At last, NSW water industry competition reform offers more certainty for water infrastructure and services

It looks like the long-awaited reforms to promote competition in the NSW water industry are not far away, with Parliament passing significant amendments to the Water Industry Competition Act 2006 (WIC Act) last week and a proposal for implementation by mid-2022.

The Water Industry Competition Amendment Act 2021 (NSW) (Amendment Act) will make major changes to the WIC Act, many of which are designed to address implementation issues with the WIC Act, and it should provide more effective opportunities for private sector water delivery and wastewater services.  It will commence once the supporting regulations are made.

The Amendment Act addresses many of the perceived shortcomings of the WIC Act reforms in 2014, which Parliament passed but which never commenced.  It has been prepared with extensive industry consultation, and the benefit of more experience with private sector participation in the water and wastewater sectors, and there appears to be a stronger desire to make these reforms work.

In this article we take a brief look at some of the key amendments and comment on some of the opportunities it offers.

The need for reform

The WIC Act was intended to introduce competition and innovation into the water sector by allowing private sector water companies to provide water, recycled water and sewerage services, and also opportunities to access public utility infrastructure.

However, private sector uptake has been slow, with industry expressing concern that the legislation does not reflect a risk management approach to regulation, and instead uniformly applies an onerous licensing scheme on all infrastructure, no matter what the size and scale.

There was also duplication with the Local Government Act 1993 (NSW) (LG Act) and concern about step-in arrangements to maintain essential services (known as "provider of last resort" arrangements).

Following a statutory review of the WIC Act about a decade ago, Parliament passed the Water Industry Competition Amendment (Review) Act 2014 (NSW) (Review Act), with the intention that it would commence operation once the supporting regulations were passed.  The regulations were never finalised and the Review Act never commenced, largely because of concerns that the Review Act was complex and impractical.

The development of the Amendment Act has followed a long and extensive process of stakeholder consultation, co-ordinated by the Independent Pricing and Regulatory Tribunal (IPART) and the Department of Planning, Industry and the Environment.

The Amendment Act provides a significant improvement on the Review Act and offers a firmer foundation for competition in the water and wastewater sector.

Key features of the Amendment Act

Objects now clearly defined

The Amendment Bill inserts an objects clause to support the existing licensing principles with a focus on the "triple bottom line" approach that places a value on environmental and social outcomes.

Key themes include protecting public health and safety and the environment, protecting the quality, reliability and pricing of water and sewerage services, sustainable use of resources, facilitating competition, and encouraging innovation and improved efficiency.

The WIC Act will be interpreted, where practicable, to give effect to these new objects.

A more focused licensing regime

The current licensing regime applies to "any water infrastructure" unless an exemption applies.  This results in costly regulatory requirements for small, low risk schemes which are also governed by other legislation.

The Amendment Act would narrow the licensing regime to those schemes which have the greatest risk for public health and safety.  The new licensing regime will apply primarily to three categories of schemes:

• Infrastructure providing water or sewerage services to 30 or more small retail customer premises, which are residential and small business premises.

  Smaller schemes will be regulated by the LG Act (sewerage) and the Public Health Act 2010 (NSW) (drinking water).

• Infrastructure which provides drinking water, including a filtration, treatment or desalination facility, which has a design capacity of more than 500 kilolitres each day (eg. the Sydney Desalination Plant).
• Infrastructure for the treatment of sewage, stormwater or recycled water which has a design capacity of more than 750 kilolitres each day.

Each category of scheme will need a licensed operator, but only the first category will need a licensed retailer since only that category will involve a direct relationship with retail customers.

The licensing regime would not apply to water industry infrastructure within the area of operations of a public water utility which is operated by or on behalf of a public water utility, unless it is operated by a "last resort" provider.

The amendments will also enable the WIC Act to regulate new sewerage, water recycling and stormwater harvesting schemes run by metropolitan councils, which are currently unregulated. Regulations under the WIC Act will specify which schemes the WIC Act will regulate. 

IPART will publish guidelines to assist in determining whether the licensing regime applies to a proposed scheme.  Initial and planned future stages of development will be taken into account. 

Separate licensing of operators and retailers and approval of schemes

One of the most important reforms is that the Amendment Act separates the licensing of scheme operators and retailers from the approval of the scheme and its infrastructure.

This enables a more effective focus on the credentials of operators and retailers, facilitates more flexibility in changing operators and retailers for a scheme, and allows better regulation of the integrity and viability of a scheme. It should accommodate a variety of scheme and related land ownership arrangements more readily than the current regime.  It should also streamline all authorisation processes, saving time and cost associated with authorisations.

