Focus: Water – June 2008

New Act introduces new water market for South East Queensland

In brief: A new urban water market for South East Queensland will have significant implications for suppliers and users of water. Senior Associate Jenny Lyons and Lawyer Scott Watson report.

• Background
• What is the market?
• How does the market operate?
• Liability of grid participants
• Existing authorities to take water and water supply agreements
• The future of the market

How does it affect you? The existence of a water grid and a water market will affect urban and industrial suppliers and users of water, and, in particular, operators of bulk water supply infrastructure (water storages and water treatment plants) and users of bulk water, in or near South East Queensland. These reforms will also have wider implications for retail water customers in South East Queensland, as the current local government water suppliers will be taken over by water retailing entities owned by local governments by 2010. Increases in bulk water charges are also expected to commence on 1 July 2008, resulting in increased retail water bills for all people and businesses in South East Queensland, with further price increases to be 'phased in' over the next 10 years.1

Background

The Water Supply (Safety and Reliability) Act 2008 (Qld)(the Water Supply Act) amends the Water Act 2000 (Qld)² to:

• establish the regulatory framework for an urban water market (the market) within South East Queensland, and
• facilitate the operation of a water grid within South East Queensland.

The market is expected to commence on 1 July 2008.³

The reforms of the urban water supply arrangements in South East Queensland arose out of a Queensland Water Commission report released in May 2007, which proposed a range of structural and regulatory reforms to the water industry by 2010.⁴

The Water Supply Act represents the second stage of this restructure and follows the initial requirement to transfer ownership of bulk water assets to the Queensland Bulk Water Supply Authority. The Bulk Water Supply Authority is a statutory authority established under the South East Queensland Water (Restructuring) Act 2007 (Qld) (the Restructuring Act) to own all major water storages and water treatment facilities in South East Queensland.

The Restructuring Act also established:

• the SEQ Water Grid Manager, who will operate as the single purchaser of bulk water services and the single seller of bulk water in South East Queensland;
• the Queensland Bulk Water Transport Authority, which is a statutory authority created to own the major transport infrastructure used to transport the water bought and sold by the water grid manager; and
• the Queensland Manufactured Water Authority, which is a statutory authority established to hold bulk manufactured water supplies (currently the Gold Coast Desalination Plant and the Western Corridor Recycled Water Project).

The water grid is a series of interconnected pipelines that connect the South East Queensland region's major water sources, water treatment plants and bulk water transport networks. The key principle underpinning the establishment of the water grid is that water is a shared resource.⁵

The State Government is constructing of a number of new water storages and water pipelines. As these water storages and water pipelines are completed and connected to existing water supplies, the water grid will enable water to be moved to areas where it is needed within South East Queensland.

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What is the market?

The market is created for the sale and purchase of declared water services. As the name suggests, a declared water service is a water service (such as a water storage, water reticulation or water treatment plant) that is declared by the relevant Minister to supply water to the water grid. The infrastructure and assets of the declared water service themselves do not need to be physically located within the South East Queensland region, but must be able to supply to this area.⁶

Declared water services are supplied to the water grid manager by a grid service provider. This will, in effect, be the Bulk Water Supply Authority as the owner of bulk water sources, the Manufactured Water Authority as the owner of bulk manufactured water supplies and the Bulk Water Transport Authority as the owner of the water transport services.

Water is sold by the water grid manager to a grid customer. A grid customer will initially consist of each local government in the South East Queensland region (Brisbane, Gold Coast, Logan, Redland, Sunshine Coast, Ipswich, Somerset, Moreton Bay, Scenic Rim and Lockyer Valley), and CS Energy Limited and Tarong Energy Limited (operators of Swanbank, Tarong and Tarong North power stations).

Local-government-owned retailers will then be responsible for the retail sale of water supply and sewerage disposal services to South East Queensland households and businesses through their water distribution networks.

The Minister has the power to impose grid contracts between a grid service provider and the water grid manager for the supply of declared water services, and between the water grid manager and a grid customer for the supply of water to the grid customer. The effect of the grid contracts is that:

• only grid service providers can sell water to the water grid;
• only grid customers can buy water from the water grid; and
• both grid customers and grid service providers must only deal with the water grid manager (though the market rules (refer below) may subsequently allow other entities to be supplied with water from the water grid).

These provisions are aimed at sharing the cost of water services across South East Queensland, as opposed to the previous system of costs being incurred by individual local governments.⁷

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How does the market operate?

The details of how the market will operate will be contained in the market rules, which the Minister is empowered to create under the Act. These market rules will cover a range of topics including:

• the process for entry into, and participation in, the market;
• the rights and obligations of grid participants;
• fees or charges payable by grid participants;
• the regulation of the operational aspects of the market;
• a process for putting in place operating protocols between grid participants where their operations interact (but there is no grid contract);
• the prices payable for water sold and purchased on the market;
• dispute resolution processes; and
• monitoring and reporting obligations.

Grid participants must comply with the market rules, which may be highly technical in nature.⁸ Until the market rules are publicly available, however, there are few details available about the operation of the market and the grid participants' responsibilities.

