Proposed NSW Water Access Regime – Fathoming The Depths

The release of the NSW government’s consultation paper on access to water infrastructure is one of many steps it needs to take in order to reach its goal of a state based access regime.

The NSW government released its ‘Water for Life’ consultation paper in May 2006. This includes an outline of the NSW government’s proposed framework for the way in which access to water and waste water infrastructure in the greater Sydney and Hunter regions will be negotiated, and how disputes may be arbitrated.

This announcement of a consultation process is at least partially a response to the Australian Competition Tribunal’s (ACT) recent affirmation of the National Competition Council’s (NCC) decision that the Sydney Water waste water infrastructure be ‘declared’ for the purposes of the Trade Practices Act 1974 (TPA), upon which we commented in our March 2006 Competition & Trade Practices issues summary.

The establishment of an industry-specific State access regime will enable the NSW government to:

• Prevent future declarations of other water infrastructure services and seek the revocation of declaration of Sydney Water’s waste water infrastructure services.
• Ensure that regulated access to water infrastructure services occurs on terms and conditions determined by the NSW government.

The proposal to introduce a state based access regime cannot change the fact that significant sewerage transmission and interconnection services in Sydney have already been ‘declared’ under the TPA. This means that access disputes over those declared services will be arbitrated by the Commonwealth and will not be governed by any state based access regime for the next 50 years, in accordance with the terms of the declaration.

However, following the establishment of the NSW water infrastructure access regime, the NSW government is likely to take steps to have the declaration revoked to ensure that its new regime can exclusively ‘cover the field’ in terms of dispute arbitration.

There is no generic NSW legislation under which a person can apply to obtain access to essential infrastructure services in NSW. Rather it is the TPA that establishes an umbrella framework for access to essential infrastructure services in Australia. The TPA provides three means by which there can be access to essential infrastructure services.

Access seekers can apply to the NCC for such services to be ‘declared’, and this was the approach successfully pursued by Services Sydney. A declaration may be made if the following criteria are satisfied:

• Access would promote competition in another market.
• It is uneconomical for anyone to develop another facility.
• The facility to which access is required is of national significance.
• Access to the facility must be able to be provided without undue risk to human health or safety.
• There must not be an existing effective access regime in relation to the facility.
• Access must not be contrary to the public interest.

The purpose of the criteria is to limit declarations, and so applications of the TPA’s access regime, to infrastructure services that:

• Are provided by a nationally significant facility.
• Have natural monopoly characteristics – that is, it is uneconomic to duplicate the facility.
• Occupy a ‘bottleneck’ position in an industry – that is, access to the infrastructure service is essential to competition in a related market.

The public interest assessment weighs the costs and benefits of imposing access regulation.

If a service is declared, the access regime established by the TPA applies to that service. The service provider is obliged to negotiate with any person seeking access concerning the terms and conditions of access. Any disputes concerning the proposed terms and conditions can be escalated by an access seeker to the ACCC, who ultimately has the power to determine the terms and conditions of access by way of arbitration.

A state or territory government can put in place an industry-specific access regime for essential infrastructure services. Once this is done, the Council cannot recommend a declaration for those services if it considers the access regime to be effective. The criteria for effectiveness are set out in clause 6 of the Competition Principles Agreement and are similar to the declaration criteria set out above.

The question of what may be considered to be effective can be determined as part of the assessment of an application for declaration. Alternatively, it may be considered prior to any application for a declaration, if the state or territory government submit the access regime to the NCC for endorsement as an ‘effective access regime’. If the relevant Commonwealth Minister accepts an NCC recommendation for certification of the regime as effective, the regime exclusively governs access to the relevant service.

The TPA provides that a provider of essential infrastructure services can voluntarily submit an ‘access undertaking’ to the ACCC. If the ACCC accepts this undertaking, the services cannot be the subject of a declaration – the terms and conditions of access contained in that undertaking will prevail. Likewise, if the services are already declared, the ACCC cannot accept an access undertaking for those services.