• Scheme and operation approvals

  The design of each scheme will need a scheme approval from IPART before it can be built.  This will involve an assessment of the financial viability of the scheme to make sure it stacks up, reducing the risk of adverse impacts on customers and the risk of scheme (as opposed to operator) financial failure.

  It will also include assessments of arrangements to cover all end users within a scheme area (and so reduce the risk of stranded end users), and the scheme's capability to meet applicable standards.

  A scheme must also have a licensed scheme operator, and, in some situations, a licensed scheme retailer, appointed to it before a scheme approval is granted.  The licensed operator will be responsible for compliance with the scheme approval, instead of the scheme owner, which should simplify the allocation of risk and responsibility.

  Once the scheme infrastructure is built, the scheme will need an operation approval, to ensure that it has been built in accordance with the scheme approval, is fit for purpose and is safe.

• Operator and retailer licences

Operator and retailer licensing will no longer be tied to specific infrastructure, so that, once an operator or retailer is licensed, it can act anywhere in NSW.  An operator or retailer must be registered for a scheme on which it is acting, and only one registered retailer can be registered for each separate service provided by a regulated scheme (ie. drinking water, recycled water and sewerage services).

Like many other licensing regimes, there will be a licensee suitability test, looking at any past offences of the licensee and its directors and the licensee's technical, financial and organisational capacity to make ongoing investments to maintain and operate the infrastructure.

Stronger "last resort" arrangements

The Amendment Act provides much more robust "last resort" arrangements than the WIC Act does or the Review Act would have done, thereby reducing a significant gap in the security of operations for essential water and wastewater services.

The "last resort" arrangements are intended to provide for the effective replacement of an operator or retailer who can no longer act in relation to a scheme (eg. because of insolvency).  The Amendment Act extends the arrangement to both operators and retailers, requires the appointment of a "last resort" operator (and, in some situations, a "last resort" retailer) before a scheme can commence operation, and provides much more certainty about the transition process and the terms on which a "last resort" operator or retailer would step in.

To assist in covering the cost of "last resort"' arrangements, the Amendment Act provides for the pursuit of a failed licensee and its related companies and insolvency officials (if any).  It also establishes an industry contribution fund and, with the Treasurer's approval, access to the Consolidated Fund.  Cost recovery from customers of a failed licensee will no longer be available.

Further consultation on some of the details of these arrangements (including contingency planning) is proposed for 2022.

Consumer protections

• Standard customer contracts

  A standard customer contract will be deemed to apply to small retail customers (except in the case of an unauthorised connection) and these terms and conditions will be set out in the regulations.  IPART will release a draft for public consultation next year.

• Monopoly services

  The Minister will retain the ability to issue a monopoly supply declaration and pricing determinations where a retailer is considered to be overcharging.

• Planning certificates

  The Amendment Bill requires planning certificates issued under section 7.55 of the Environmental Planning and Assessment Act 1979 (NSW), which are included in contracts for the sale of land, to state whether the property under contract is serviced by a private water utility under the WIC Act.  This puts buyers on notice regarding the retailer and pricing.

• Auditing and offences

  The Amendment Bill expands the auditing, reporting and investigatory functions of IPART and increases IPART's investigative powers and penalties for offences. 

• Offence to directly on-sell drinking water

  The Amendment Act will prohibit the on-sale of drinking water obtained from a public water utility, unless the on-seller is also providing a sewerage service and the services are the subject of a single contract.  Entrants should bring additional infrastructure to the market and not simply benefit from the existing infrastructure.

Impact on existing licence holders and pending applications

The 22 private schemes currently operating under the WIC Act, including decentralised developments such as Barangaroo and Central Park, will be given 12 months after the Amendment Act commences to transition to the new licensing framework.  During the transition period, existing licences will continue to apply under the WIC Act as in force before the Amendment Act commences.

IPART will grant existing schemes the new approvals and licences required under the new licensing regime, but it can require an operator of last resort to be designated for each essential service before granting an operational approval.

Pending applications which were not determined before the commencement of the new changes are taken to be applications under the new licensing regime, and will be subject to it (subject to any specific exemptions provided by the regulations).  

Existing unlicensed schemes which were not captured under the old licensing rules, but will be captured by the new rules, will have 12 months after the Amendment Act commences to make the relevant applications.  Fee exemptions apply to existing unlicensed schemes.