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Liability of grid participants

Under the new structural arrangements, the contractual relationship between the parties will not follow the physical flow of the water.⁹ Each grid participant (which includes both grid service providers and grid customers) will only have a contract with the water grid manager and therefore no contracts will exist between grid participants themselves. This means that, although the various grid participants will have operational contact with each other, there is no opportunity for them to deal with the liability issues that may arise between them in a party-to-party contract.

The State Government's position is that liability should be limited to direct losses, consistent with the general position adopted by entities operating in a utilities market, such as the Victorian gas industry market.¹⁰ Consequently, a grid participant will not be civilly liable to another grid participant for any consequential loss for an act or omission (including negligence) of the first grid participant in the performance of its function under the Water Act (or a failure to perform).

In this case, consequential loss will include any lost profits or revenue, use of equipment, business interruption, loss of data, downtime, loss of goodwill, damages or any other special or indirect loss or damage. This exclusion of liability, however, does not apply to the extent that the consequential loss was caused or contributed to by the wilful default of the responsible grid participant.

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Existing authorities to take water and water supply agreements

Existing allocations, licences and permits to take water for town water supplies or urban purposes held by local governments, existing licensees and other permit holders will also be transferred to the water grid manager. As more water sources and pipelines are completed and connected to the water grid, water will be able to be moved around South East Queensland. This transfer of existing allocations is necessary to ensure that the water grid manager is the sole purchaser and seller of declared water services, and can respond to drought situations or implement water supply models as necessary.¹¹

The Water Act will now provide that any water supply agreements in force for the supply of water or a water service that are to be supplied by a declared water service will end at 30 June 2008. However, each of those affected by this provision, that is, each local government whose local government area forms part of the South East Queensland region (together with certain power stations), is deemed to be a grid customer.

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The future of the market

The establishment of a water market is an important part of the State Government's restructure of the water industry. The next piece of legislative reform to affect the water industry is expected in 2009, which is when the State Government intends to establish the new local government-owned distribution entities and retail businesses.¹²

The State Government believes that these changes are at the very cutting edge of water reform.¹³ Public attention, however, has been focused on local government concerns over possible repercussions of the water reforms, including the possible privatisation of the water industry similar to that recently seen in the Queensland electricity markets.¹⁴

Another concern is that, while local government bulk water assets have been transferred to the Bulk Water Supply Authority, local governments remain responsible for the final distribution of water to consumers. The result is that local governments will have no role or control in the other upstream aspects of the water supply chain, which largely determine the price, quality and availability of water.¹⁵

The aim of the water market and the water grid is to increase the water supply available to South East Queensland and to ensure greater accountability for water supply and security by the State Government. The new water market, however, has been recently described as a governance nightmare with too many layers of bureaucracy and no direct accountability.¹⁶

Whether these criticisms are justified and whether the reforms are effective in practice will only become apparent after several years of operation, and once the future reforms have been implemented so that the market is fully established.

Footnotes

1. Queensland Water Commission, Water Reform – Frequently Asked Questions (2008) at 19 June 2008.
2. Refer to AAR Focus: Water – June 2008 for further information on the Water Supply (Safety and Reliability) Act 2008 (Qld).
3. Queensland, Hansard, Legislative Assembly, 30 April 2008, 1329 (Craig Wallace, Minister for Natural Resources and Water and Minister Assisting the Premier in North Queensland).
4. Queensland Water Commission, Our Water – Urban Water Supply Arrangements in South East Queensland, Final Report, (2007).
5. Explanatory Notes, Water Supply (Safety and Reliability) Bill 2008 (Qld) 20.
6. Explanatory Notes, above n 5, 205.
7. Queensland, Hansard, Erratum to Explanatory Notes, Water Supply (Safety and Reliability) Bill 2008 (Qld) 2.
8. Explanatory Notes, above n 5, 18.
9. Explanatory Notes, above n 5, 18.
10. Explanatory Notes, above n 5, 19.
11. Explanatory Notes, above n 5, 20.
12. Queensland, Hansard, above n 3.
13. Queensland, Hansard, above n 3, 1330.
14. For examples refer to Tuck Thompson, 'Queue to sell water', Courier Mail (Brisbane), 30 May 2007; Kathy Sundstrom, 'Natoli fears water sell-off', Sunshine Coast Daily, 31 May 2007.
15. Dr Kenneth Wiltshire and Dr Jonathan Heales, 'Sinking Feeling', Courier Mail (Brisbane), 21 June 2008.
16. Dr Kenneth Wiltshire and Dr Jonathan Heales, 'Sinking Feeling', Courier Mail (Brisbane), 21 June 2008.

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For further information, please contact:

Adam Thatcher Partner, Brisbane Ph: +61 7 3334 3157 Adam.Thatcher@aar.com.au		Andrew Mansour Partner, Sydney Ph: +61 2 9230 4552 Andrew.Mansour@aar.com.au
Chris Schulz Partner, Melbourne Ph: +61 3 9613 8772 Chris.Schulz@aar.com.au		Robyn Glindemann Senior Associate, Perth Ph: +61 8 9488 3712 Robyn.Glindemann@aar.com.au
Bill McCredie Partner, Brisbane Ph: +61 7 3334 3049 Bill.McCredie@aar.com.au

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