urban water regulation in nsw · urban water regulation in nsw ... it is useful to consider the...

Urban Water Regulation in NSW

Sydney Water response to the Joint Review of:

The Water Industry Competition Act 2006, and

Regulatory arrangements for water recycling under the Local Government Act 1993

February 2013

Sydney Water – February 2013

Contents

1 Sydney Water’s experience with urban water regulation 7

1.1 Sydney Water’s response 7

1.1.1 Scope of this submission 7

1.1.2 Importance of Last Resort arrangements 7

1.2 Sydney Water’s experience with the Water Industry Competition Act 8

1.2.1 Roles 8

1.2.2 Observations and learnings 8

2 Broader reform issues and regulator views 9

2.1 Additional proposals to increase regulatory certainty 9

2.2 IPART submission to the review 9

2.3 Other issues to consider 10

2.3.1 Consistency in pricing and licencing between WIC and IPART Acts 10

2.3.2 Regulatory principles in a new fully-formed WIC Act 10

3 Case studies 11

3.1 Case study 1: WIC Act licences for SDP Pty Limited 11

3.2 Case study 2: Bingara Gorge 11

3.3 Case study 3: Sewer mining schemes and the WIC Act 12

3.4 Case study 4: Central Park 12

4 Responses to the Discussion Paper 13

4.1 Chapter 3: Issues relating to the WIC Act 13

4.2 Chapter 4: Issues relating to the Local Government Act 27

4.3 Chapter 5: Cross-sectoral issues 32

4.4 Chapter 6: Looking to the future 34

5 Conclusion 38

5.1 Objectives in the WIC Act 38

5.2 Licensing individual proponents rather than schemes 38

5.3 Introduction of an economic viability test for proposed schemes 38

5.4 Introduction of a ‘tiered’ or varied licensing approvals framework 38

5.5 Default monopoly declarations and price regulation 38

5.6 Increased information provision requirements to WIC Act customers 38

5.7 Increasing regulatory certainty 39

5.8 Broader regulatory reform issues and regulator views 39

Sydney Water – February 2013 Page | 3

Executive summary

Sydney Water welcomes the opportunity to make a submission to the Metropolitan Water Directorate’s Urban Water Regulation in NSW review and Discussion Paper (“the Discussion Paper”). The Water Industry Competition Act 2006 (“WIC Act”) commenced in 2008 and is the first of its kind in Australia. Sydney Water was involved in the development of the WIC Act and has subsequently had significant interaction with the WIC Act framework, including:

• As the long term service provider in greater Sydney and as the owner of ‘monopoly infrastructure’ under the WIC Act;

• As a partner to various private sewer mining schemes;

• Participation in the working group developing retailer and operator of last resort provisions;

• Assisting Sydney Desalination Plant Pty Limited (“SDP”), then a wholly owned subsidiary of Sydney Water, in its application for WIC Act licences (which were subsequently granted); and

• Continuing to work cooperatively with several emerging private schemes anticipated to be licenced under the WIC Act, including the Central Park and Barangaroo developments.

Sydney Water has had less direct interaction with the provisions of the Local Government Act 1993 (“LG Act”). Most of Sydney Water’s comments relate primarily to the WIC Act. Sydney Water supports efforts to refine the current regulatory framework to ensure consistency of regulation, and a level playing field, to public and private water servicing schemes.

Sydney Water’s perspective

Sydney Water’s vision is to provide valued water solutions. It puts customers front of mind, and contributes to liveable cities. Some of our key strategic objectives include:

• Providing a reasonable commercial return to our shareholders, the NSW Government;

• Achieving capital excellence through efficient planning and delivery; and

• Achieving operational excellence through working at ‘industry best practice’ or better.

Sydney Water has gradually increased the involvement of the private sector over the long term, as demonstrated by:

• Transition from a day labour force to market models of service and reduction in Sydney Water’s workforce;

• Establishment of Build, Own Operate (“BOO”) privately owned Water Filtration Plants and associated supply contracts;

• Private sector delivery of expenditure:

o Majority of capital expenditure program: Sydney Water uses competitive procurement methods for delivery of capital works that enable the organisation to regularly test the market, provide innovation and give private providers the opportunity to compete for delivery of works; and

o More than 80 cents in every dollar of overall Sydney Water expenditure is channelled from external sources; and

• Refinancing of SDP. This was also an important structural change for the urban water industry in Sydney, as it continued the disaggregation of the bulk water supply which commenced with the separation of the Sydney Catchment Authority (“SCA”) in 1999.

The emergence of competition is a positive influence for the urban water industry in greater Sydney. Competition can bring broad benefits to the industry as a whole, including increased innovation in service provision, diversified product offerings, incentives for efficient performance, and increased agility or responsiveness amongst water providers. In turn, this leads to better


overall economic efficiency in service delivery and increased value for customers. All of these outcomes align closely with Sydney Water’s own corporate objectives.

However, achievement of these benefits should not impose more costs on some service providers, or customers, than others. Sydney Water notes the importance of competitive neutrality, and the creation of a level playing field for all proponents of water servicing schemes.

Performance of the regime to date

The introduction of the WIC Act was a significant institutional reform in the urban water industry in NSW. It had dual objectives, of increasing recycling (notably in a time of drought), and facilitating competition. As such, it created an enabling framework for private water servicing schemes to arise.

The WIC Act enables competition on two fronts: (a) third party access competition with incumbent owners of monopoly infrastructure; and (b) a licensing framework for private, competing schemes. It also provides for declaration of monopoly suppliers, transparent price regulation, and arbitration of sewer mining disputes.

Five years on, it is useful to consider the types and scale of activity that have arisen under the new WIC Act framework. The licensing framework for private schemes has seen the most activity. Private proponents have identified several niches in the market such as:

• Providing integrated wastewater and recycled water services to geographically discrete villages. Typically this can accelerate provision of services to these areas ahead of the incumbent service provider’s timeframe for doing so, and incorporate the use of third pipe dual reticulation (in some cases through the use of decentralised systems); and

• Differentiated product offerings: for example, offering recycled water to non-residential customers for a range of purposes, in competition with the potable water offered by an incumbent service provider. This suggests there is a market for recycled water as a value-adding element in architecture, urban development projects, and industrial processes.

Many of the schemes licensed to date were to some extent envisaged before the introduction of the WIC Act. Some stakeholders may argue that nine schemes is not a substantial number. However, there is substantial variety in the types of schemes, and Sydney Water understands there are several dozen more schemes currently contemplated. This is a good indicator of demand.

None of the schemes that have arisen to date involve head to head competition, or competition in the market, for the same products. In other words, no schemes have emerged which would permit an individual customer in a particular location, to be able to choose between two or more service providers for the same service (for example, no customer can currently choose between Sydney Water and a WIC Act licensee to provide their drinking water). In terms of competition objectives, these schemes do nonetheless offer some partial benefits, in the form of competition by comparison.

Some of the licenced schemes appear to have monopoly characteristics for the services they offer. For example, in the peri-urban villages, the WIC Act licensee is the only service provider of wastewater and recycled water services. However these schemes have not been subject to monopoly supplier declarations or price regulation.

The third party access provisions have generated less activity thus far. Sydney Water has increased its level of preparedness for such approaches, by producing a draft voluntary undertaking for access to its drinking water network, and a draft cost allocation manual for its wastewater services. Sydney Water remains willing to negotiate with any applications for access to the networks, in accordance with the current regulatory framework.

Sydney Water expects that government and the industry will continue to explore the benefits of competition, and will continue to participate in the development of value-driving opportunities that arise. Sydney Water is aware of some feedback from the development community that decisions on whether or not to partner with a private licensee are currently influenced by a lack of familiarity with alternative service providers and offerings. It is envisaged that market confidence in new providers will increase with time.


A further factor to consider is that water, as a commodity resource, is subject to natural cyclical distortions based on prevailing climatic conditions. History has shown that water can have periods of acute shortage followed by long periods of abundance. There can also be significant disparities in costs: for example, dam water can be substantially cheaper to provide than water produced by desalination or recycling technologies. Today, when the drought conditions that were present at the time of the WIC Act’s creation have eased, water servicing schemes are evaluated primarily on their inherent commercial viability.

The future of competition: what does success look like?

Any analysis of the success to date of the WIC Act framework, and the outlook for competition in the urban water industry in future, must first determine the objective against which success is evaluated.

Competition is generally considered as a means to an end, such as economic efficiency or increased value, rather than an end in itself. Sydney Water notes the comments in the 2003 Dawson report1 that “…whilst competition is an important means whereby an economy can achieve economic efficiency, competition is not an end in itself. The achievement of economic efficiency is the ultimate goal, because it results in high productivity, which in turn sustains economic welfare. Maximising competition is the means to that end.”

Sydney Water supports these goals and would welcome the inclusion of wording that reflects this in any objects clause added to the WIC Act.

It is the role of government to decide the type and extent of competition that is desired for the urban water sector. There is activity in the licensing framework, and Sydney Water has increased its readiness for activity in the third party access framework.

Sydney Water expects that governments, regulators, stakeholders and the industry itself will continue to monitor trends and explore the opportunities and benefits that the regulatory framework can provide for increased competition on its merits, to improve the overall efficiency of the sector and drive opportunities for value. This may include amendments to the urban planning regulatory framework (given that water services are a key enabling infrastructure for growth), or further interventions in the current institutional arrangements such as further disaggregation of parts of the urban water value chain. Sydney Water will continue to assist in supporting and facilitating these efforts.

Creating an environment of certainty in future

As the urban water sector sees increasing levels of competition, a robust regulatory framework is essential to ensure effective competition. A key element of this is certainty of the regulatory regime and institutional frameworks. As such, Sydney Water considers that there is scope for other amendments to the WIC Act that are not specifically addressed in the Discussion Paper. Some potential measures could include:

• Incorporating pricing principles or a mechanism to set pricing principles to apply in pricing determinations for WIC Act licensed schemes. Transparent pricing principles are a core element of the National Access Regime, under Part IIIA of the Competition and Consumer Act 2010 (Cth). The WIC Act currently contains pricing principles for third party access regimes, but not provision for monopoly supplier licensee determinations.

• Enabling WIC Act licensees that are declared monopoly suppliers to seek a merits review of pricing determinations.

• Provisions to enable a WIC Act licensee to enter into an agreement with the Minister/State on the amount of compensation the licensee will be entitled to if a WIC Act licence is cancelled.

Section 2.1 canvasses these issues in more detail and proposes some specific areas that could be considered in the WIC Act.

1 2003, Report on the review of the Trade Practices Act 1974, Chapter 1


Key issues for reform of urban water regulation

Sydney Water’s responses to the questions raised in the Discussion Paper are laid out in this submission. A number of additional matters are discussed in broader policy terms. Sydney Water considers that the key issues as policymakers consider reforms to the legislative and regulatory framework are as follows:

• Introduction of an ‘objectives’ clause in the WIC Act;

• Licensing individual proponents rather than schemes;

• Introduction of an economic viability test for proposed schemes;

• Introduction of a ‘tiered’ or varied licensing approvals framework;

• Default monopoly declarations and price regulation;

• Increased requirements for information provision to future customers of WIC Act licenced schemes;

• Increasing regulatory certainty; and

• Broader regulatory reform and regulator views.

These issues are referred to in response to the specific questions in the Discussion Paper, and are described in summary at the conclusion of this report.

Retailer and operator of last resort

The framework of ‘retailer and operator of last resort’ arrangements is a key element of the WIC Act. These issues are being canvassed separately from this review, carrying on from the Discussion Paper on last resort arrangements released in 2010/11.

