Water: what is the future for Australia?

Posted 31 December 2010

Australia (NASA).

By John Radcliffe

Subsidies reduce the cost of water and exacerbate the inefficient price signals users already receive, yet most water utilities are still attracted to the siren-call of offered subsidies.

Most of Australia is just emerging from the longest drought since recorded European settlement. The community has become cognisant of Australia's water limitations as never before. There has been much debate as to whether this was natural climate variability or represents evidence of climate change potentially arising from global warming.

But with governments rushing to invest in new water infrastructure, how should we manage our water resources and water supply systems in the future so that they are used responsibly and efficiently, while recognising that riverine and groundwater environments need sufficient water for their ecosystems to operate effectively?

Can we continue to put our faith in such instruments as the Intergovernmental Agreement on the National Water Initiative, even though it has no legislative backing and is really only an unenforceable 'gentlemen's agreement'? Perhaps it needs more 'teeth', comparable to European Union Water Directives.

The 1994 COAG Water Reform espoused two principles. The first was to separate out the title of land from rights to water and make each separately tradable. There has been progressive development of water markets. In 2008, there was trade of 1600 gigalitres (GL) of water allocations ("temporary trades") and 900 GL of water entitlements ("permanent trades").

However, there are still some distortive constraints on trades, including the limit of no more than four per cent of water being able to be traded out of districts in Victoria, either to other states or the Commonwealth Water Holder.

The second 1994 COAG principle was to separate out the management of water resources from the operation of water supply systems, which were to become commercial businesses through the adoption of pricing regimes based on the principles of consumption-based pricing and full-cost recovery.

We are now seeing some recidivism. A merger between Melbourne Water (a water supply wholesaler), the Port Phillip and Westernport Catchment Management Authority and the Central Coastal Board, is due to be completed in June 2011. The Queensland Bulk Water Supply Authority, trading as Seqwater, a new statutory authority acting as a water wholesaler with 25 dams, 47 weirs and 46 water treatment plants, is also responsible for water resource management on 1.2 million hectares of catchment.

Should we insist on the previously agreed separation of functions or should we move to a more collaborative approach to water resource management and supply services? Is that equitable for other water entitlement holders? Have the water businesses been able to act commercially or are they being constrained by the governments on top of them?

What of the capital that is being invested in water supplies? Desalination has been chosen for the Gold Coast, Sydney, Melbourne, Adelaide and Perth, with $10 billion committed on construction for building six desalination plants which between them can produce 485GL water a year, an amount roughly equivalent to the total annual residential drinking water consumption of NSW and the ACT.

A further $2.5 billon has been spent on three advanced water-treatment plants with the capacity to produce 85GL a year of drinking water from Brisbane's wastewater.

Over-investment?

Though initially driven by the constraints of drought, some of these schemes provide for water supply needs well into the future. Is there a risk of over-investment potentially leading to a high cost to current consumers for excess capacity? There have been recent debates about the necessity for and adequacy of cost-benefit analyses for these projects. We may need better standards for the initiation of such major public investments.

This brings us to the basis by which the capital is secured. The chief executive of one of Australia's largest water utilities has made it clear that she sees that there is no need for subsidies and urban water projects should be fully funded by water users, as was implied in 1994. That assumes that prices are set on an objective economic basis.

A 2008 Productivity Commission paper commented that subsidisation can frustrate cost-recovery objectives and deter appropriate investments. Subsidies reduce the costs of water and exacerbate the inefficient price signals already received by users.

Yet most water utilities are still attracted to the sirencall of offered subsidies. There is independent economic regulation in Victoria, NSW and the ACT, thereby providing transparency and rigour in price setting, but there is still a need to establish independent economic regulation in Queensland, South Australia, Western Australia, Tasmania and the Northern Territory.

In the future, we will have to look forward to clearer market signals covering water use and greater competitiveness in the supply of water services. Australia has yet to establish a good track record in either of these areas.

Governments have tended to use water-pricing regimes to achieve equity, environmental, revenue and economic efficiency objectives simultaneously. As Mike Young and Jim McColl have pointed out, this approach violates a golden rule in policy development - to avoid conflicts, use a separate instrument to achieve every objective and, once an instrument is assigned to one objective, don't try to use it to achieve another objective.

A wide variety of pricing structures continues to be adopted, though it is noteworthy that the NSW Independent Pricing and Regulatory Tribunal (IPART) has moved away from the otherwise widely adopted inclined block tariffs. As yet, 'postage stamp pricing' remains the norm. There has been no implementation of scarcity pricing.

Many home-occupiers receive no price signals at all with regard to water use as this is still paid by landlords. Water bills may be sent so infrequently that any price signal messages are effectively disconnected from the time of use.

However, the first signs that there is potential to change current pricing and charging models have appeared. Melbourne's biggest retailer, Yarra Valley Water, recently advised that it was starting work on a range of water options for households and businesses, including:

  • a 'high security' water tariff, where customers pay a higher price for an unrestricted supply;
  • a 'scarcity' tariff, where customers pay a cheaper price on the grounds they will consume frugally and face supply restrictions sooner than customers on more expensive plans;
  • an 'environment' tariff, where customers would pay extra to ensure their water is delivered using environmentally friendly methods such as green power, or to ensure extra flows are returned to stressed rivers; and
  • a 'community' tariff, where customers would pay extra to ensure that groups such as sporting clubs had access to water through rainwater tanks and other means.

