Victoria´s Green Paper On Water Reform

Article by Mr Alan Rosengarten, Mr Lawrence Baker, Ms Katherine Lake and Ms Joanne Draper.

Introduction

In August this year, the Victorian Government released its detailed Green Paper on water reform entitled Securing our Water Future – Green Paper for Discussion (Green Paper). The purpose of the Green Paper is to promote community discussion on how best to manage Victoria's water resources. Public submissions on the Green Paper are due by 30 November 2003. The Government will then use this input to establish priorities for the water industry and will communicate these priorities to the community through a white paper to be released in early 2004.

The Green Paper reveals a bold and widely scoped agenda for addressing the many challenges facing Victoria's water sector. The ultimate goal is sustainable management of the water resource. The Green Paper indicates that the objective will be pursued in the following arenas:

• a water allocation system that balances the needs of the environment with those of users

• increasing the use of recycled water

• enhancing water trading

• encouraging efficient irrigation

• strengthening regulation of environmental flows

• developing a pricing framework that better reflects the environmental costs of water use and promotes efficient water use, and

• reviewing and improving the legislative framework.

The Deputy Premier and Minister for Water, Mr John Thwaites, has declared that Victorian water reforms will proceed regardless of the outcome of the Council of Australian Government (COAG) statement on national water policy (The National Water Initiative, 29 August 2003). (The National Water Initiative is intended to build on the achievements of the 1994 COAG strategic framework for the reform of the Australian water industry and will be settled early next year for consideration at the first COAG meeting for 2004.)

This article briefly outlines the Green Paper's main reform proposals.

The Government proposes to amend the Water Act 1989 (Vic) to establish an environmental reserve with legal status. In catchments that are not over allocated, sustainable diversion limits will be set for the purpose of providing flows to the environmental reserve. In catchments that are fully or over allocated, the reserve will initially be set at a cap that recognises the rights of the existing water entitlement holders. The Government has identified seven rivers south of the Dividing Range on which caps will be imposed in addition to the existing Murray Darling Basin cap in the north of the State. All significant water use will be metered and all water entitlements will be publicly registered.

Victorian urban water users can expect significant changes to the structure and level of water prices. The Government will introduce permanent water saving measures for the Melbourne metropolitan area and will require regional urban water authorities to develop permanent water saving measures. A range of mandatory AAA and AAAA water saving appliances and household fittings will be introduced and all new homes will be required to have a water tank or solar hot water system from July 2005. Changes to the Environment Protection Authority regulations and the Victorian planning provisions may be necessary to reflect Government policy on sustainable urban water management. Legislation has been introduced to increase penalties for unauthorised water use and water theft.

The Government has determined that a new dam for Melbourne is not a viable option but is considering other options for increasing Melbourne's water supply. Many of these options are becoming feasible as a result of advancements in technology. For example, preliminary studies have already been undertaken in the Melbourne region to assess the feasibility of aquifer storage and recovery (ASR) schemes to increase Melbourne's supply of water. ASR schemes provide for the injection of recycled water or stormwater into aquifers which temporarily store the water for later use.

Another option being promoted by the Government is water mining. This process involves pumping sewage from the existing sewerage network to a treatment plant, following which the treated water will be discharged for a suitable non-consumptive use. This process is currently being trialled as a joint initiative between Melbourne Water, Parks Victoria and South East Water to top up Albert Park Lake with recycled water.

Through the further development of these types of technologies and processes, the Government aims to achieve a 15 per cent drop in water use in Melbourne and a target of 20 per cent of Melbourne's waste water being recycled by 2010.

The Green Paper envisages significant changes to the framework currently regulating the use of water for irrigation purposes. In particular the Government has indicated that it will seek to unbundle water entitlements into their three component parts, namely:

• a water share

• a share of delivery capacity, and

• a site-use licence which grants permission to use water on a specific piece of land.

By unbundling water entitlements, the Government hopes to enhance the value of water rights by expanding trade, creating new possibilities for dealing in water (eg leasing of water rights) and developing new products (eg options and other forms of derivatives), so as to ensure that water is directed towards the highest value use.

It appears, however, that the Government is not resolved that full unbundling of water rights from land is the optimal policy solution. The Government notes that concerns have been raised about non-irrigators monopolising the market and pushing prices beyond the reach of irrigators. The Government does, however, suggest that this concern could be addressed by limiting the water holding of a non-irrigator to five per cent of the available water rights. While any change needs to be implemented in a manner which allows the affected communities sufficient time to adjust to the new regime, the imposition of an arbitrary limit on water holdings may jeopardise the benefits that the Government is seeking to achieve by opening up the water market, particularly given that participation in the water market would be voluntary.

One of the other issues canvassed by the Government in relation to irrigation is the issue of salinity and other pollution side-effects of irrigation. The Government suggests three key measures to minimise these effects: pollution charges, tradeable pollution permits and regulation. Although the Government will be consulting on these options, it has expressed a preference for light handed regulation requiring irrigators to audit their watering system's performance every five years and, if necessary, to upgrade those systems to reduce pollution side-effects.

In summary, the Government clearly recognises that irrigation is one of the key areas in which water savings can be made, particularly given the high water usage of this sector. As noted in the Green Paper, more than 75 per cent of water harvested in Victoria is used for irrigation. Of the water allocated to irrigators, approximately 25 per cent is lost as a consequence of inefficiencies in the distribution system, including ageing infrastructure. The Government has set itself the target of cutting these losses by 25 per cent.

One of the main hurdles facing the Government in achieving this objective is the massive cost involved in upgrading Victoria's ageing infrastructure. To take one example, the estimated cost of replacing 17,500 kilometres of open channels with pipeline in the Wimmera Mallee region is $300 million. Given the tight budgetary constraints that the Government has imposed on itself, it is unlikely that the level of investment required to upgrade Victoria's infrastructure could be met without a significant contribution from the private sector.