Sydney Water considers that this is a key aspect of the overall water competition regime, and that it is not optimal to consider these issues through separate processes. Critical parameters for the last resort framework include customer protection and service provision, appropriate and equitable cost recovery principles, and potential market impacts and incentives. These issues should be considered in the same context as the broader review.

Sydney Water will continue to participate in the separate review of last resort arrangements over the course of 2013.

Broader water industry regulatory reform in NSW

Sydney Water’s submission focuses on responding to the specific questions raised in the Discussion paper. Sydney Water also acknowledges the submission to the review published by the NSW Independent Pricing and Regulatory Tribunal (“IPART”).

IPART’s submission raises broad policy issues and options for reform, including discussion regarding changes to key planks of the current regulatory regime, for instance, the requirement for IPART to have regard to ‘postage stamp pricing’ in considering access undertakings, and other strategic issues.

Sydney Water welcomes this broader policy debate, and looks forward to a constructive and vigorous debate supported by in-depth analysis of all options and all important matters that arise. The Corporation will be a willing participant in discussion by policymakers regarding future options for industry reform.

In addition to policy matters raised by IPART, Sydney Water encourages the Metropolitan Water Directorate to consider broader policy debate on engendering greater consistency in pricing approaches between the WIC Act and the IPART Act, and whether there is merit in considering any potential benefits of public water utilities being regulated under a new fully-formed WIC Act containing best regulatory practice principles for the entire urban water industry.

The broader issues raised by IPART and Sydney Water are discussed at Section 2 of this submission.


1 Sydney Water’s experience with urban water regulation

1.1 Sydney Water’s response

1.1.1 Scope of this submission

Sydney Water supports the joint approach to reviewing the WIC Act and the recycling provisions of the LG Act. As the urban water industry continues to evolve, and private schemes emerge, having a streamlined, uniform, consistent and level playing field across the regulatory framework is essential to ensure the sector achieves objectives such as increased customer value.

The sections of the LG Act relating to recycling have less direct relevance for Sydney Water. Therefore, Sydney Water’s submission primarily focuses on the WIC Act components, while noting the importance of consistent, level and streamlined regulatory arrangements for all water related projects.

In responding to the questions in the Discussion Paper, Sydney Water provides advice on means by which such streamlining could occur. In Sydney Water’s view, in order to streamline regulatory processes and improve consistency across frameworks, changes to the LG Act should be in line with changes to the WIC Act.

For example, the Discussion Paper raises the prospect of tiered approaches to regulation under the WIC Act. This may involve a higher level of regulation for schemes with higher risk profiles, and reduced regulatory requirements on lower-risk projects.

In reviewing the LG Act, Sydney Water considers that policymakers could introduce a similar framework for local schemes regulated under the LG Act. Sydney Water also recommends consistency of legislative definitions where appropriate, across both the WIC Act and the LG Act.

1.1.2 Importance of Last Resort arrangements

Sydney Water notes that the provisions of retailer and operator of last resort are being canvassed separately from this review, continuing from the Last Resort Discussion Paper (as distinct from this review’s Discussion Paper) that was released in 2010/11.

The framework of ‘retailer and operator of last resort’ arrangements are a key aspect of the WIC Act and the overall competition framework. Sydney Water considers that the dislocation of the review process for the last resort provisions from the remainder of the WIC Act, is not optimal. The proposed ‘last resort’ framework should be considered in the same context as the broader review.

Key issues in Sydney Water’s view, as highlighted in its 2011 submission were:

• Ensuring customer protection and service provision;

• The importance of not creating perverse incentives. The regulatory framework should not create a moral hazard. That is, it should not provide private licensees with disincentives for sound operation and maintenance of their infrastructure;

• The need for appropriate cost recovery frameworks, reflecting the different phases of last resort provider activities. This includes equity considerations, such as who should pay the costs of last resort provisions (for preparation and maintenance of contingency plans, preparation for a potential trigger/step in event, and costs relating to actually stepping in and providing services if required); and

• Potential market impacts and incentives created by the last resort framework.

Sydney Water looks forward to participating in the next phase of development of this framework.


1.2 Sydney Water’s experience with the WIC Act

1.2.1 Roles

Sydney Water has had significant experience with the WIC Act, including:

•••• As the long term service provider in greater Sydney, Sydney Water is the owner of ‘monopoly infrastructure’ under the WIC Act;

•••• As a partner to various private sewer mining schemes;

•••• Participation in the working group developing retailer and operator of last resort provisions;

•••• Sydney Water also assisted SDP in its application for WIC Act licences, which were subsequently granted; and

•••• Sydney Water continues to work cooperatively with several emerging private schemes anticipated to be licenced under the WIC Act, including the Central Park and Barangaroo developments.

Sydney Water supports and facilitates the emergence of private water schemes, including recycling. These schemes can lead to greater efficiency within the overall sector, through increased innovation, incentives to lower costs, diversification of product offerings and agility. All of these outcomes are consistent with Sydney Water’s own strategic vision of providing valued water solutions.

1.2.2 Observations and learnings

The first five years have demonstrated that there are a range of opportunities for private proponents to deliver services, including recycling, often in competition with an incumbent provider, in the urban water sector.

Sydney Water has had the opportunity to observe a range of outcomes of the framework as it evolves. These are detailed in responses to specific questions posed in the Discussion Paper. Below are some of Sydney Water’s strategic findings:

• Informed participation is a key consideration. Particularly in the early phases of a competitive water market, there is a need for robust processes for communicating with prospective customers of WIC Act licensees. Though some measures were introduced in the 2011 amendments that addressed this issue, further measures and continuing vigilance in this area is important.

• While third party access is available, there are also other forms of engagement with an incumbent provider that a potential proponent may adopt.

• The overall economics of schemes is an important consideration that should be addressed in the assessment of a licence application. This is an important tool in minimising the likelihood of disruptive events that require step-in from the last resort provider, which can have significant implications for customers as well as that provider.


2 Broader reform issues and regulator views

2.1 Additional proposals to increase regulatory certainty

As the urban water sector sees increasing levels of competition, a robust regulatory framework will be essential to ensure effective competition. A key element of this is certainty of the regulatory regime and institutional frameworks. As such, Sydney Water considers that there is scope for other amendments to the WIC Act that are not specifically addressed in the Discussion Paper.

Potential measures may include:

• To increase certainty in relation to pricing, incorporate into Section 52 of the WIC Act pricing principles or a mechanism to set pricing principles, to apply in pricing determinations for WIC Act licensed schemes. The Act currently contains pricing principles for third party access regimes, but not for monopoly supplier licensee pricing determinations. There are various means to achieve this. For example, provisions known as ‘tariff orders’ exist under section 15A of the Electricity Industry Act 2000 (Vic), and fixed pricing principles are found in the National Gas Law and Queensland Competition Authority Act 1997.

Established pricing principles are a core feature of the National Access Regime (NAR) under Part IIIA of the Competition and Consumer Act 2010 (Cth), and any pricing principles developed in the WIC Act could be consistent with those in the NAR.

• Enabling WIC Act licence holders that are declared monopoly suppliers, to seek merits reviews of pricing determinations. There is provision for this under the Gas Supply Act 1996 (NSW).

• Permit a WIC Act licensee to enter into an agreement with the Minister/State on the amount of compensation to which the owner will be entitled if a WIC Act licence is cancelled.

Section 19 of the WIC Act permits the Minister to cancel a WIC Act licence in the public interest; and outlines provisions for the licensee to seek compensation for this in the Supreme Court. To limit the uncertainty concerning the level of compensation payable, which is a risk for new market entrants, the government may wish to consider drafting a provision that enables a licensee, once a WIC Act licence is granted, to enter into an agreement detailing the amount of the compensation entitlement should cancellation occur.

2.2 IPART submission to the review

It is expected that a number of water industry organisations and bodies will make submissions to the Metropolitan Water Directorate concerning the legislative review. Sydney Water notes that IPART has published a submission.

While some of the measures recommended in IPART’s submission are aimed at streamlining the legislation with a view to reducing the complexity of water industry regulation, a number of IPART’s recommendations would involve much broader changes to the way the water sector is regulated in NSW. Broader policy matters discussed by IPART include:

• A proposal to open up water filtration services (currently excluded under the WIC Act framework) to third party access-seekers;

• Removal of the recently added licencing principle concerning equitable sharing in infrastructure costs – IPART considers that new market entrants could better contribute to water security infrastructure through third party access prices; and

• The barriers to entry inherent in the existing regulatory framework, including the requirement that IPART has regard to ‘postage stamp pricing’ when considering access undertakings, in line with government policy.

Sydney Water considers these matters, and their policy implications if pursued further, would involve significant changes to the regulatory framework governing the urban water sector. Matters such as these require comprehensive analysis at the utility and regulatory levels, and also by central government.


2.3 Other issues to consider

In addition to the broader policy matters and regulatory and institutional reform raised by IPART in its submission to the Metropolitan Water Directorate, Sydney Water considers that:

(a) There should be greater consistency between the approach IPART is required to take for the pricing and licencing of public water utilities, and that required under the WIC Act; and

(b) When pursuing avenues for further reforms, policymakers may wish to examine the merits of public water utilities being regulated under a new fully-formed WIC Act, containing best practice regulatory principles for the entire urban water industry. These issues are discussed further below.

2.3.1 Consistency in pricing and licencing between WIC and IPART Acts

Currently there are differences in the approach that IPART is required to take for the pricing and licencing of public water utilities under the IPART Act versus approaches required under the WIC Act. Ideally there should be a clear set of consistent objectives / obligations on IPART under both Acts. For example, the pricing principles in section 41 of the WIC Act that IPART must have regard to in deciding whether or not to approve an access undertaking for an infrastructure service are different from the methodology for fixing prices set out in section 14A of the IPART Act.

There may be merit in reviewing the pricing and licencing obligations under both Acts with the aim of identifying changes to minimise differences in pricing and licensing objectives and obligations. This will reduce regulatory complexity and provide greater regulatory certainty.

2.3.2 Regulatory principles in a new fully-formed WIC Act

The existing regulatory framework is complex, with multiple legislative requirements and differing approaches to regulation under the various Acts.

Sydney Water believes that in the future there may be merit in exploring the possibility of public water utilities being regulated under a new fully-formed WIC Act, which contains best practice regulatory principles for the entire urban water industry that are consistent with Part IIIA of the Competition and Consumer Act (Cth).

Sydney Water believes that such an approach will encourage greater efficiency and provide greater regulatory certainty. Sydney Water supports further investigation by policymakers to determine whether this is the case (Sydney Water is happy to assist in such investigation).


3 Case studies

Below are several case studies in which Sydney Water has had some involvement. They highlight some relevant overall lessons learnt for the urban water sector as it continues to evolve.

3.1 Case study 1: WIC Act licences for SDP Pty Limited

One of Sydney Water’s primary experiences with the WIC Act was assisting SDP, then a wholly owned subsidiary of Sydney Water, to apply for Network Operator and Retail Supplier licences. Sydney Water was further involved in WIC Act-related processes through the subsequent amendment to that licence to include the delivery pipeline under the licence.

SDP applied for the WIC Act licences, as the owner of the infrastructure. Veolia (the plant operator) was named as a third party to the licences. The portfolio Minister declared SDP a ‘monopoly supplier’ under the WIC Act. The Minister subsequently referred SDP to the IPART for a transparent price review and determination process.

SDP, with Sydney Water’s assistance, managed the development and implementation of relatively complex and detailed WIC Act plans (Infrastructure Operating Plan, Water Quality Plan and Retail Supply Management Plan). These plans, which are requirements of the WICA regulations, were then subject to audit.

