LAKES R US P/L- APPLICATION RE P/L-

SUPPLEMENTARY SUBMISSION TO THE NCC.

• POINT 1 in NCC letter of 1 November 2004.

Lakes R Us Pty Ltd (LRU) Proposal and the Operations of Snowy Hydro Limited (SHL)

The reasons for selecting Snowy Hydro Limited operations.

• No other storage facility has the capacity to divert water to the Murray or Murrumbidgee systems. • The evaporation rate is higher in other in the Murray Darling Basin Commission (MDBC) area because SHL’s storage facilities for water are colder and deeper. The benefit of storing water, where it will assist SHL to reduce the cost of insurance to its customers in the event of their gas and coal fired generators experiencing failure, for what ever reason, is of great value to every household with reduced electricity charges. Consideration should be given to the environmental benefits as a result of a reduction in greenhouse gases achieved because it would be less likely for the thermal generators to be operating their generators in standby mode in anticipation of a National Electricity Market spike in price. The increased volume of stored water in SHL will increase SHL’s peak electricity output capabilities. LRU’s water will have the same value as the “above target” water that SHL utilizes to produce at least 60% of its income from only 15% of SHL’s yearly .

The NSW “Energy Directions Green Paper” issued by the Minister of Energy and Utilities, Frank Sartor released on the 6th Dec 2004 states that electricity demand is rising at 2% each year with peak demand spikes rising even faster at 4%. 10% of NSW generation and network capacity was used for only 1% of the year. 1300 megawatts of generation capacity was used to meet 87 hours of peak demand. From current predictions 18% of generation capacity would be required for 1% of the year. Current generation and interconnection capacity is unlikely to Draft – 4th January 2005 meet demand under normal circumstances and will not meet demand in exceptional weather conditions over the next decade. The value of water, held by LRU which may be used to meet the future needs of this impending crisis will increase if it is held in Lake Eucumbene, the largest of SHL’s storage facilities. Electricity restrictions in NSW in the near future and during the next decade will cause disruptions to the economic well being of NSW and the nation.

LRU’s access to SHL would assist at peak usage spikes in the N.E.M as there would be more water to cope with the extra demand for peak electricity generation. This benefit to the nation would occur with a nil increase in greenhouse gas emissions. All this is achievable by LRU utilizing vacant airspace in SHL’s storage. Under the current science on global warming the luxury of not using the air space to store water is unaffordable. This air space has been vast and vacant for at least 60% of the time since it’s construction. If global warming is going to make rainfall even less likely and predictable then leaving this air space vacant is not in the public interest.

LAKES R US Business Plan.

When the outcomes of the declaration to SHL by LRU has been finalised, a full business plan will be provided to the NCC. It is extremely difficult to provide a business plan with so many variables in both income and the expenditure.

Currently SHL rents airspace in Blowering , which is owned by NSW. The rental rate is set at $120,000 for 120000 megalitres of airspace which must be left vacant at all times to facilitate the rapid generation of electricity and not cause flooding downstream of SHL’s turbines. LRU’s rental conditions on SHL’s Lake Eucumbene would differ in that there would be no stipulation or demand that up to 800,000 megalitres of airspace be maintained at all times. LRU believes that its impost on SHL’s Lake Eucumbene will beless than SHL’s impost on the NSW owned .

Under this precedent the rental charge per year should not be more than $1 per mega litre per year, for the utilisation of Lake Eucumbene’s vacant airspace by LRU given that LRU and its customers are prepared for, and except, the water losses in spill events.

LRU expects that in times of peak demand that SHL will pay LRU (and its customers) a fee of $98 per mega litre to borrow LRU water for generation purposes. SHL deemed $98 per mega litre was the price some water users should pay to borrow SHL water in October 2004. Under this precedent LRU and its customers must be paid by SHL if SHL use water that belongs to LRU for

Page 2 Draft – 4th January 2005 peak generation or operating in the hedging and derivatives in the national electricity market using LRU water. LRU proposes to sell shares to allocation holders in the Murray Darling Basin that can utilize the benefits that LRU can offer. These shares should increase in value over time as LRU’s volume and the value of the water increases to SHL for electricity generation.

Lakes R Us will charge its customers a fee, for a profit, to store water with them in SHL’s facilities. LRU’s business offices will be situated in Berrigan, for the day to day operations of directing the storage and trading of water from South , Victoria and New South Wales. LRU’s water exchange would also facilitate trades in temporary water from one year to the next water allocation year and will also operate a futures market.

There are plenty of water traders within the Murray Darling Basin and there is no facility or organization that would be able to offer all the services that LRU could offer to water users if Lakes R Us is successful in its application to the NCC for declaration. SHL could offer some of these services though, on prices charged for offers to use SHL borrow facilities at up to $180 per megalitre, it is obvious that they have no competition in the market. LRU would like to compete in this market and the benefits would flow to the nation with the increased efficiency.

The MDBC cap has greatly increased the uncertainty of water supply to most water users. Often it is not until the irrigation season is well underway that an estimate of how much water will be available can be made. The water users have had the cap imposed on them and now require a cost effective and efficient method of helping them to deal with this circumstance. LRU believe that its application for declaration to SHL storages will help immensely for water users to manage their own water needs from year to year

• Point 2 in NCC letter of 1 November 2004.