While in the Green Paper the Government reiterates its view that there are significant gains to be made from involving the private sector in the delivery of water services pursuant to the Partnerships Victoria policy, some aspects of the Green Paper are not adequately targeted towards the facilitation of such involvement. Unless the Government is prepared to subsidise private sector involvement, public private partnerships will only be viable if:

• the pricing principles adopted by the Government are based on full cost recovery (including debt financing costs). The Government now accepts this as a fundamental pricing principle (see below discussion), and

• there are alternative means by which the private sector can generate a return on its equity. One option would be to introduce a national pollution trading scheme under which the private developer would be entitled to receive tradeable pollution permits to the extent that the development in question reduced pollution. These permits could be sold to landholders seeking to manage their land in a way that would increase pollution.

An additional option would be to grant water rights to the private developer that equate with the value of any water saved as a result of carrying out an infrastructure project. Such a mechanism would obviously require an unbundling of water rights to disengage the nexus between water rights and ownership of land.

Each of these options requires a firm commitment on the part of the Government to adopt innovative solutions to its funding dilemma to enable it to adhere to its ultimate objective of ensuring the sustainable management of the water resource.

The Green Paper definitively recognises that past water management policies have caused environmental degradation to rivers and wetland areas, and resulted in significant damage to flora, fish and bird species, as well as increasing costs to industries which rely on water, such as tourism and water recreation.

A range of strategies are expected to be adopted to deal with this environmental degradation (and especially the lack of environmental flows which is a major cause of river stress). In summary, the Government intends to amend the Water Act to broaden the management responsibilities of rural water authorities to include management of the wider environmental reserve and other aspects of environmental river health. At the State level, the Government intends to establish a budgetary and governance framework for the acquisition of water for the environment, while at the regional level, the Government will establish an operational manager of the environmental reserve.

The Government proposes quite distinct strategies for streams whose flows are regulated by a major public storage dam (such as the Goulburn River which is regulated by Lake Eildon) and streams whose flows are not regulated by major dams.

For unregulated streams, streamflow management plans are being developed with scientific input to cap extraction rates and set rostering rules to reliably meet environmental flows and users' entitlements under water licences. The recommended environmental flows will be met by either converting summer pumping licences to winter-fill licences (which is the preferred option) or, where this is not possible, by reducing the total licensed volume after providing adequate notice to licence-holders. To accommodate these changes, irrigators will need to investigate options such as building an off-stream storage to be filled during winter to meet summer demand, or finding an alternative source of water such as groundwater. Urban authorities are expected to be subject to the same rostering rules as irrigators.

The approach to dam regulated streams will be different due to the much higher concentration of irrigators, most of whom already hold 15 year licences or water rights with indefinite terms. The strategy will be to continue to invest in cost-effective distribution savings projects to reduce losses occurring as a result of leakage, seepage and evaporation. Such losses are currently estimated at around 25 per cent of the water diverted.

Perhaps most significantly, the Government appears resolved to buy back water for the environment, with a preference for investing in adjustment projects guided by local authorities.

Much of the detail remains to be resolved, such as the extent of environmental bulk entitlements and issues such as funding and compensation for affected entitlement-holders. Nevertheless there appears to be genuine political momentum towards establishing an effective environmental reserve along with other policy reforms designed to limit further environmental degradation arising from water mismanagement.

The Green Paper sets out the Government's principles and objectives behind the pricing regime. These are consistent with the April 2003 Ministerial Statement on Water which outlined the Government's policy in relation to water pricing.

One of the Government's key pricing principles relates to cost recovery and includes the following aspects:

• prices should cover all operational, maintenance and administrative costs

• prices should be sufficient to ensure that water authorities have the means to undertake necessary renewals and rehabilitation of existing assets, and

• prices should recover the cost of capital associated with new investments.

The pricing principles are designed to:

• reward water conservation and incentivise water conservation and sustainable use

• recover the costs of water services and management of the resource, and

• better reflect the scarcity of the resource and the environmental externalities associated with the provision and consumption of water.

As prices will take into account environmental factors, an increase in prices is expected.

Generally prices should become more differentiated to encourage recycling and efficient water use. Price structures may reflect seasonal supply factors, the type of use and the quality of water consumed.

Water authorities, in consultation with customers, will be required to design pricing structures that are consistent with the Government's principles. From 1 January 2004, the Essential Services Commission will be responsible for reviewing and regulating water prices and will, in performing this function, be required to have regard to the Government's water pricing principles.

The Government will examine the case for changing the boundaries of catchment and water management authorities and of local government with a view to more closely aligning them.

The Government also restates its commitment to innovative and accountable management institutions in the water sector. The Government states that the metropolitan, regional urban and rural water authorities should be structured to maximise their capability and effectiveness in delivering the Government's objectives. The Green Paper poses some options for improving the institutional arrangements of the water sector. It is expected that there will be much debate over the types of mechanisms and corporate/authority structures to improve the efficiency and accountability of water authorities.

Overall, the Green Paper sets out more than 80 proposals to protect and manage Victoria's long-term water supplies. It is a leading initiative in Australia and represents a very comprehensive analysis of the requirement for water reform.

Importantly, the Government has indicated that it will be consulting with experts, key stakeholders and rural communities in relation to a range of matters, such as:

• the merits of full unbundling of water rights and the alternative option which requires the retention of some nexus between the right to receive water and land ownership

• the development of sustainable water plans by rural and urban water authorities

• the details of the trading system, such as the scope of the trading system and issues surrounding the compulsory acquisition of water rights by the Government

• the development of stream flow management plans for unregulated streams, and

• the case for institutional reform of the catchment and water management authorities.