Responsibility for the desalination plant, including the WIC Act licences, was transferred to the private sector after the SDP refinancing project, in 2012.

3.2 Case study 2: Bingara Gorge

Bingara Gorge is a 1,100 lot development by Delfin Lend Lease, adjacent to the small township of Wilton (unsewered) in the Wollondilly Shire in southwest Sydney. Under a State planning agreement negotiated with the NSW Government, approval for the development was granted on the condition that the proponent provided a sewer treatment and recycling facility.

Treated effluent is proposed to be used for household recycled water and irrigation of the 18-hole golf course being developed by the proponent. Strict licence conditions have been imposed on the operation of the treatment plant so there is no discharge to the ‘Class P’ protected waters adjacent to the development site. Sydney Water remains the provider of potable water services.

Delfin Lend Lease contracted Veolia to build and operate the required treatment facilities. A network operator licence was granted by IPART under the WIC Act to Veolia in 2010 for the ‘construction, operation and maintenance of non-potable water and sewerage infrastructure and provision of non-potable water and sewerage services to the residents of Bingara Gorge’. There are currently around 100 occupied dwellings at the site.

Sydney Water understands that soon after the scheme commenced operation, residents living at Bingara Gorge expressed concerns about the cost of wastewater service provision. Sydney Water understands that the concerns were regarding wastewater prices higher than the regulated price. This demonstrates that:

a) There was the potential for confusion among consumers regarding provision of waste water services;

b) There was scope for better information provision requirements for buyers of lots in new WIC-licensed areas; and

c) The small nature such schemes has the potential to result in prices higher than the regulated price.

It should be noted, responding to these matters, in 2011, the NSW Government amended the WIC Act with the addition of licensing principles to ensure that consumers are aware of the cost of essential services in an evolving competitive market.


3.3 Case study 3: Sewer mining schemes and the WIC Act

A number of recycled water schemes rely on municipal sewage as an additional feed source to supplement site-generated wastewater.

The water utility grants access to its reticulation network for sewer mining, provided there is no adverse impact on the greater sewerage network. The sewer access point is generally close to the recycled water treatment facility. Interconnection arrangements are negotiated as part of the access agreement between the utility and the WIC Act licence holder.

Most recycled water treatment involves storing and treating sewage. This can cause the generation of odours, which can lead to local community complaints. These complaints are normally reported to the local Council or the EPA. It is often difficult to isolate the actual point source of odour generation, particularly when there is sewage infrastructure in close proximity, owned and operated by different parties (water utility and WIC Act licence holder).

Should the EPA deem action is necessary, investigations often involve external consultant studies to assess potential point sources, odour mitigation strategies and best practice reviews.

These studies are expensive and are often co-funded by the water utility and the WIC Act licence holder. These impacts are generally not foreseen during the WIC Act licence assessment process, but result in unintended expense by both parties and localised community concern. It may also create issues for the water utility in respect of its notification requirements under its EPA licences.

These impacts will cause apprehension for water utilities when assessing access arrangements for sewer mining schemes and can result in a lack of confidence in the ability of the private sector managing odour impacts.

3.4 Case study 4: Central Park

The Central Park development, at Broadway in Sydney, is a new residential and commercial development, which includes 1,900 apartments, 100,000 square meters of commercial and retail premises and 4,500 square metres of open space.

The Water Factory Company (“WFC”) proposes to be the sole private water utility for the Central Park site – providing drinking water, wastewater and recycled water services to tenants and owners within the complex.

This is a ground-breaking development, because the proposal means that for the first time, Sydney Water will have no retail relationship at all with customers within this precinct of Sydney Water’s geographic area of operations. Sydney Water’s only involvement with the site will be at the ‘precinct’ level, supplying services to WFC under a commercially negotiated agreement.

In January 2013, the Minister for Finance and Services granted WFC a WIC Act Network Operator Licence for the Central Park development. WFC has also applied for a WIC Act Retail Supplier Licence covering the development. Sydney Water’s relationship with WFC will cover the provision of bulk drinking water to the boundary of the site. It will also cover standard commercial terms for sewer mining, trade waste disposal and interconnection points.

The Central Park scheme represents, in broad terms, the emergence in Sydney of competition ‘for the market’, although not competition ‘in the market’.

A further broad issue this raises for policymakers to consider is the level and scope of regulation that may be warranted for this, and similar developments in the future. WFC is essentially a ‘monopoly’ in a small, localised area.

Policymakers need to consider whether such developments should be subject, for example, to price regulation. Currently, SDP is the only WIC Act-licenced scheme subject to price regulation.


4 Responses to the Discussion Paper

4.1 Chapter 3: Issues relating to the WIC Act

Question Sydney Water response

1 Should the WIC Act be amended to set out more specific objectives than currently? If so, what should these specific objectives be?

Yes. Sydney Water supports the inclusion of an objects clause, as adopted in similar legislation in other industries, such as energy. It should set out to mitigate the potential public health, environment and financial risks that third-party schemes face and ensure that they have a long-term viability in this regard.

The long title and licensing principles provide a good starting point. They are broadly consistent with the wording of the National Access Regime, which sets as an objective ‘to promote the economically efficient operation of, use and investment in the infrastructure by which services are provided, thereby promoting effective competition in upstream and downstream markets’

Sydney Water believes the WIC Act should incorporate the words underlined above in its current phrasing. For example, in the long title:

“An Act to encourage effective competition and to facilitate the development of infrastructure for the economically efficient production and reticulation of recycled water”.

The same changes should also be made to the relevant clauses of the licensing principles in Section 7.

This would require development of appropriate definitions of the underlined words.

The legislation for third party access in electricity, gas and telecommunications regimes posits the long-term interests of consumers or end-users as part of the objects clause. Sydney Water would support the inclusion of similar wording in an objects clause for the WIC Act.

Such wording is important as it emphasises that competition, and/or recycling, are not an end in themselves – but rather a means to achieve a greater overall outcome, namely increased overall value and efficiency in the sector. Sydney Water supports wording that facilitates new or private water schemes where they are a cost-effective measure in comparison with other available means of managing the water supply.

2 Do you consider that the WIC Act to date has operated to encourage competition in the supply of water and sewerage services, or facilitated the development of infrastructure for recycled water? Please provide details.

The WIC Act has certainly seen the development of some forms of competition – for example competition by comparison. It has also facilitated the market for integrated wastewater treatment and recycling as an attractive, marketable, valuable asset in architecture sustainability, for industry, and for homes. With nine licensed schemes, the Act has been a significant enabler. Sydney Water understands that dozens more schemes are expected.

There are no cases of competition in the market, or head to head competition as yet – ie where a customer who lives in a particular location, can choose between more than one service provider for the same service. For example industrial customers in the Rosehill area have been able to choose to purchase recycled water from the Rosehill Scheme, rather than purchase just drinking water from Sydney Water. But these are different product offerings.

Nine schemes is not a large number. However, there are inherent factors in the urban


water sector that may limit the natural emergence of substantial levels of real competition. The Productivity Commission came to a similar conclusion in its 2011 inquiry on Australia’s Urban Water Sector.

3 Is the policy intent behind section 10(4)(d) still valid? Please cite the reasons for your view and – if applicable – provide specific examples. [Section 10 (4) (d) requires that new schemes must take a certain amount of their water ‘other than from a public water utility’ – to encourage proponents to develop new sources of supply.]

The WIC Act has two objectives which may not always work in harmony: to facilitate competition and recycling. This requirement helped achieve the latter, and was valid in the context of the drought conditions of the day. However, it could potentially inhibit competition by imposing a requirement for the development of a new water source. For example, it could form a block on the development of pure retail competition.

Evaluating the validity of this depends on the overall outcome sought – competition or recycling. Given that the water supply for greater Sydney is secure for at least 25 years, the competition objective may be more important currently, in which case Sydney Water suggests that the clause may no longer be valid.

In addition, the amendments made in 2011 set a new licensing principle that enabled the Minister to have regard to relevant policy documents currently in force, such as the Metropolitan Water Plan, when considering the grant of a licence. The Plan governs the water supply and demand balance for greater Sydney. This principle may potentially be invoked if a scheme were proposed that presented disadvantages to the demand and supply balance, instead of Section 10 (4) (d).

4

If you consider that section 10(4)(d) is still valid, are any specific changes required to give effect to that policy intent as the market evolves?

Sydney Water recommends that this clause be removed as it is no longer appropriate given developments in the industry over the first five years of the WIC Act. The clause was originally designed to promote recycling – as recycled water is a source of water a proponent may obtain otherwise than from a public water utility.

However, the clause as it currently stands now creates an uneven playing field, as SDP has an advantage over all other WIC licensees, in that it produces its own large-scale potable water source.

Additionally, it may be in the interests of further promoting competition, that this clause is removed. Removing the clause may encourage new entrants to enter the market and seek access to Sydney Water’s infrastructure under Part 3 of the WIC Act.

5

If changes are required, what alternative models should be considered and what benefits could they provide?

The focus of this section of the WIC Act should be placed on the provision of various products (water, wastewater treatment, recycled water) targeted at the market for each product – that is, the end users.

The key focus in granting a license is to ensure appropriate arrangements/infrastructure are in place to ensure the product is ‘fit for purpose’ in terms of intended uses, to ensure there is sufficient supply and to protect consumers and the broader community from negative impacts (eg. environment, public health and existing infrastructure). Removing unnecessary limitations in the Act is also a positive in terms of promoting competition and recycled water, in areas where there are abundant sources.

Sydney Water notes there are already a number of examples of schemes that evidence diverse uses of different water sources, which has greatly reduced the need for the promotion of ‘new sources of water’.

New sources of water will be found naturally as technology evolves, costs of schemes come down, and markets emerge. In effect, it can be argued that the market should


drive the innovation.

6 Is the WIC Act regulatory regime sufficient to enable private sector entry into the market, or are there still too many regulatory barriers?

The water industry responds to natural climatic cycles including drought and water surplus. In creating legislation that provides enabling architecture, there are going to be periods where it is inherently more favourable than others to utilise the frameworks made available. Sydney Water considers that the legislation is performing as intended.

The government may wish to explore further reforms in the urban water sector.

The principal barriers to large scale competition are economic not regulatory, requiring significant investment in high cost infrastructure. For example, even though access to existing infrastructure is available, the retail margin is minimal. Nonetheless, Sydney Water has participated cooperatively with new entrants to the market, and increased its preparedness for third party access approaches.

7 If there are still barriers present, please describe the specific nature of these barriers and provide actual examples, if possible.

The customers of large providers benefit from economies of scale, through the postage stamp arrangements established by IPART for Sydney Water customers. Postage stamp pricing provides that wins and losses are shared by a customer base – and customers are protected from ‘cherry picking’.

While there are mechanisms that could defray the disparity between postage stamp pricing and scheme specific pricing, the resulting cross-subsidies would be transparent. This would also work against the competitive tensions and hence efficiencies/benefits sought through competition reforms.

Some proponents, particularly of small schemes, may find the WIC Act regulatory framework complex, which can increase costs. The global financial crisis has also created greater hurdles to find finance in the market – this can impact stakeholders such as the development community.

As noted in the Discussion Paper, Sydney Water’s determined prices are not sufficient to cover the costs of replacing assets – a private proponent cannot offer such pricing.

In both the retail and network sectors, Sydney Water notes that perversely, competition can increase the regulatory burden on an industry – through the need to regulate a large number of diverse players instead of a small number of consolidated, experienced entities. This can lead to poor consistency and dilute responsibility for core objectives of the regime such as the protection of public health and the environment.

