Australia: New flexibility in Commonwealth water rules

The Minister for Sustainability, Environment, Water, Population and Communities, the Hon Tony Burke MP, has issued a public notice indicating that he proposes to make amendments to the Water Market Rules 2009 (Cth) and the Water Charge (Termination Fees) Rules 2010 (Cth).

A number of these amendments address issues in relation to which we actively engaged with the Department of Sustainability, Environment, Water Population and Communities after the ACCC produced draft amendments and advice in March 2010.

Some of the key issues which have been dealt with in the amendments published by the Minister include:

Pro rata reductions of annual fixed charges will no longer reduce termination fees

The Water Charge (Termination Fees) Rules 2010 (Cth) do not currently facilitate the practice of operators granting a pro rata reduction of annual fixed charges to customers who terminate rights of access part-way through a financial year. At present, if an operator were to grant a pro rata reduction of annual fixed charges in respect of the financial year in which a customer terminates, the operator would be unable to recover the maximum of ten times the operator's annual fixed charges as a termination fee. For example, if a customer were to terminate halfway through the financial year, and the operator were to reduce the customer's annual fixed charges by half (a pro rata reduction), the operator would only be permitted to charge a maximum termination fee equal to half that year's annual fixed charges multiplied by ten.

The definition of "total network access charge" in the Water Charge (Termination Fees) Rules 2010 (Cth) will be amended to address this shortcoming, so an operator may charge a maximum termination fee based on ten times a full financial year's annual fixed charges, even if the operator gives a pro rata reduction of annual fixed charges in respect of the financial year of termination.

Action: Operators may wish to consider introducing pro rata reductions of annual fixed charges for customers who terminate part-way through a financial year, and revising their charges policies accordingly. Policies for the calculation of termination fees may require amendment so that pro rata reductions of annual fixed charges for customers who terminate rights of access part-way through a financial year are not taken to reduce termination fees.

Customers will no longer be able 'lock in' lower termination fees by giving notice of termination taking effect in a future financial year

Customers can give notice of termination of rights of access which is to take effect in a future financial year. At present, it is the total network access charge (TNAC) in the financial year in which the notice is given (not the financial year in which termination takes effect) that caps the termination fee. Paragraph 7(a) of the Water Charge (Termination Fees) Rules 2010 (Cth) will be amended so that customers can no longer 'lock in' a lower termination fee by giving a notice of termination that is to take effect in a future year. This will close a loophole we had identified.

Nevertheless, in most cases customers do not specify a later financial year in which the termination is to take effect. In these cases, operators must continue to be mindful that where a customer gives notice of termination of rights of access in a financial year, it is that financial year's charges that determine TNAC, even if the termination is not processed until the following financial year. This is an issue that we have seen the ACCC policing rigorously.

Action: Operators should review their policies for the calculation of termination fees to ensure they contain a very clear statement about which financial year's TNAC will cap termination fees (both where the customer specifies a later financial year in which the termination is to take effect, and where the customer does not).

Operators whose water delivery rights represent a share of a flow will have a clear right to take security upon transformation

Rule 10 of the Water Market Rules 2010 (Cth) permits operators to demand security when a customer transforms irrigation rights if the ratio of the volume of water delivery right to the customer's remaining irrigation right exceeds 5:1.

This rule does not, however, deal with entitlements to the delivery of water that are based on an entitlement to a share of a flow. The rule will be expanded as part of the upcoming amendments to cater for water delivery rights that have been converted from a volume of water into an entitlement based on a flow rate basis or some other basis. To calculate the notional volume of water, the operator must apply the same formula (in reverse) as was originally used to convert the volume of water into an entitlement based on a flow rate or other basis. Operators will need to provide details to the customer to show that the operator's requirement for security is in accordance with the rules.

Action: Operators whose water delivery rights are defined by reference to a flow rate or another basis, rather than a volume of water, should review and revise their transformation policy to accommodate the proposed new rules.

New general compliance obligation rejected

The ACCC's advice had recommended that the Minister introduce a broad new compliance obligation in the Water Market Rules 2009 (Cth) by amending rule 16 to prohibit all actions an operator does or fails to do that prevent or unreasonably delay transformation arrangements. The ACCC's draft amendment would have imposed a significant and onerous new obligation on operators, and would have applied retrospectively to operators' past actions.

We identified this as a serious issue as the ACCC's draft amendment would have imposed unreasonable obligations on operators and exposed them to potentially significant liability over which they would have no control. Following submissions from a number of operators opposing this amendment, the Minister has decided not to adopt the ACCC's draft amendment.

Please contact us if you would like to discuss the implications of the amendments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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