An effective access regime or an ACCC accepted access undertaking in respect of a service prevent declaration of that service. There is therefore a significant incentive for state and territory governments and governmentowned service providers to establish access regimes and / or submit undertakings they designed to avoid the imposition of Commonwealth regulation on their activities, and to allow service providers to obtain a greater degree of certainty about the terms and conditions upon which they will be required to provide access.

The TPA prevents declaration where there is an effective State or Territory access regime or an ACCC accepted access undertaking, and prevents the ACCC accepting an access undertaking where declaration has occurred. However, not surprisingly, this Commonwealth legislation does not prevent a State or Territory from establishing its own access regime in respect of a declared infrastructure service.

As a result, it is possible for two access regimes, the Commonwealth’s TPA regime and a State or Territory regime, to apply to the same infrastructure service. This would be the case in respect of those of Sydney Water’s waste water infrastructure services declared under the TPA, if the NSW government established its water infrastructure regime.

The co-existence of the declaration and any state based access regime for water infrastructure is likely to cause regulatory uncertainty. Should the NSW government put its water access regime in place, it would then have two different regimes governing the arbitration of disputes concerning access to water infrastructure in NSW – the Commonwealth regime and the NSW regime.

An access seeker would need to use the procedures under the state based access regime in relation to the non-declared water infrastructure services – that is, the services of Sydney Water, other than its waste water infrastructure services, and those of Hunter Water. However, two differing sets of arbitration processes under two distinct arbitrators will potentially apply to any access dispute in respect of Sydney Water’s waste water infrastructure services.

The situation is further complicated by the potential for any person, whether Sydney Water or an access seeker, who obtains an advantage from the Commonwealth regime over the state based regime, to argue that the Commonwealth regime alone applies to Sydney Water’s waste water infrastructure services. This is because the Constitution provides that Commonwealth legislation applies to the exclusion of state legislation to the extent of any inconsistency. The uncertainties have the potential to cause greater delays and costs in the administration and implementation of access.

In practice, however, it seems likely that the NSW government intends to move quickly, following the establishment of its water infrastructure access regime, to have declaration of Sydney Water’s waste water infrastructure revoked, either before or after seeking certification of its regime.

The substitution of a state based access regime or undertaking for the declared services could only occur if the NCC recommended revocation of the declaration made by the ACT.

There are no provisions in the TPA expressly conferring a power on any person to seek a recommendation for revocation from the NCC. Further, while the NCC cannot revoke a declaration unless the criteria for declaration are no longer satisfied, the NCC has a discretion whether to revoke where this requirement is met. Once again, however, these elements of the TPA are unlikely to raise any barrier to the NSW government in obtaining revocation, as the NCC is likely to act in accordance with the intent that the TPA not cover a service that is subject to an effective access regime¹ regardless of the lack of legislative compulsion.

The relevant Minister can only revoke the declaration if it receives a revocation recommendation from the NCC. The NCC can only make that recommendation if it is satisfied that, at the time it is considering its recommendation, the tests for making a declaration would not be satisfied. This would include in particular whether the declaration continues to promote competition in another market, and the effectiveness of the new access regime in relation to the facility.

While the NCC may make such a recommendation on the basis that an ‘effective’ access regime now exists, a crucial step for the NSW government is to first seek to develop an effective access regime – that is, a regime that conforms to the Competition Principles Agreement principles for such a regime – before seeking revocation. Provided, however, the NSW government makes some effort to ensure its regime accords with those principles, even where the regime is not strictly an effective access regime, the pre-conditions for revocation will almost certainly be met. This is because the NCC is likely to conclude that continued declaration of Sydney Water’s waste water infrastructure services will not promote competition in any related market, where a State regime would compel regulated access to those services in the absence of declaration.²

Obtaining this recommendation may take some time, as there are at present no statutory timeframes in which the NCC must adhere in making the recommendation.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.