8 If you believe that there are barriers still present, can these barriers be reduced or removed by legislative, policy or regulatory changes?

Sydney Water reiterates the importance of the regulatory framework encouraging competition that is effective and will deliver greater overall economic efficiency. While efforts to remove barriers are to be encouraged, this should not be done at the expense of incumbent providers, who represent a large customer base.

9 Are there specific access arrangements, or other terms of the WIC Act regulatory framework, that discourage private sector entry or constrain the financial viability of new entrants? Please provide specific examples.

As well as all the factors noted above, the requirements for technical and financial adequacy could be seen as a barrier. Sydney Water believes, however, these are appropriate to ensure the proper protection of public health.

10 What types of water and wastewater infrastructure schemes should be regulated under the WIC Act and what schemes should be exempt?


All schemes, other than household self-supply (which is regulated by local government authorities), council stormwater harvesting schemes should be regulated under WIC Act to ensure the proponents, operators and owners take responsibility and understand the need for ongoing monitoring and independent auditing. None should be exempt but the WIC Act licences should be graduated appropriately.

What may vary under the revised WIC Act is the level of regulation applicable to schemes with differing risk profiles. Regulation should be based on a risk-based assessment process with licensing/testing regimes applied responding to varying levels of risk. This way, all schemes are developed and operated under some level of regulatory scrutiny, but higher levels of oversight are reserved for those proposed schemes that truly warrant it.

It could potentially be of benefit to retain the inclusive nature of the regulatory requirements, but provide the ability for the Minister to exercise discretion for cases where a lower level of regulation is necessary. It is also worth noting that as competition continues to emerge, there may be more cases of schemes that were not anticipated during the creation of the legislation, but that warrant low levels of regulation. The legislation may be drafted in such a way as that applicant would need to satisfy the Minister (advised by IPART) that the scheme was low enough risk to not need full regulatory coverage.

It should be noted that self-supply schemes that may demonstrably have broader public health or environmental impacts (as opposed to discreet impacts within the scheme boundaries) should be subject to regulation under the WIC Act.

11

How can self-supply schemes be best defined?

Self-supply schemes may be defined as “schemes that do not provide services to third parties via reticulated networks”.

12

Should schemes that operate for self-supply purposes be licensed under the WIC Act?

a. What alternative approaches should be considered?

Yes, except for household self-supply. This should continue to be regulated by Local Government.

One caveat upon this is that if self-supply schemes encompass any inherent risks to public health or the environment, they should still require some form of regulation. In this case, regulation may be tiered according to risk-profile. In regard to alternate approaches, given that Sydney Water supports general consistency of regulation, alternative models are not supported.

13 What approach should the WIC Act take to water industry infrastructure owned and operated by government agencies?

Sydney Water supports the adoption of a risk-based, tiered licensing framework. Government providers (that are not public water utilities), as well as private proponents should be subject to that framework. For higher risk schemes, this may mean more onerous requirements, for low risk schemes it might involve self-regulation through guidelines for example.

14 What are the factors contributing to the lack of take-up of third party access to water industry infrastructure services under Part 3 of the WIC Act?

Sydney Water has taken steps to facilitate the entry of any potential players to the drinking water market with the submission on a draft voluntary third party access undertaking for the drinking water network. While not yet finalised, this has greatly increased Sydney Water’s readiness for future applications for access.

As well as third party access, there are other means by which to engage with an incumbent, For example, Sydney Water has liaised closely and effectively with the


proponent of a future scheme, treating the proponent as a commercial customer rather than via third party access, to meet their servicing requirements.

With the easing of drought conditions, the public appetite for competing schemes may have diminished, and alternative supply schemes no longer appear such a necessary insurance policy.

Possible reasons for the lack of take-up of access to water in the past are:

• complexity and lack of transparency around the provisions – compared with the licensing regime, the access regime is opaque.

• the level of regulation in the water industry is a potential barrier to entry – there are high compliance costs for economic regulation, environmental regulation and planning requirements, including potential complexities around building infrastructure on/across private land.

15 Does Part 3 of the WIC Act, including the pricing principles in section 41, require amendment to better achieve its object of promoting the economically efficient use and operation of, and investment in, significant water industry infrastructure, thereby promoting effective competition in upstream or downstream markets?

Sydney Water believes the principles are adequate as they currently stand – importantly, they recognise the need to maintain postage stamp pricing, which prevents ‘cherry picking’ that could have detrimental impacts for large numbers of small retail customers of incumbent utilities.

16 Are the current licensing principles appropriate for achieving the objectives of the Act?

a. If not, what changes in the principles should be made in order to better achieve the Act’s objectives?

The current principles are a good description of the mix of factors that need to be balanced to ensure good regulatory outcomes.

The principles should be coupled with a test of economic viability.

Sydney Water supports the introduction of a tiered, risk based assessment framework. This may weed prevent unintended consequences that could potentially arise from schemes that are too small or risky to be sustainable.

The recent additions have strengthened the regime, particularly the principle on potential for adverse financial implications for small retailers. However, it may be useful to develop some guidance supporting this principle, around possible thresholds for ‘adverse financial impacts’. The emerging work on customer willingness to pay may provide useful insights.

Schemes should be operated by trained staff – an accreditation system could be developed (as is the case in the USA) to ensure sustainability of schemes (principally around capability of operators).

17 Should licence conditions be used to ensure that, at least for an initial period, charges do not exceed the level indicated in the application?

Sydney Water supports the introduction of a tiered, risk based licensing framework. This would set corresponding licensing requirements for each level of risk outcome, and also corresponding forms of price regulation.

Depending on the manner of implementation, Metropolitan Water Directorate’s proposal could have perverse outcomes. To cap prices could impose higher initial costs as prospective licensees may have an incentive to estimate prices with contingency for unforeseen circumstances that could increase scheme costs.

However, there would need to be some transparency of any such changes to scheme costs. The licence conditions should make some provisions for this. If those costs and


hence charges exceed a particular threshold or margin above the initial level indicated in the application, then some form of review process should take place or the applicant could be required to make publicly available its intended changes, which may be challenged by customers. This is particularly relevant in areas where the applicant would be the monopoly supplier of those services.

18

How should the Government ensure that those who purchase ‘off the plan’ are appropriately informed about prospective water and wastewater charges?

Better information provision should be regulated through changes to the NSW Conveyancing Act 1919. There is already a recent precedent in this regard, from a regulatory perspective, through various other inclusions in the Conveyancing Act regarding water infrastructure and services (eg. recovery of debts owing, physical pipe location, and detailed plumbing and drainage matters).

Information should be included pertaining to likely price structures / costs of water servicing to consumers, as well as broad details regarding the proposed servicing strategy (eg. dual pipe reticulation, types of recycled water end-use etc).

As a general principle, those buying off the plan should be made aware that the property / site is not serviced by the regulated monopoly supplier, and that any charges relating to water and wastewater services may differ from the monopoly’s current pricing (which may include ‘postage stamp’ pricing).

Contracts of sale should clearly inform the customers that water services are provided by an alternate provider and as such they may be charged more than customers of the regulated monopoly supplier.

19 Should the licensing principles in the Act be broadened so as to explicitly consider the financial viability of schemes, in addition to the financial capability of the proponent?

Yes. This offers a range of advantages including:

• ensuring competition arises on its merits, and not for its own sake – or in other words, arises in a way that assists customers and the industry overall by lowering costs – ie improving overall economic efficiency;

• protecting future customers from signing up to schemes that impose excessively high financial burdens; and

• avoiding high costs for incumbent utilities and other parties to prepare for, and/or ultimately manage, last resort incidents where the WIC Act-licensee withdraws or fails. The costs associated with these incidents are ultimately passed on to customers to bear.

20 Are any other amendments required to address concerns about financial viability? For example, should the regulatory framework impose size/risk thresholds under which schemes are not permitted, or under which the onus would shift to the proponent to demonstrate that the proposed scheme would be financially viable?

Sydney Water supports the setting of a size threshold. However, schemes below this threshold should not be automatically excluded. The proponent should be given the opportunity to clearly demonstrate their financial viability.

If a fixed threshold is set and all schemes below it excluded, this could preclude the development of new niches in the market that may emerge as the regime evolves.

21 Should a licensee who is the sole provider of essential water and/or wastewater services to small retail customers be automatically declared a monopoly supplier?

Yes, Sydney Water believes this is in the public interest. However it may be advisable for the regulatory arrangements to provide clear and accessible guidelines (for example, fact sheets and worked examples) on the criteria to be used to determine what


constitutes a “monopoly supplier.”

Sydney Water understands that a monopoly supplier declaration has not been sought for several peri-urban village schemes to date (such as Bingara George – see case study 2), even though such schemes essentially operate as small, discrete monopolies. Sydney Water understands that this is because:

(a) customers have not themselves sought monopoly supplier declarations – perhaps through lack of familiarity with the regulatory framework, or lack of awareness that bodies such as the Energy and Water Ombudsman (“EWON”) may advocate on their behalf; and

(b) resourcing issues have impacted on the regulator’s ability to seek monopoly supplier declarations for such schemes.

Automatic monopoly supplier declarations for such schemes will provide important benefits for the customers as it will:

• lessen the impact of the two issues described above;

• assist with protecting customers from ‘price gouging’ (if monopoly declarations are accompanied by transparent price regulation, whether by way of price capping, price monitoring or review of pricing policies); and

• create a level playing field with other schemes.

It would be preferable to have monopoly suppliers declared at the outset of the licensing of the relevant scheme as this will streamline the currently separate process of seeking a monopoly supplier declaration from the Minister.

22 Should it be mandatory that IPART regulates prices charged by monopoly suppliers, monitors prices or reviews their pricing policies?

Yes, it should be mandatory that IPART regulates prices charged by monopoly suppliers, monitors prices or reviews their pricing policies.

However, there should be flexibility in the form of regulation, to allow different price regulation options for schemes of varying type, risk and size.

A monopoly supplier declaration without mandatory price regulation by IPART will achieve little benefit for customers.

23

What would be the implications of these proposals for proponents and regulators?

Sydney Water’s views above would, if implemented, provide important benefits to consumers. It would be preferable to have monopoly schemes declared at the outset, which streamlines the (currently separate) process of seeking a monopoly supplier declaration, and brings about transparent price regulation, thus creating a level playing field. These proposals may also be complemented by having more flexible forms of regulation at the regulator’s disposal. For example, simple price capping or monitoring across schemes with similar profiles, rather than complex price setting methodologies on a scheme-by-scheme basis.

It may additionally be useful to impose a term on the monopoly supplier declaration. For example, in future neighbouring developments which may encroach on peri-urban schemes, the encroaching development may be serviced by an incumbent utility or another WIC Act licensee. In this case, there may be the potential for these entities to compete to provide services to customers.

Having a permanent monopoly supplier declaration in place would impede this. Therefore the declaration may have a logical term placed upon it. This could potentially be defined as ‘when the monopoly circumstances change, or have the potential to change.’

The discussion paper envisages this as requiring a separate application for the declaration to be revoked. Sydney Water’s view is that there is no clarity on who would


make this application. The licensee may not elect to do so, as the declaration may inhibit competitive incursions from other service providers. It may also be a cumbersome regulatory approach. A more streamlined approach may achieve the same or better consumer outcomes.

Sydney Water suggests a better mechanism might be to require a regular review by the regulator of the monopoly circumstances – this could be carried out as part of regular audits.

It is recognised that these proposals may have resource implications for regulators. This could be managed, however, through the implementation of more flexible forms of regulation (eg. the tiered approach as referred to above).

24

What other options are available to protect customers from unregulated prices charged by a monopoly supplier?

