrastructure services (or specified classes of such services). A proclamation may limit the operation of the access regime. It will also be possible for the Governor, by proclamation, to activate a Commonwealth water legislation displacement provision in relation to Part 4 Division 1 of the Water Act 2007 of the Commonwealth if this becomes necessary.

6—Repeal of section 26

Section 26 of the Act imposed certain requirements on the Minister relating to preparations for a third party access regime. This clause repeals the section.

7—Insertion of Part 9A

This clause proposes to insert new Part 9A:

Part 9A—Third party access regime

Division 1—Preliminary

86A—Interpretation

Definitions are set out for the purposes of the Part.

86B—Application

The access regime will apply to operators of water infrastructure or sewerage infrastructure, and infrastructure services to the extent specified by proclamation.

The access regime does not (and cannot) apply in relation to infrastructure operated by an irrigation infrastructure operator that may be subject to water charge rules under Part 4 Division 4 of the Water Act 2007 of the Commonwealth (whether or not such rules have been made in relation to the infrastructure (or in relation to any service that may be provided in connection with the infrastructure)).

Division 2—Regulator

86C—Appointment of regulator

The Essential Services Commission of South Australia is the regulator.

86D—Report to Minister

The regulator must report to the Minister on an annual basis.

Division 3—Information to facilitate access proposals

86E—Segregation of accounts and records

Special accounting requirements will apply in order to assist in the implementation of the access regime.

86F—Information brochure

A regulated operator will be required to provide, on application, an information brochure giving terms and conditions on which access may be provided.

86G—Specific information to assist proponent to formulate proposal

A regulated operator will be required to give a person with a proper interest in making an access proposal detailed information about specified matters. A charge may be made for information provided under the proposed section.

86H—Information to be provided on non-discriminatory basis

Information is to be provided to persons interested in making access proposals on a non-discriminatory basis.

Division 4—Negotiation of access

86I—Access proposal

A person who wants access to regulated infrastructure or to vary an existing access contract in a significant way or to a significant extent may put an access proposal to the regulated operator.

86J—Duty to negotiate in good faith

The respondents to an access proposal are required to negotiate in good faith.

86K—Existence of dispute

The circumstances in which an access dispute exists are set out.

Division 5—Conciliation

86L—Settlement of dispute by conciliation

If a dispute is referred to the regulator, the regulator must, in the first instance, seek to resolve the dispute by conciliation (except in certain circumstances).

86M—Voluntary and compulsory conferences

The regulator may call voluntary and compulsory conferences of the parties to the dispute to attempt to resolve the dispute.

Division 6—Reference of dispute to arbitration

86N—Power to refer dispute to arbitration

The regulator may appoint an arbitrator and refer a dispute to arbitration.

86O—Application of Commercial Arbitration Act 2011

The Commercial Arbitration Act 2011 applies to an arbitration.

86P—Principles to be taken into account

The principles which an arbitrator must take into account are set out.

86Q—Parties to the arbitration

The parties to an arbitration are defined.

86R—Representation

A party may be represented by a lawyer or, by leave, another representative.

86S—Participation by other parties

The Minister and the regulator may participate in an arbitration.

86T—Arbitrator's duty to act expeditiously

The arbitrator must proceed with the arbitration as quickly as possible.

86U—Hearings to be in private

The proceedings are to be in private unless all parties agree to public proceedings. The arbitrator may give directions about who may be present.

86V—Procedure on arbitration

An arbitrator is not bound by technicalities or the rules of evidence. The arbitrator may obtain information on matters relevant to the dispute in any way the arbitrator thinks appropriate.

86W—Procedural powers of arbitrator

The arbitrator has power to direct procedure including delivery of documents and discovery and inspection of documents.

The arbitrator may obtain expert reports and may proceed in the absence of any party given notice of the proceedings.

The arbitrator may engage a lawyer to give advice on the conduct of the arbitration and to assist with the drafting of the award.

