Help shape a new National Water Agreement

Draft principles for a new National Water
Agreement
ACCC submission on DCCEEW Discussion Paper

18 September 2024
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Draft principles for a new National Water Agreement 1
Draft Principles for a new
National Water Agreement
The ACCC welcomes governments’ commitment to revitalising Australia’s national water policy framework through the development of a new National Water Agreement, including by inviting comment on draft principles in the current phase of consultation.

Appropriately planning for and managing Australia's water resources and the infrastructure used to supply water and other services will be critical to maintaining healthy biodiversity and ecosystems, supporting human life and population growth, managing cost of living and delivering productivity in all sectors of the economy, including agriculture and energy. A new
National Water Agreement can provide direction and coordination across all Australian governments to achieve the agreed water policy objectives and outcomes. But it must be supported by clear principles.

This submission on the draft principles makes five main points:
1. Clear principles that outline agreed national commitments will usefully guide
government decision-making in the water sector and enable robust assessment of
progress towards delivering outcomes that benefit all Australians. However, to set
the Agreement up to deliver benefits in the future, work remains to clarify, refine and
reach agreement on a final, coherent set of principles.
2. Clarity on the priority and interaction between principles in the Agreement will support
efficient decision making. It would be helpful for the Agreement to reconcile and, as
appropriate, indicate how to prioritise the principles so the Agreement makes clear its
priorities for action and parties can resolve trade-offs where conflicts between
principles occur.
3. It is important for the principles in the new Agreement to describe economic
regulatory arrangements, pricing principles and markets that actively promote
outcomes to the long-term benefit of all Australians and drive productivity. The new
Agreement’s principles can support long-term beneficial outcomes through fit-for-
purpose regulation that provides for price signals that drive prudent and efficient
investment and the efficient use of resources and that recognise that pricing is
relevant to decision-making on service levels.
4. Giving greater prominence and priority to principles that commit to coordinated,
robust planning processes will support prudent and efficient infrastructure
investment and confidence in water management and market arrangements.
5. In the ACCC’s experience as a regulator, voluntary principles are generally less
effective at driving reform progress. Principles in the new Agreement are likely to
deliver greater benefits where they are agreed as binding commitments by
governments, with reasons for departing from the principles to be transparently
explained and substantiated.

In developing the principles for the new Agreement, we encourage governments to adopt economic regulatory arrangements, pricing principles and markets that actively promote outcomes to the long-term benefit of all Australians and drive productivity. The water reforms of the 2000s grew out of the National Competition Policy reforms of the 1990s. The elements of the 2004 National Water agreement reflected economic principles designed to support better resource management and improved outcomes for consumers and the

Draft principles for a new National Water Agreement 2
environment. It enabled the expansion of property rights frameworks, caps on the use of resources, providing for the regulation of monopoly infrastructure and for the expansion of water markets, and using pricing to signal to users the costs of their activities.

Updated principles in a new National Water Agreement can build on these foundations to outline a regulatory framework that will support the effective operation of water markets and pricing oversight of monopoly infrastructure, recover efficient costs, support prudent and efficient investment and transparent government decisions about who pays for services and when subsidies are appropriate.

Getting the regulatory settings right is important because Australia faces the need to undertake significant investment in new and replacement water infrastructure to address the challenges of ageing assets and manage water needs and service standards in the face of a more variable climate. Clear principles will help the water sector address these challenges and avoid the prospect of poorly planned and regulated investment increasing the costs borne by all Australians.

Clear principles outlining agreed national commitments will usefully guide decision-making in the water sector
If the principles are to be effective, it is important that they are clear and agreed and committed to between governments. The structure and language of the current draft principles would benefit from being further tested and refined to reduce the potential for overlap or confusion between principles and across different objectives. The principles should make plain and resolve any areas of disagreement between governments as they deliver on their shared undertaking to update the 2004 Agreement.

The ACCC recommends, where possible:
▪ consolidating or reducing the number of principles
▪ simplifying and clarifying terminology, including aiming for consistent use of terms or,
where different terms are used, making apparent the reasons for differences through
definitions.

The work to deliver a new National Water Agreement seeks to build on elements of the 2004
NWI, incorporate recommendations from the Productivity Commission's inquiries, address missing or outdated elements, and consult with interested stakeholders to ensure the new agreement reflects industry experience and community sentiment. These welcome efforts to increase the range of perspectives, issues and interests reflected in the Agreement have created a lengthy set of draft principles, which in their current form are not internally consistent or compatible.

The ACCC acknowledges that work on refining the principles and integrating them into the full agreement is continuing in parallel with this consultation round, and that this work will seek to eliminate duplication and adopt consistent terminology across the agreement. To support clarity, the language in the draft principles (and some objectives) could be strengthened. Several objectives and principles allow considerable flexibility by using wording like "continues to move towards" and "where feasible". If this language is retained, this increases the risk the Agreement will not deliver on its desired objectives and it will be important for the Agreement to provide for Action Plans to set targets that will drive progress.

Draft principles for a new National Water Agreement 3
Clarity on the priority and interaction between principles will support efficient decision making
It will be important to integrate new material with due regard to existing principles and to be clear about where the scope of a principle (or objective) has changed. Failure to do so risks diluting the coherence of the Agreement, the ability of governments to deliver against it and the delivery of productive and efficient outcomes for Australians and the effectiveness of individual principles.