In other utility industries, ‘opt-outs’ are a common means by which consumers may exit a scheme, and return to service provision by a regulated incumbent. This is problematic in the water industry, given that some new entrant schemes are located in areas physically unserviced by an incumbent.

Given the isolation of many of the WIC Act schemes, it may not be efficient for Sydney Water to install new services to accommodate competitor ‘opt outs’. There may be some use in exploring options for managing opt-outs, where viable (as servicing by an alternative provider may prove viable in some instances).

Other alternative mechanisms to protect consumers may include regular or ad-hoc reviews by IPART, price-capping (eg. capping at a fixed percentage above the regulated price), appeals mechanisms (potentially through regulators or an ombudsman body).

As Sydney Water has outlined above, it is considered that monopoly suppliers should be subject to automatic price regulation of some form.

25

Are the licensing criteria appropriate, balanced and justified? Are any changes required?

Broadly, the licensing criteria in the WIC Act are reasonable and should provide the minimum necessary information required to demonstrate proponents’ capacity and capability.

As discussed above, however, in Sydney Water’s view Section 10 (4) (d) of the WIC Act may require amendment or removal. The requirement to supply ‘sufficient quantities of water obtained otherwise than from a public water utility’ may be considered overly restrictive given the limited raw water source options available.

Sydney Water also suggests inclusion in the WIC Act of scheme financial viability criteria as discussed in response to previous questions.

26

Are there other approaches that would provide a higher level of certainty as to a company’s ongoing financial capacity in a competitive market?

As discussed in earlier questions, Sydney Water considers there may be a case for the inclusion of scheme financial viability criteria.

Additional approaches could be considered, including an on-going requirement for licensees to provide regular financial statements and insurance compliance statements.

A requirement on licensees to provide a bond or bank guarantee in certain circumstances where the financial capability is questionable could be considered. These options may, however, be seen by the market as regulatory burdens and barriers to entry. This should be considered in the context of the retailer/operator of last resort framework.

27 Should a change of ownership (or change of third party) trigger an automatic review of the technical, organisational and financial capability of the corporation/party?


Yes – Sydney Water considers this a sensible ongoing precaution that maintains the stringent initial requirements for licence applications to be granted. Sydney Water, as a potential retailer/operator of last resort, supports the implementation of the proposed measure.

It should not be an unreasonably high resource exercise, from a regulatory perspective, given the due diligence requirements that would likely have been undertaken as part of the ownership change transaction.

28

Does the two stage approval process for acquiring a full operational licence require modification to provide better outcomes for applicants and regulators?

a. If so, what alternative approaches should be considered?

The two-stage process is a sensible regulatory approach, as requiring assessment of the proposed technology at the initial stage can provide guidance and greater certainty to applicants as they progress to the final approval stage. The approach is also likely to lead to fewer resourcing challenges on regulators.

Sydney Water notes the parallels with the approach used under current planning legislation. In that scenario, enough detail is submitted with a development application for the determining authority (usually council) to assess and grant a development application (“DA”). Once the proponent has fulfilled the conditions of the DA, the council may grant a Construction Certificate that allows the proponent to commence construction.

For water infrastructure proposals under the WIC Act, it is appropriate that at the initial stage, the proponent presents enough information for an independent assessor on behalf of IPART to determine, amongst other things, the financial, environmental and public safety risks of the proposal have been addressed.

29

Is the current licence application process appropriate? If not, should the owner, operator or both be required to apply for a network operator’s licence?

From Sydney Water’s perspective, the current process is appropriate as it provides for flexibility for the scheme proponent to select the option that suits their scheme.

When SDP was a wholly-owned subsidiary of Sydney Water, the WICA licences were sought in the name of SDP as the owner of the infrastructure, mainly because it was intended to be the owner in perpetuity, whereas the operator was on a fixed term contract. Ideally, the regime should maintain this flexibility.

It would appear that to require all parties to apply for a licence could create perceived regulatory barriers to entry.

The licence application process is currently extensive. Smaller proponents seeking a WIC Act licence, for example in a growth area, may look to partner with a larger firm to assist with the initial capital requirements.

30

Should the Act be amended regarding the technical capabilities of ‘authorised persons’?

Sydney Water supports amendment to the WIC Act to require the same level of technical capability for an “authorised person” as for the primary applicant. The principle should be that the operator, as an “authorised person” has the technical capacity to operate the plant, including minimum requirements regarding past experience.

31

Are the appropriate stakeholders included at the mandatory referral phase of the WIC application process?

Yes. Sydney Water supports the notification (but not mandatory referral) of relevant public water utilities whose assets will be used by or connected to the scheme. It is preferred that notification occurs at the earliest stage of the application, with the option for the public water utility to request further notification or provision of other detailed


information later in the process.

It is appropriate that government stakeholders are notified of applications (eg. the NSW Department of Health, the NSW Office of Environment and Heritage and their respective Ministers). Sydney Water notes, in its direct experience through the licencing of SDP, that these stakeholders were consulted and provided advice in relation to the application which IPART took into account in its recommendation to the Minister responsible for the Act. This process was appropriate and should be retained.

32

Do stakeholders have concerns in relation to insufficient and/or untimely consultation?

a. If yes, where in the process is further consultation required and what form should it take?

Sydney Water is unaware of current stakeholder concerns.

33

Should councils be notified of all licence applications relevant to the council’s local government area, and not just those where connection to council infrastructure is proposed?

Sydney Water does not consider there to be a need for mandatory notification of councils, under the WIC Act framework, if the scheme does not involve council infrastructure.

34

What has been the experience of applicants with the time taken to process applications?

a. What changes, if any, are required to the current application process?

The application process for WIC Act licences by Sydney Water’s former subsidiary company, SDP, took five months to complete. The subsequent licence variation, to include the desalinated water delivery pipeline within the scope of the SDP licence, took another three months.

There was some uncertainty for a time, in the early stages of the application process, as to whether SDP would require a retail supplier and network operator licence, or simply a network operator licence alone. This led to confusion around which application documentation to proceed with. This was unnecessarily resource-intensive. The amendments made in 2012 improved some of the relevant sections of the WIC Act.

Sydney Water recommends that a fixed timeframe for IPART’s processing of licence applications be included in the legislation / regulations. If there is a transition to more flexible arrangements (eg. different, risk-based licence assessments and several tiers of forms of price regulation for monopolies) then there may be differing tiered timeframes for schemes with differing levels of complexity.

This may result in additional resourcing requirements upon IPART. However, given the number of potential scheme licence applications expected in the next few years, additional resources may already be warranted.

35

Is the risk of supply failure adequately addressed at the initial application stage?

Sydney Water believes the technological risk is adequately tested at this stage. This matter should be considered in the context of the retailer/operator of last resort framework.

36

Would there be benefit in requiring applicants to furnish more information at the initial stage? If yes, please indicate what additional information should be required.

Sydney Water considers that it would be useful if applicants provide information at the initial stage about what organisation/s, if any, the proponent has approached or had discussions with as a prospective last resort provider in case of physical supply or asset failure.

In addition, an applicant could also be required to provide information on how it proposes


to provide additional security to cover the costs if there is a need for step-in by a last resort provider. This possibility should be considered in the context of the ‘last resort’ framework.

37

Should there be greater flexibility in the licence regime so the level of regulation is more suited to the nature of the scheme?

a. If so, what options are available to ensure the level of regulation is appropriate to the risks associated with the scheme?

Yes, Sydney Water supports this proposal in principle. A tiered approval system appears, from a public policy and regulatory perspective, to be a sensible and efficient method of enabling a wide range of schemes, but avoiding unnecessarily onerous, costly regulation.

The assessment should be based on risk. Investment in a robust risk-assessment tool should deliver worthy outcomes.

38 For new small retail customers that are serviced by a private water utility, should WIC service providers have deeming rights for new customer contracts?

Where a private water utility has been declared (or actually is) a monopoly supplier for drinking water, reticulated recycled water, wastewater and/or stormwater services, it should also have deeming rights conditional upon the utility producing and making available a standard customer contract or equivalent terms and conditions of trade. A prospective property buyer could be made aware of this through the conveyancing process as discussed earlier.

Customers should also be informed in advance that they are likely to be charged prices that differ from the neighbouring public utility. If deeming rights apply, then those charges must be subject to some form of scrutiny (see response to question 22). The recent history of Bingara Gorge (see Case Study 2 in this submission) shows the potential for customers concern regarding price levels that were unanticipated or not well understood at the time of their house purchase.

Where the private water utility is not a declared or de facto monopoly it cannot have deeming rights.

39 Is it appropriate that the definition of a ‘small retail customer’ captures small industrial/commercial customers i.e. these customers receive services below the specified threshold?

Yes – if the objective is customer protection. Small businesses have similar financial vulnerabilities to households and will benefit from these protections.

For reference, Sydney Water treats small commercial customers the same as residential customers.

40

Is a retail supply licence necessary when a scheme supplies large volumes to commercial / industrial customers?

a. If yes, rather than a standard retail management plan, what alternatives should be considered for licensed service providers supplying large customers only?

Yes – Sydney Water considers that a retail supply licence is still necessary as the licence application process ensures a range of valid assessment and approval processes are complete before commercial supply begins.

If policymakers are to adopt a new tiered licence framework, as discussed in previous answers above, the level of detail required to be included within the retail management plan could be increased or reduced according to the risk profile of the scheme.

41 Are the requirements relating to retail supply management plans adequate?


Yes. The current consistent format is efficient as it provides proponents with the ability to prepare a combined plan for water and wastewater services.

42

Are the requirements relating to network operator plans adequate?

The requirements for network operator plans are comprehensive and adequate for purpose. The requirements in preparing the plans, however, may be onerous for smaller operators that lack the experience of larger firms. Consideration could be given to a risk based approach to the requirements, with low risk projects provided with less stringent requirements.

Sydney Water previously had concerns about the requirement to publish the plans on the internet. This posed challenges given the sensitive operational nature, and significant volume, of some of the information. However, the 2012 WIC Act legislative amendments resolved this issue.

43

Should further guidance be provided to help prepare sewage management plans?

Sydney Water is not aware of major shortcomings in the guidance provided for the preparation of sewage management plans. Management plans should, however, include adequate emphasis on the capability of operators to implement plans.

Some proposed schemes will have impacts on Sydney Water’s wastewater treatment networks. Sydney Water is willing to work with proponents to minimise impacts on our systems and to provide advice on the best way this can be achieved. Guidance for the preparation of sewage management plans should therefore include a requirement that the proponent formally liaises with Sydney Water.

44

Without compromising standards, can the plans or the audit process be improved to make the process more efficient?

Sydney Water’s experience with the audit process was that it was extensive, detailed and time consuming.

The process is likely to depend heavily on the skills, knowledge, experience and organisational capability of the auditor. Consideration could be given to ensuring that the audit team includes a subject matter expert to avoid delays to the audit process.

Where the applicant/operator has in place an accredited quality management system, consideration could be given to eliminating or reducing additional audit requirements.

45

Without placing public health at risk, is it possible to improve the process by which a scheme achieves validation and verification before the Minster grants approval to start commercial operation?

Validation and verification monitoring is a key component of the introduction of new schemes. Validation can be time consuming and expensive. Sydney Water agrees that a national approach may be required with a validation framework for novel systems that have not been pre-validated.

A risk based approach to validation and ongoing monitoring may also be appropriate. There should also be a facility/flexibility to reduce ongoing monitoring frequency/ parameters based on performance/risk, subject to approval of the regulator.

46

Have the current licensees readily demonstrated initial compliance with the 12 elements of the guidelines? What has been the most difficult aspect?