86X—Giving of relevant documents to the arbitrator

A party to an arbitration may give the arbitrator a copy of all documents (including confidential documents) the party considers to be relevant to the dispute.

86Y—Power to obtain information and documents

The arbitrator may require information and documents to be produced and may require a person to attend to give evidence.

Information need not be given or documents need not be produced where the information or contents are subject to legal professional privilege or tend to incriminate the person concerned of an offence. The person concerned is required to give grounds of objection to providing information or producing documents.

86Z—Confidentiality of information

The arbitrator is given power to impose conditions limiting access to or disclosure of information or documents.

86ZA—Proponent's right to terminate arbitration before an award is made

A proponent has the right to terminate an arbitration on notice to the other parties, the arbitrator and the regulator.

86ZB—Arbitrator's power to terminate arbitration

Where the dispute is trivial, misconceived or lacking in substance, or where the proponent has not negotiated in good faith, the arbitrator may terminate the arbitration.

86ZC—Time limit for arbitration

An award must be made within the period of 6 months from the date on which the dispute is referred to arbitration. However, the period does not include time awaiting compliance with orders of the arbitrator for the provision of information or documents.

86ZD—Formal requirements related to awards

Before an award is made a draft must be circulated to the Minister, the regulator, the parties and each designated agency to enable representations to be made.

An award must be in writing and must set out the reasons for it. If access is to be granted, the award must set out the conditions.

A copy of the award must be given to the Minister, the regulator, the parties and each designated agency.

86ZE—Consent awards

An award can be made by consent if the arbitrator is satisfied that the award is appropriate in the circumstances.

86ZF—Proponent's option to withdraw from award

After an award is made, the proponent has 7 days within which to withdraw from it. If the proponent withdraws, the award is rescinded and the proponent is precluded from making an access proposal within 2 years unless the regulator agrees. The regulator may impose conditions on such agreement.

86ZG—Termination or variation of award

An award may be terminated or varied if all parties affected by the award agree. The provisions of Part 9A relating to an access proposal and arbitration apply to a proposal to terminate or vary an award (or a dispute arising out of such a proposal).

86ZH—Costs

The costs of the arbitration are at the discretion of the arbitrator except where the proponent terminates an arbitration or elects not to be bound. In that case, the proponent bears the costs in their entirety.

86ZI—Contractual remedies

An award is enforceable as if it were a contract between the parties.

86ZJ—Appeal on question of law

An appeal to the Supreme Court is allowed only on a question of law. An award or decision of an arbitrator cannot be challenged or called into question except by appeal under the proposed section.

86ZK—Injunctive remedies

The Supreme Court may grant injunctive remedies if required to enforce compliance with an award.

86ZL—Compensation

The Supreme Court may order compensation to any person where there has been a breach of an award.

Division 7—Related matters

86ZM—Confidential information

The regulated operator is required to ensure that confidential information (which is defined) remains confidential.

The regulator may, however, disclose confidential information to the Minister or the public if it is in the public interest to do so.

86ZN—Access by agreement

The proposed section clarifies that the new Part does not prevent a regulated operator entering into an access contract with another person on terms and conditions agreed between the parties.

86ZO—Copies of access contracts to be supplied to regulator

Copies of access contracts must be supplied to the regulator on a confidential basis.

86ZP—Regulated operator's duty to supply information and documents

A regulated operator must give the regulator specified information or copies of documents relating to the regulated operator's water/sewerage service business.

86ZQ—Unfair discrimination

A regulated operator must not unfairly discriminate in relation to access to regulated infrastructure. A regulated operator must not unfairly discriminate between entities in the terms and conditions on which it provides access to regulated infrastructure.

86ZR—Review of Part

The regulator must review the Part within the last year of each prescribed period (which is defined).

8—Amendment of section 90—Consultation between agencies

This amendment is consequential.

Debate adjourned on motion of Hon. T.J. Stephens.