The timing and approach to developing the agreement also does not appear to allow for stakeholders to see a full draft before the final agreement is made. The next phase of public engagement occurs during the development of action plans. This means stakeholders may not fully appreciate how all the elements of the agreement work together and may not have the opportunity to comment on governance arrangements, such as the arrangements for development and review of action plans.

While refining the principles and integrating them into the agreement ahead of its endorsement by First Ministers will be challenging and take time and effort, clarity as to the interaction between principles and commitments being made, and how they are being prioritised, will ultimately assist with the Agreement’s implementation and support delivery of the promised benefits of a new National Water Agreement.

Principles can support beneficial long-term outcomes through fit-for-purpose regulation providing for price signals to drive prudent and efficient investment
To support lasting benefits to Australians, this next generation of water policy reforms can build on the economic foundations of the 2004 Agreement, which remain sound and will help deliver the best outcomes for water users for the lowest, most appropriate cost.

Price signals influence demand and investment
Price signals are important in driving prudent and efficient investment in and use of infrastructure, with recovery of efficient costs supporting sustainable service delivery. Price signals also drive the efficient use of water, helping the available water to be used by those who value it most. These price signals similarly ensure the efficient use of government resources allocated to managing water resources. They are also relevant to decision-making on appropriate service standards and demand management measures.

The fees and charges levied by water service providers are important information to signal to users the costs of their activities, to allow potential irrigators to compare operators when deciding where to position their business and to facilitate the operation of efficient water markets.

The new Agreement will more effectively drive outcomes if it reflects that pricing is a key mechanism to achieve the Agreement’s objectives and outcomes. The principles should provide that the recovery of efficient costs from water users is generally appropriate. The

Draft principles for a new National Water Agreement 4
Agreement can also usefully outline the principles for when governments will apply transparent, publicly reported subsidies to give effect to social, environmental or other public good outcomes.

Monopoly infrastructure services need effective regulation and transparent information
Managing water resources generally involves the building and operation of water storage and delivery infrastructure that is uneconomic to duplicate – that is, monopoly (or near monopoly) infrastructure - which may be provided and operated by public or private service providers depending on the jurisdiction and services in question.

The ACCC considers that there should be pricing oversight for monopoly or near-monopoly government-owned infrastructure operators. When the charges levied on infrastructure operators’ customers do not recover the costs of building, maintaining and operating the infrastructure, this sends inefficient pricing signals. While the users of subsidised infrastructure may benefit, this distorts private investment decisions and comes at a cost to governments and other customer classes. For this reason, it is important the economic regulation of water infrastructure services provides for customers to pay charges based on efficient costs.

It would be beneficial for the principles of a new Agreement to support regulatory frameworks applying principles that provide clear direction on how to effect:
• transparent investment decisions
• independent pricing oversight or other forms of economic regulatory arrangements
• cost reflective and consumption based pricing
• cost recovery, including principles that describe the arrangements for sharing costs
between governments and users
• the use of market mechanisms to drive productivity and enable the efficient
allocation of resources between users.

Clarity on the priority and interaction between these principles and other principles in the
Agreement, especially those relating to service standards, water efficiency and demand management measures and environmental externalities, will support efficient decision making.

Principles for coordinated, robust planning processes will support prudent and efficient infrastructure investment and confidence in water management and market arrangements
It is important for the principles in the new Agreement to describe economic regulatory arrangements, pricing principles and markets that actively promote outcomes to the long- term benefit of all Australians and drive productivity, especially as we invest in significant replacement and new infrastructure to support the net zero transition and adapt to greater climate variability.

Draft principles for a new National Water Agreement 5
Appropriately planning for and managing Australia's water resources and the infrastructure used to supply water and other services will be critical to maintaining healthy biodiversity and ecosystems, supporting human life and population growth, managing cost of living and delivering productivity in all sectors of the economy, including agriculture and energy.

A new National Water Agreement can provide direction and coordination across all
Australian governments to achieve the agreed water policy objectives and outcomes. But it must be supported by principles that give greater prominence and priority to coordinated, robust planning processes.

It is desirable that the principles in the new
Agreement be expressed as binding on governments
While recognising that conditions (and therefore appropriate management responses) can differ across Australia's water resources and sectors, the ACCC considers that the principles in the new Agreement will be more effective if they are described as binding commitments by governments. It would also be helpful for the Agreement to more clearly identify which principles are intended to be applied to and bind private entities.

In the ACCC’s experience as a regulator, voluntary principles are generally less effective at driving reform progress. Principles in the new Agreement are likely to deliver greater benefits where they are agreed as binding commitments by governments. If the principles are not generally binding, or the governance arrangements provide too much licence to depart from shared positions, the effectiveness of the principles can be undermined, in turn reducing the role the Agreement will play in delivering reforms and providing clarity and certainty to policy makers, regulators and other stakeholders.

Where the Agreement allows for divergences from the agreed principles, reasons for departing from the principles should be transparently explained and substantiated, setting out the circumstances and basis for departure. This will help reduce the risk that different jurisdictional approaches distort incentives in connected markets, undermining the achievement of the Agreement’s objectives.

It is difficult at present to assess whether the principles in the Agreement will ultimately support clear reform actions and accountabilities at the national (or jurisdictional) level, as this will depend on how obligations or commitments to give effect to the principles are expressed in the full Agreement and are supported by the Agreement’s governance arrangements.

For principles to effectively shape reform progress, the Agreement governance arrangements will need to provide for independent oversight of the development and implementation of Action Plans (specifically, assessing how they will give effect to the principles, at the time plans are made and on an ongoing basis) and for provide public reporting and accountability for delivering the commitments in those plans.

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