SDP demonstrated compliance with the 12 elements when it was a wholly-owned subsidiary of Sydney Water.

47

If the environment is considered under other more pertinent legislation, should there be further environmental consideration under the WIC Act?

a. If yes, should the WIC Act include requirements to develop environmental plans


and/or management systems?

b. What alternative approaches should be considered?

Sydney Water does not consider it appropriate for the WIC Act to become a legislative vehicle for environmental regulation already addressed through other relevant legislation.

Environmental plans and management systems are elements of planning approvals and regulated under the NSW Protection of the Environment Operations Act 1997 (“PoEO Act”). Including environmental planning and management under the WIC Act framework is likely to lead to duplication of regulatory requirements, and would be perceived by the broader industry as regulatory burden.

If policymakers consider that there are inadequate environmental regulations and mechanisms to provide coverage for major projects including WIC Act schemes, amendment to other relevant legislation with the specific objective of protecting the environment may be required. This should not be addressed in the WIC Act which has the twin objectives of promoting competition and recycling.

48

Should the prohibition in section 10(3) on granting a licence to a disqualified corporation remain as is or be amended so it only applies to the extent that the declaration is still in force?

For the sake of clarity it may be preferable to clarify that the prohibition only applies to the extent that the declaration is still in force – it appears this is the intent of the WIC Act.

49

Should section 16 refer to persons specified in the licence as well as to licensees?

Yes – the legislation should provide the option to impose the penalty specifically on an authorised person.

50

Should the WIC Act provide more guidance as to when enforcement action should be taken, and what form the action should take?

There should be consistency in the criteria for taking enforcement action for all providers irrespective of whether their licence is covered under the WIC Act, the Sydney Water Act 1994 (“SW Act”), or the Hunter Water Act 1991 (“HW Act”) etc. Consequently there should be some guidance within each of these Acts to address this.

Given the important public health issues at stake, however, it may not be desirable to provide a defined threshold level that is likely to trigger enforcement action. This may potentially have the adverse outcome of implying that actions below this threshold may not be dealt with seriously.

It is therefore suggested that the WIC Act may be amended to incorporate provisions similar to those in the SW Act which do not provide an arbitrary or numerical threshold at which an enforcement action may be taken – but rather, a definitional threshold that can be used to assess the seriousness of an action which may require enforcement.

51

Should the WIC Act provide licensees with a right of appeal to the Administrative Decisions Tribunal when they are aggrieved by an enforcement action?

Yes. Sydney Water supports amendments to the WIC Act to specifically provide licensees with a right of appeal to the Tribunal if aggrieved by an enforcement action. This will enable licensees to have a right of recourse against the regulator’s decision, provide consistency across all licensees, and a level playing field with the incumbent utilities.

52

The government seeks feedback from licensees regarding the administration and compliance costs currently incurred under the WIC Act.

In Sydney Water’s view it has been onerous and time-consuming. For example, the process of applying for the WIC licences for former subsidiary company SDP involved a


substantial proportion of the working time of a significant number of employees, over several months.

It may be that small proponents have difficulty meeting the ongoing resourcing needs, and catering to the complexity of the licence application requirements. This could be a disincentive for the development of a scheme and may be perceived as a regulatory barrier to entry.

In Sydney Water’s interactions with the broader industry, Sydney Water has anecdotally been advised that the private sector considers there to be a need to streamline the licencing process, reduce the timeframes for approval, and lessen the project management costs.

Sydney Water supports the adoption of a tiered approach, taking into account the risk profile of schemes and the history and expertise of an applicant.

Having said that, Sydney Water understands the importance of these controls and notes that the legislation has only been in existence for five years, with only 19 licences granted. Over time, as experience increases and the licensing regime may evolve to a tiered scheme with varying requirements corresponding to risk levels, it will be possible to streamline the processes and hence costs.

Sydney Water also considers that it appears logical to have a different fee structure corresponding to the relevant tiers of approval triggered by each licence application.

53

Are there any unnecessary costs associated with meeting these requirements? If so, can industry provide examples of these?

Previously, unnecessary administration costs were created by the regulatory requirement to publish WIC Act operating plans (the Infrastructure Operating, Retail Supply Management and Water Quality Plans) on the licensee’s website. This, in reality required the preparation of two separate versions of the same plans, confidential and public. This matter was resolved with the 2012 amendments to the WIC Act.

While the WIC Act is broadly performing as intended, industry feedback provided anecdotally to Sydney Water is that the licence application process could be more targeted in relation to specific schemes. As discussed in previous answers, the creation of a tiered licencing regime also creates scope for varying information requirement levels in the application process. As stated above, this would be based on the risk profile of the scheme.

It is also Sydney Water’s view that the regulators may be able to streamline the timeframe for the approval of licence applications. Sydney Water’s direct experience with the process was via licencing of the former subsidiary company, SDP. It is considered that the licence application process, as well as the later licence variation process to incorporate the desalinated water delivery pipeline within the coverage of the licence, could have occurred in a more streamlined way.

54

Should the application fee reflect the risk/cost of a scheme?

Yes. If there are tiered/hybrid licensing and approval requirements based on risk, presumably this reflects a different level of scrutiny and assessment that regulators must apply and therefore differing demands on their time and resources. The fee structure should reflect this.

It is a good incentive to have lower (but still effective) fees for simpler schemes. A lower fee structure for simpler schemes also reduces the impacts of a perceived barrier to entry to the market.


4.2 Chapter 4: Issues relating to the Local Government Act


55

Should section 60 refer explicitly to water recycling schemes? If so, how should they be defined?

Yes. Given the extensive range of schemes that have arisen, recycling is now a permanent part of the landscape for water infrastructure, and this should be recognised.

For consistency, Sydney Water suggests that the LG Act could incorporate the same definition for recycled water as per the WIC Act. With respect to recycled water, the general wording of the LG Act should be kept consistent with the WIC Act.

56

Should the regulation of council water recycling schemes remain as is or be revised? For example by:

a. applying the same regulatory requirements to recycled water schemes undertaken by metropolitan and non-metropolitan councils

b. including stormwater harvesting and reuse schemes (and, if so, should the level of scheme risk be a factor as to whether approval is required?)

c. adding stand-alone provisions for recycling and stormwater reuse schemes (rather than using section 60 as the basis for regulating such schemes)

Regulation of council water recycling schemes should be revised to create a level playing field across the board. Sydney Water considers regulation should be the same for all councils and should cover both wastewater recycling and stormwater harvesting and reuse schemes.

57

Would a staged approval process be beneficial? If so, what should that look like?

Yes – it should be consistent with the WIC Act framework. Please refer to Sydney Water’s comments in the answers to questions 28 and 37 above.

58

Should section 60 specify applicable guidelines to increase clarity?

Yes – the applicable guidelines should be referred to in Section 60 of the LG Act, to provide consistency of assessment and clarity of requirements for proponents of schemes.

59

Should section 60 approvals be subject to mandatory referral to other agencies (e.g. Health, EPA)? If so, should a. these agencies have an advisory or concurrence role?

b. referral/concurrence be required in all cases?

Yes – to be consistent with the WIC Act. All recycling schemes should be subject to the same regulatory framework.

Flexibility could be incorporated in the WIC Act for either a concurrence or advisory role depending on the nature and risk level of the scheme – that is, concurrence for higher risk tiers, advisory for lower. For higher tiers, concurrence could be mandatory.

60

The government seeks feedback on:

a. difficulties encountered in the section 60 application process and suggestions for improving it

b. whether the process should include:

i) timeframes and stop the clock provisions

ii) application and annual fees

iii) dispute resolution provisions


c. whether there would be merit in requiring the RWQMP to be certified by an accredited auditor prior to submission to NOW

This is not something Sydney Water has had direct experience with. It is recommended, however, that all recycling schemes be subject to the same regulatory framework, including fees and dispute resolution provisions.

The requirement for certification of the RWQMP by an accredited auditor appears a logical way of reducing the burden on regulators. However, it may be worthwhile investigating the likely typical costs for this – it could add substantially to costs, especially for small schemes, making them less commercially viable.

61

The government seeks feedback on:

a. current compliance monitoring arrangements for council-led recycling schemes and whether changes are needed?

b. options available to improve compliance monitoring – e.g. using independent auditors to audit scheme performance

c. whether changes to terminology could clarify requirements?

While this is not something Sydney Water has had direct experience with, it is recommended that all recycling schemes should be subject to the same regulatory framework, including inspections and ongoing monitoring.

The requirement for compliance monitoring by an accredited auditor appears a logical way of reducing the burden on regulators. However, it may be worthwhile investigating the likely typical costs for this – it could add substantially to costs, especially for small schemes, making them less commercially viable.

62

Should water supply authorities constituted under the WM Act be subject to the same requirements as local councils with respect to water recycling schemes?

While this is not something Sydney Water has had direct experience with, it is recommended that all recycling schemes should be subject to the same regulatory framework.

63

Should section 68:

a. refer expressly to water recycling schemes and, if so, how should they be defined?

b. include stormwater harvesting and reuse schemes (to the extent such schemes are not regulated under the WIC Act)?

c. regulate the operation of low risk, closed loop commercial and industrial waste recycling schemes, or are such schemes appropriately regulated under other legislation?

a) Water recycling schemes should be specifically excluded from the LG Act, with the exception of council stormwater harvesting and reuse schemes.

b) In respect to council stormwater harvesting and reuse regulated under the LG Act, these schemes should be audited using similar protocols to those required under the WIC Act.

c) With respect to closed loop commercial and industrial waste recycling schemes, the main controls that should apply to these systems are workplace health and safety controls, backflow containment and zone protection. In all industrial recycled water supply schemes in which Sydney Water has been involved, the risks are managed in accordance with the (“AGWR”) as they are for any other water recycling scheme. It should be noted that true “closed loop” systems may not exist in practice (ie. all systems are likely to have some external effects).

64

In relation to section 68 C5 and C6 approvals (for schemes larger than single residential property), the government seeks feedback on the following:


a. Any issues facing applicants for section 68 approvals, including degree of clarity regarding regulatory requirements, etc

b. Any issues for councils processing section 68 applications, including technical capacity to assess proposals, degree of integration with development consent, etc

c. Any issues for utilities relating to the connection of new infrastructure to mains water and sewer.

a) Applicants requiring Section 68 approvals should submit all relevant details of the scheme with their DA so that the scheme and DA can be assessed at the same time. This avoids duplication by councils during the assessment process. The level of detail required should be enough to determine the scheme, consistent with that provided in the DA. Correct operation of the scheme should be demonstrated by the proponent prior to occupation certificates being granted.

b) If a council does not have the technical capacity to assess the proposal, the scheme should be referred to the New South Wales Office of Water (“NOW”) or the EPA for advice. The council should still have the authority to determine. The proponent should demonstrate the integration of the scheme with the application being determined.

c) Consistency with Section 78 of the Sydney Water Act 1994 so that any scheme that is likely to have an impact on a water authority’s infrastructure should be referred to the authority for assessment and advice.

65

Should the link between section 68 approval and development consent be strengthened? If so, what approaches should be considered?

Yes – as above, a Section 68 application should be requested at the same time as the DA is lodged under the EP&A Act to avoid duplication of assessment (should the proponent be proposing the scheme at DA stage).

The information provided should demonstrate appropriate linkages between the operation of the scheme and the DA being assessed.

Relevant amendments to Section 68 of the LG Act should be made that expressly state that if the proponent is proposing a recycling scheme at the same time as seeking development consent, then the Section 68 application should be submitted at the same time.