These options would give consumers a choice of level of service, although how these alternatives would be implemented and monitored is as yet unclear.

Similarly, there has been a diverse approach to sewage charges, with little evidence of innovation and little recognition of volume treated.

However, Yarra Valley Water has adopted a novel approach through customers now paying a fixed charge of $277.80 per year plus $1.7196 per kilolitre of sewage produced. The sewage volume charge is identified as an assumed proportion of the metered water returned to a sewer. The identified percentage is different for houses and flats and varies with season. In winter it is assumed that 90 per cent of all the delivered water returns to the sewer. In summer the assumed percentage is less. Those who can show that they have adopted greywater recycling can apply for their assumed percentage to be lowered.

Facilitating recycling through reform

Recycling for non-drinking consumption has been widely accepted across Australia and some jurisdictions have even set recycling targets. The risks with these schemes have been proven manageable, and governments and communities have been increasingly using recycling to secure their water supplies and deliver broader environmental and urban amenity benefits.

However, recycling for drinking continues to be contentious - policy bans remain in New South Wales, Victoria and South Australia. While South East Queensland has infrastructure in place it will only recycle water for drinking purposes if dam levels fall to 40 per cent. Western Australia has initiated a groundwater injection scheme that will, if successful, lead to highly treated recycled water entering the drinking water supply some years in the future.

The Commission acknowledges there are risks with all forms of water recycling. However, the Commission considers that the means and processes are now available to manage such risks to levels of safety comparable with existing supply sources.

The Commission argues that decisions on whether to use recycling for drinking purposes should objectively consider the risks, the costs and the benefits through a transparent and participatory process.

Each recycling scheme, as with other supply options, will present unique opportunities and risks that need to be systematically identified and managed. In the Commission's view, the Australian Guidelines for Water Recycling (2006 and 2009), developed cooperatively by all jurisdictions (NWI Clause 92ii), provide an excellent framework for managing safety and guiding responsible decisions.

The weight of scientific evidence emerging since publication of the Guidelines reinforces the Commission's view that the risks of using recycled water, including for drinking purposes can be satisfactorily managed.

Market signal

This represents the beginnings of a market signal, albeit crude, for the wastewater generator.

Many of Australia's wastewater treatment plants are being extended to generate recycled water for irrigation, third pipe supply to houses in new suburbs - for toilet flushing, car washing and garden use - and for urban amenity plantings.

Stormwater has suddenly changed from being a hazard to becoming a water resource. The City of Orange, NSW, is already using treated stormwater for drinking.

The adoption of wastewater and stormwater recycling should in future be economically driven. To achieve this successfully, it needs to be preceded by adoption of drinking water charges that are rigorously and fully priced.

Competition is starting to be implemented at the householder level with the advent of more self-installed water sources - domestic water tanks (though often subsidized by government grants) and domestic groundwater bores (for which generally there is no resource charge and little regulation, with Perth the most obvious example).

These sources are beginning to have an impact on the operations of retail water companies as was recently highlighted by Shaun Cox, Managing Director of Melbourne retailer South East Water, in a presentation to the June 2010 ATSE International Workshop - 'Water and its interdependencies in the Australian economy'. He pointed out that stimulation of competition for its core product was leaving water utilities with an increasingly "stranded" monopolistic asset base.

The other well-known example is from the City of Salisbury, SA, which has been selling recycled stormwater for industrial and amenity use as an alternative to reticulated Adelaide tap water from the SA Water Corporation, albeit with various subsidies accepted to generate the capital to do so.

More recently, the two competitors have come together with Salisbury recycled stormwater and SA Water recycled Bolivar wastewater being mixed for use in the suburban Mawson Lakes third-pipe system. These developments, though now of some standing, are probably still in advance of the legislative framework to do so.

There are electricity and railway industry models that offer some examples for the establishment of competition where monopoly service providers have previously operated.

Australia's first water competition legislation, the NSW Water Industry Competition Act 2006, picks up aspects of such models. However, the legislation has not provided a 'level playing field' in that Government Business Enterprises are currently excluded.

The National Water Initiative could be amended to better provide for competition options to be realised. We need further modelling of how water systems can be configured and owned to allow retail purchasers a choice of water supplier and the legislative structures that may be required to achieve such an outcome.

Ultimately, Australia's water services will need to be driven by clear economic signals which have likely been derived from established competitive supply systems based on equitably achieved ownership of water entitlements secured from scientifically sound water resource plans. Any social needs for water should be separately funded.

Dr John Radcliffe AM FTSE is Chair of the ATSE Water Forum. He was previously a Deputy Chief Executive of CSIRO, Director- General of Agriculture in South Australia and was a National Water Commissioner from 2005-08.

Source: ATSE Focus

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