66

What processes are needed within councils to ensure proposals meet all relevant regulatory requirements? For example, would a decision support tool help?

Yes - given that most councils will not have the technical ability to assess more complex proposals, a decision support tool would be of benefit to guide councils through the relevant details required for proper assessment and determination.

The decision support tool should also refer councils (where relevant) to other agencies such as NSW Health, NOW, the EPA and Sydney Water for advice or approval where necessary.

67

Should section 68 reference particular guidelines and, if so, which (AGWR, ‘Purple’, other)?

a. Should these agencies have an advisory or concurrence role?

b. Should referral/concurrence apply in all cases, or should the level

of scheme risk be taken into account?

Sydney Water supports referencing all relevant guidelines in the legislation. This would provide consistency of assessment and clarity of requirements for proponents of schemes. Section 68 should reference the AGWR, not the Purple Guidelines. See also Sydney Water’s response to question 93 below in relation to the guidelines.


68

Should section 68 approvals be subject to mandatory referral to other agencies (e.g. NOW and Health)?

Yes – to be consistent with the WIC Act. All recycling schemes should be subject to the same regulatory framework

Flexibility could be incorporated in the Act for either a concurrence or advisory role depending on the nature and risk level of the scheme – eg. concurrence for higher risk tiers, advisory for lower. For higher tiers, concurrence could be mandatory.

69

Are current time limits for processing applications reasonable?

Sydney Water does not have any comments on this question.

70

Is it appropriate that, under section 103 of the LG Act, approvals lapse after five years unless council otherwise determines?

Yes – Sydney Water considers that should the proponent not have acted on an approval for five years then it should automatically lapse. This could be overturned if there are extenuating circumstances under Section 107 of the LG Act. This would ensure consistency between other approvals issued under the LG Act.

71

Should section 68 approvals be transferable?

Sydney Water is not aware of circumstances under which approvals of local council approved recycled water scheme were transferred, or whether such a transfer has been sought. Sydney Water considers, however, that approvals should not automatically be transferred. Regulatory controls should be in place to ensure the transferee has the capability to operate the scheme.

72

In relation to section 68 approvals for recycling, the Government seeks feedback on:

a. current compliance monitoring arrangements (including level of resources and technical expertise available to support compliance activities)

b. do councils require independent audits and cross-connection checks, per the Purple Guidelines? c. levels of compliance observed

d. suggestions to improve current arrangements

Sydney Water has limited experience of the specific ‘workability’ of the current arrangements under the LG Act and does not have any comments on this question.

73

Should penalties under the LG Act be increased? If so, what penalties – including non-monetary penalties – may be appropriate to support compliance?

Penalties should reflect the size, complexity and risks of operating the scheme and whether the operator is either a company or individual. Penalties in the main should be financial. However, there should be provision to restrict the future operation of the scheme should the offence be severe, wilful or negligent.

74

Should section 68 conditions of approval be standardised to enhance consistency between councils? What other measures could increase consistency?

Yes – there should be consistency in regulations and approvals across different council areas. This is to ensure an even playing field and minimise the costs associated with the establishment and ongoing operation of schemes.

Sydney Water considers that measures to ensure consistency would include appropriate training of council staff assessing proposals, or if there are no skills evident to assess proposals, compulsory referral to qualified assessors with the authority to make recommendations to council.

75 Do councils have the expertise to assess proposed recycled water schemes, particularly


complex or high risk schemes? If not, what options to address this could be considered?

Sydney Water does not have any comments on this question.

76 Would there be merit in requiring proponents to submit a RWQMP certified by an accredited auditor as part of the initial section 68 application? Should councils be able to rely on this under section 93, rather than form their own view?

This is not something Sydney Water has had direct experience with. It is recommended, however, that all recycling schemes should be subject to the same regulatory framework, including fees and dispute resolution provisions.

77 Should private recycled water schemes that hold an EPL continue to be exempt from the requirement to obtain a section 68 approval?

a. What alternative approaches should be considered?

Sydney Water has not had any direct experience with this issue. It is recommended, however, that all recycling schemes should be subject to the same regulatory framework, including fees and dispute resolution provisions.

78 Are there any recycled water schemes in NSW that have been abandoned or switched off (please provide details)?

Yes – Sydney Water is aware of a number of schemes that have been switched off either temporarily or permanently.

There are two categories of schemes; essential and non-essential. Essential schemes require an alternative service and are less likely to be switched off. Non-essential schemes, for example those which may have been implemented by developers to achieve green building ratings, may be more likely to be switched off.

Once developed, these ‘non-essential’ schemes may prove more costly to maintain than originally planned; or there may be a lack of appropriately skilled staff to run the scheme correctly.

79 Should scheme viability be considered at the approvals stage?

As Sydney Water has advised in responses above (regarding WIC Act schemes) it may be appropriate for a financial viability test to be incorporated into licence assessment processes under the LG Act. This would provide for consistency across legislation.

From a broader perspective in relation to the LG Act, Sydney Water considers that the proponent should always have the onus of demonstrating the viability of a scheme. This should be done at the approvals stage. The onus should increase as the corresponding size of the scheme increases, or if the scheme is in an area that is remote from other service providers.

The demonstration of financial viability may decrease the risk that the operator / supplier of the future can no longer operate due to losses incurred in the operation of the scheme, causing major inconveniences for its customers. This is likely to be particularly important for council-regulated schemes (compared to WIC Act schemes in areas where large utilities are nominated as ‘last resort’ providers) because cost implications on councils, and impacts on remote communities are potentially more significant.


4.3 Chapter 5: Cross-sectoral issues


80 The Government seeks feedback regarding:

a. Evidence of distortionary effects (please provide details)

b. Whether there is a need for measures to avoid such effects

The current regulatory arrangements, as noted in the Discussion Paper, create the potential for distortionary effects. Most notably, as local council approved schemes are regulated under the LG Act and are not subject to the requirements of the WIC Act, proponents may seek to have local councils assume responsibility for schemes rather than apply for a WICA licence.

While Sydney Water is unaware as yet of any significant examples, the Discussion Paper refers to future potential schemes (such as in the City of Sydney) whereby proponents of schemes may seek council responsibility for schemes, rather than regulatory approvals via the WIC Act and IPART.

As stated in previous responses above, Sydney Water considers that all recycling schemes should be subject to the same regulatory oversight and approvals.

81 How should the government address the overlap between the WIC Act and LG Act in relation to existing private recycled water schemes (larger than single household)?

Sydney Water considers that the legislation should be amended so as to ensure recycled water schemes (other than council stormwater harvesting and reuse schemes) are covered by the WIC Act rather than the LG Act.

82 To what degree should planning, environmental and recycling approval processes be streamlined? How should this be done?

Planning, environmental and recycling approval processes should be streamlined and integrated to the fullest extent possible. If all approvals are granted concurrently for recycling projects then the chance of agency duplication in effort will be minimised through appropriate sharing of information.

Concurrent approvals would also increase certainty for the proponent. This could be achieved by amendments to relevant legislation requiring proponents to obtain planning, environmental and recycling approval concurrently for projects that fit certain criteria.

Compulsory requirements in legislation to have concurrent and streamlined processes would ensure relevant agencies are appropriately informed of proposals in a timely manner.

83 The Government seeks feedback on whether there is a need to clarify the distinction between effluent disposal and recycling (and the applicable guidelines) and, if so, options to achieve this.

There would be benefit in clarifying and standardising across both the LG Act and the WIC Act a definition of recycled water that differentiates it from normal sewage effluent disposal (to waterways), and should include some element of beneficial use.

Irrigation with treated effluent is recycling and should be regulated accordingly. WICA licences for irrigation should be appropriately streamlined to match the risk. Environment Protection Licences for wastewater treatment and disposal need to acknowledge only that a portion of the effluent is directed to a regulated recycling scheme.

Suppliers of treated effluent for irrigation should only concern themselves that supply quality is fit for use from a health perspective. Users, under the terms of their agreements, should accept responsibility for use of water being fit for purpose, including the volume and quality applied to their land, and its impacts on the land, groundwater


and streams.

84 Should auditors examine the degree to which incident management plans are implemented?

Auditors should examine the development and methods proposed for implementation and testing of incident management plans. The degree to which the plans have been implemented should be independently audited after operations commence and the audit results reported to the regulator.

85 Should there be a standard licence condition requiring post occupation checks or audits to manage the risk of cross-connections?

Sydney Water considers that there should be a standard licence condition requiring applicants to outline how they intend to control the risk of cross connections, including regular checks for cross connections where appropriate.

A standard requirement for post occupation checks or audits would not be appropriate in all situations, especially where a plumbing regulator is responsible for compliance post the supply delivery point.

86 Should the power for councils to order connection to council’s water supply or sewerage network be repealed or qualified so as to be consistent with competitive neutrality principles? What implications could this have for local councils? What alternative approaches should be considered?

If councils retain the power to order connection to a water or wastewater system, then the property owner / developer should have the option to connect to whatever systems are available (not just that managed by the council or metropolitan provider).

In so doing, the property owner must comply with state plumbing regulations and any specific requirements of the selected provider (these will vary dependent on geography, property use etc.)

It is difficult to be overly prescriptive at the legislative level as local infrastructure and conditions will vary and these need to be considered as part of any connections process.

It should be noted that a total repeal of this requirement could have serious implications to the natural environment and / or public health. Policymakers should seek detailed advice from health and environmental regulators, and local authorities, as to potential impacts and means to mitigate such impacts.

87 Should changes be made to current arrangements regarding connection of proposed schemes to existing water utility infrastructure? What options should be considered?

Sydney Water does not consider, after the first five years of the WIC Act being in force, that there is a need for changes to current arrangements regarding connection of licenced schemes to water utility infrastructure. The current legislative arrangements appear to be working well in relation to schemes connected to Sydney Water’s networks.

The emergence of larger-scale WIC Act licenced schemes does not appear, at this stage, to require a changes to existing arrangements. This may, however, change over time and will be an appropriate area for assessment at future reviews of the WIC Act.

88 Should schemes above a certain size be required to provide capacity and supply information to facilitate water planning and drought management? If so, what information, and how could such information be provided?

Sydney Water considers this to be an appropriate approach to assist in over-arching water planning and drought management.

At the smaller scale, localised level, estimates should also be provided as part of the licence application processes, so that information on the contribution to supply of


decentralised schemes can be captured.

Information could include, but should not necessarily be limited to:

• total scheme volumes (eg. on a daily/yearly basis);

• operating regimes of planned schemes (ie. times of operation and supply);

• seasonal variances in estimated volumes and usage;

• end use of supply (particularly in the event a scheme provided customers with more than one form of product); and

• volumes of source water and source type.

4.4 Chapter 6: Looking to the future


89 The government seeks feedback from stakeholders about their experiences with the national and state guidelines, including in relation to verification and validation.

Sydney Water had experience with the validation and verification of SDP. Validation was able to be demonstrated due to extensive pilot plant trials and testing prior to construction.

Verification was able to be demonstrated through a comprehensive monitoring program at all stages of the process prior to drinking water being supplied to consumers. Ongoing testing of the drinking water was carried out using on-line instruments and grab sampling.

This level of effort entailed significant cost, time and expertise. However, it was necessary due to the nature of the scheme and the potential risks to public health.

While Sydney Water notes that the verification and validation process for larger schemes such as SDP may be appropriate, it is aware that for smaller schemes, this has been costly and onerous.

A risk/complexity based approach to validation and verification requirements would appear reasonable, including a “deemed to comply’ approach that is flexible enough to accommodate local conditions, for existing proven standard technologies. New or novel technologies would need to be fully validated and verified prior to full implementation.

90 Should the regulatory framework consider the financial viability of schemes? If so, how?

a. Should proponents be required to undertake a financial assessment, particularly schemes providing essential services?

b. What alternative approaches should be considered?

Yes, it would be a very useful addition to the WIC Act to include tests of ongoing financial viability of schemes as part of the application process. It would help balance informed participation in property investment with customer protection, minimise the likelihood of stranded assets and wasted capital, and reduce the need for last resort interventions, which under the current scenario are likely to be complex, incur costs and create customer/reputation impacts.

Sydney Water agrees that this is important for essential services, where this is the greatest need for continued service provision. Sydney Water also believes it is equally important for recycling schemes, which are often non-essential – because the high cost of recycling infrastructure, combined with the easy availability of low-priced drinking water, may cause recycling schemes to become unviable.

Indeed, it is recycling schemes (for non-essential purposes) that have become unviable


so far, for example the high rise building switched off in the Discussion Paper’s case study. For essential schemes, the customer impacts are more serious, but for non-essential schemes there are serious cost impacts.

91 Should regulator fees be set based on scheme risk or complexity? What alternative approaches should be considered?

Sydney Water supports the notion that regulator fees should be sufficient to cover costs in principle. In practice this may prove difficult to achieve while keeping fees reasonable and consistent.

The size of a scheme is not necessarily a good proxy for determining fees. Basing them on the risk profile of the scheme is better and should be achievable if a robust system is created to evaluate risk and apply it consistently across all schemes.

Proponents of new schemes would need to have a view as to the likely regulatory fee prior to submission so the basis for assessing risk would have to be transparent, relatively easy to apply and self-assess.

The risk criteria need to consider, health environmental, technological and economic factors.

It is important that third party schemes are regulated in a manner that is congruent with incumbent service providers, and do not benefit from under-regulation to ensure their financial viability.

92 Should approval bodies other than the primary regulator receive fee revenue to help cover costs?

Sydney Water considers that, ideally, there should only be one regulatory fee. This could include cost recovery elements for more than one regulator but provides greater transparency to scheme proponents.

93 Should regulatory requirements reflect the level of risk associated with each scheme?

a. If so, what broad framework would be best for both proponents and regulators?

b. Is there merit in adopting a tiered approach to recycled water regulation, similar to that in Victoria and Queensland?

c. Is there merit in adopting a hybrid approach to reduce regulatory costs while retaining flexibility?

d. Should the Purple Guidelines be repealed or revised (if so, how)?

a) Sydney Water agrees that regulatory requirements should reflect the level of risk from the scheme and the competence of the operator. The framework should incorporate:

• risk assessment;

• competent operator;

• tiered approach;

• credits for accredited Quality management system; and

• deemed compliance for pre-validated mature technology.

b) A tiered approach would be beneficial to provide greater certainty of requirements and reduce regulatory costs.

c) Yes, as noted in response (a) above.

d) Yes, they are out of date and should be replaced with the AGWR. However the Purple Guidelines should be reviewed for any useful elements not covered by the AGWR, and this could be built into the AGWR at its next iteration.


94 The Government seeks feedback regarding the regulatory features that should be considered for inclusion in any future reforms

Sydney Water agrees largely with the proposals in the Discussion Paper. It should be noted, however, that the regulatory approach puts an onus on a proponent to compile a significant body of information in the early planning/design stages of a project.

While the preparation of this level of information is necessary for complex schemes, it can be onerous for smaller-scale schemes with lower risk profiles. Any information aides that can be provided by regulators to assist with a streamlined process eg. via more concise guidelines, templates etc would be a useful development.

On a broader policy level, Sydney Water notes the issues raised in IPART’s submission and looks forward to participating in robust investigation of future options within the urban water sector. These proposals are complex and warrant thorough investigation and appropriate analysis.

In addition to policy matters raised by IPART, Sydney Water encourages the Metropolitan Water Directorate to consider broader policy debate on engendering greater consistency in pricing approaches between the WIC Act and the IPART Act, and whether there is merit in considering any potential benefits of public water utilities being regulated under a new fully-formed WIC Act containing best regulatory practice principles for the entire urban water industry.

95 Is specific guidance required to support the WH&S framework in relation to industrial water recycling schemes?

If the WH&S Act were to be the sole framework used for self-supply schemes, guidance for employees adopting this approach would be beneficial to ensure they fully understand the implications of recycled water on their site.

96 Should monitoring frameworks be created to ensure appropriate ongoing management of industrial waste recycling schemes?

Yes – there may not be any true “closed loop” systems in practice. See answer to question 63 above.

97 The government seeks feedback on what is the best way to allocate and administer regulatory responsibility? For example, should a consolidated regulatory framework be developed or current arrangements retained?

Sydney Water has anecdotally been made aware that many councils do not have the resources or expertise to regulate recycled water schemes. As per the response to question 81 above, Sydney Water considers that the legislation should be amended so as to ensure recycled water schemes (other than council stormwater harvesting and reuse schemes) are covered by the WIC Act rather than the LG Act.

Centralising regulatory arrangements would ensure consistency of standards/compliance and create a more level playing field across the industry.

National validation processes and approved technologies would also reduce regulatory processes resulting in less onerous frameworks for both proponents and regulators.

Sydney Water is aware that the Australian Water Recycling Centre of Excellence is looking at establishing national validation guidelines for recycled water schemes and technical assessments. Factoring in such national approaches to regulatory frameworks would be of benefit to the industry, and could be considered by policymakers as part of this, and future reviews of the WIC Act.

98 What alternative regulatory models should be considered?

See Sydney Water’s response to question 97 above.


99 What capacity building, tools and resources are required for proponents and regulators to ensure that risks to human health are appropriately managed?

Sydney Water has identified gaps in the capacity of industry to manage these schemes. There is a need to develop appropriate skills and training for operators to bridge these gaps.

Sydney Water would advocate accredited training scheme/s as a key means of bridging gaps and improving market resilience. There could potentially be a role for large-scale water utilities in bridging gaps with regard to mitigating human health risks.

100 Could external expertise (e.g. accredited auditors) help reduce the regulatory burden on councils? Based on experience with private certifiers, what issues need to be addressed?

Yes – Sydney Water considers this appropriate given most councils do not have the expertise to assess recycled water projects. All proposals should be assessed by an accredited auditor prior to being submitted to council.

This would ensure consistency in the assessment process across council areas, and ensure that a council’s assessment skills are utilised in its area of expertise. The auditor should make a recommendation on the recycled water scheme that should accompany the development proposal by the proponent. Issues that need to be considered when using private certifies are:

• relevant training and skills of the certifiers;

• professional indemnity insurance;

• probity and arm’s-length nature of transactions;

• maintenance of accredited auditor register;

• audits of recommendations made by accredited auditors; and

• schedule of fees able to be charged by auditors.

101 101 How should the efficiency of reform outcomes be assessed?

Sydney Water supports an increasing focus on outcome-based regulation where the effectiveness of regulatory frameworks and practices are honed, and can be measured, in relation to outcomes and customer expectations.

These concepts may be easier to apply to mature situations such as licensing frameworks in long-established industries. At the nascent, developing stage, there is not a vast body of empirical data or schemes to assess trends and commonalities in the framework and the emerging industry.

One key metric may be the continuing emergence of schemes: eg. the first five years saw 19 licences over around ten schemes. Also, another metric may be mapping the diversity of scheme types.

Possible other metrics include a calculation of schemes abandoned, and of last resort appointments and feedback from participants (both the last resort provider and the licensee) on the ease/costs etc of the processes.

Feedback mechanisms should also be used to assess the efficiency of reform outcomes. For example, avenues for proponents to provide feedback on the process of applying for access, a licence, or arbitration under the WIC Act, at multiple stages of the process may be a useful tool to gauge ongoing effectiveness.

Sydney Water expects that the debate on broader policy issues will continue and looks forward to engaging with stakeholders on significant issues.


5 Conclusion

As noted above, Sydney Water has identified and supports a number of key reforms to the regulatory framework. Some of these reforms are direct measures in response to specific questions and matters raised in the Discussion Paper (5.1 to 5.6 below).

Sydney Water has also identified further matters for consideration in reviewing the broader legislative and regulatory environment. These include broader policy matters, such as the scope for improved regulatory certainty, and regulator views on further stages of industry reform (5.7 and 5.8 below).

5.1 Objectives in the WIC Act

Sydney Water sees scope for introducing an objects clause. This should enhance the existing wording in the long title and licensing principles, which refer to promoting competition. Sydney Water recommends that qualifiers such as ‘effective’ competition are incorporated. This ensures that increased competition is not encouraged as an end in itself, but rather where it can enhance the overall strategic objective of driving better value from the sector.

5.2 Licensing individual proponents rather than schemes

Sydney Water notes that there has been discussion regarding a transition to licensing proponents across an operating area, rather than scheme by scheme. This is likely to reduce the regulatory burden of assessing new proponents multiple times. Sydney Water notes that this may lead to a group of providers, accredited under the WIC Act, becoming regular partners with councils, developers and industry.

5.3 Introduction of an economic viability test for proposed schemes

Sydney Water supports the introduction of economic viability, as well as financial viability of the proponent, as part of the licence assessment process. This would enable the regulator to scrutinise the viability of a proposed scheme over a longer period than currently. It could preclude schemes with excessive costs and risks. This is an important measure in minimising the recourse to last resort arrangements, which are likely to have significant financial and reputational impacts for last resort providers and customers alike.

5.4 Introduction of a ‘tiered’ or varied licensing approvals framework

Sydney Water supports transitioning to a framework of varying levels of licensing requirements, based on a robust risk assessment.

5.5 Default monopoly declarations and price regulation

Sydney Water supports an automatic assessment of monopoly supplier status as part of the licence application process. This should be accompanied by price regulation of all schemes assessed as monopolies. However, a tiered or varying framework of price regulation is supported. For example, schemes considered high risk may require full price regulation, whereas lower risk schemes may be subject to more light handed forms of regulation such as price monitoring.

5.6 Increased information provision requirements to WIC Act customers

Sydney Water supports requirements for advance notice to customers who may in future be customers of a WIC Act licensee rather than an incumbent provider. This facilitates informed participation. Changes to the Conveyancing Act 1919 (NSW) may achieve this and would align well with existing requirements for other water servicing information to be provided to prospective property purchasers.


5.7 Increasing regulatory certainty

As noted above, Sydney Water considers that there may be scope to introduce additional measures to increase the regulatory certainty for all players, including new entrants to the industry. These include the ability to set pricing principles for pricing determinations of WIC Act licensees; incorporating merits reviews into the institutional framework; and enabling agreement on compensation issues to provide certainty in the event a WIC Act licence is cancelled.

5.8 Broader regulatory reform issues and regulator views

Sydney Water notes the broader policy recommendations in IPART’s submission to the MWD review, including discussions regarding widening the scope for third party access to utility infrastructure, removing ‘water security’ contributions from the WIC Act, and the on-going role of ‘postage stamp pricing’ as government policy.

In addition, Sydney Water encourages the Metropolitan Water Directorate to consider broader policy debate on engendering greater consistency in pricing approaches between the WIC Act and the IPART Act. In the future, policymakers may wish to consider exploring the merits of public water utilities being regulated under a new fully-formed WIC Act which contains best regulatory practice principles across the urban water industry.

These proposals would need to be a part of a broader public policy debate around the future shape of the water industry. Sydney Water would be a willing participant in such discussions and any moves to increase levels of competition in the sector.

urban water regulation in nsw · urban water regulation in nsw ... it is useful to consider the...

Documents