Clearly Identify the Service

The services that Lakes R Us is seeking access for are those services that are required to store water after it has been allocated to the water user in the water usage year and the transportation of that water to the Murray and Murrumbidgee. Some of the allocation holder’s water may be in excess of requirements in that allocation year due to rainfall or prudent attitudes to water use. This unused water shall be transferred back up into the SHL system by swapping required release water coming out of SHL storage’s’ under the MDBC guidelines that SHL must adhere to. LRU requires access to the service that Lake Eucumbene would provide in storing water over time in the vacant airspace that exists between the current water level and its maximum storage level set at the spill height for Lake Eucumbene.

Page 3 Draft – 4th January 2005

SHL offers a loan facility for water referred to as “Snowy Borrow” for irrigators from time to time, currently there is a “Snowy Borrow” on offer to Murray Irrigation Limited water users at the rate of $98.00 per megalitre. This is a precedent for the method that LRU would use to enable LRU to utilize the airspace in Lake Eucumbene. SHL currently loans water to water users and this water is repaid back into SHL storages, including Lake Eucumbene, using the swapping of required release water as the replacement mechanism. LRU requires access to this service. This mechanism is subject to MDBC approval and LRU would require access to this process.

When LRU’s water enters the MDBC controlled water storage and regulation system the normal temporary trade rules will then apply for this water, for delivery to allocation holders at their request. LRU’S water will be temporarily traded into SHL storages and a trade under the current temporary trading rules is all that is required to trade this water out of SHL.

Access will be required to all the services provided by structures including valves, tunnels, pipes, turbines, streams and regulation equipment that allow water, stored in Lake Eucumbene, to be transported into Blowering Dam from SHL. When LRU’s water reaches Blowering Dam, LRU will then require access to the water release mechanism at Blowering Dam and access to the watercourse that allows water to be transported to allocation holders in the system and beyond.

LRU will also require access to the service SHL can provide with all the structures including valves, tunnels, pipes, turbines, streams and regulation equipment that allow water stored in Lake Eucumbene to be transported through the Regulating Pondage, into the M.D.B.C. controlled .

The saving to LRU prospective customers is obvious as some of Snowy Hydro’s customers for the “Snowy Borrow” would have been unable to store the water in excess to their requirements in previous years. They will be unable to store water in the future unless LRU obtains access to SHL storage. Some of the current “Snowy Borrow” customers might be borrowing back their own water. If these irrigators were able to save this water for later use or sell it with LRU it would reduce the price that SHL charges for “Snowy Borrow” water because of the increased water in the temporary water market forcing increased competition on SHL. In particular in South Australia’s case when SHL asked for $180.00 per megalitre for water that may have included previously unused South Australian water.

Access to the services described in this reply would facilitate an efficient and effective carryover mechanism that would assist water users to increase Australia’s productivity growth.

Page 4 Draft – 4th January 2005

• Point 3 in NCC letter of 1 November 2004.

Physical Assets of the Facility

The Hydro –Electric Scheme is a complex integrated water storage and hydro-electric power generating system. LRU requires access to this facility to store water over time and to release and transport water at certain times into the Murray and Murrumbidgee River systems. This national icon is owned and operated by SHL. SHL’s shareholders include the NSW government with 58%, VIC government with 29% and the Commonwealth government controlling 13% of electricity entitlements in the scheme. SHL is an independent commercial entity and operates as a normal private sector business.

Under Clause 46 of the Murray Darling Basin Agreement, if any change to flow, use, control or quality of water in the , the MDBC must be notified. The MDBC will then advise the governments concerned.

LRU requires access to the airspace that is above the water level that is maintained in the Lake Eucumbene facility by SHL from time to time, to the spill way that is used in the event of the maximum capacity of this lake being reached. Other facilities LRU require access to include;

Eucumbene- tunnel to transport water through to Tumut Pondage then down to Tumut 1 continuing through Tumut 2 Pondage, through Tumut 2 power station ,through Talbingo through Tumut 3 power station , through Jounama Pondage ,into the NSW DIPNR/ State Water owned and controlled, Blowering Reservoir on into the Murrumbidgee River system for distribution to allocation holders.

SHL Facilities that LRU requires access to on the Murray River side of the system include Lake Eucumbene, transporting water into the Eucumbene- Snowy Tunnel, through the Island Bend Reservoir, through the Snowy –Geehi tunnel, into and out of the Geehi Reservoir transporting the water through the tunnels and pipes to Murray 1 power station, into Murray 2 pondage through the tunnels and pipes that transport the water through Murray 2 power station, into the Khancoban Pondage. From this pondage LRU will require access to transportation facilities for its water to flow into the MDBC controlled Hume Dam.

LRU will also require access to the facilities that control the transportation of its water through SHL’s facilities from Lake Eucumbene to the Murray and Murrumbidgee River systems being valves, control panels, switches and all other facilities to allow LRU to convey its water safely and efficiently to its customers in NSW, VIC and SA.

Page 5 Draft – 4th January 2005

• Point 4 of NCC letter of 1 November 2004.

Uneconomical to Develop another Facility

The issue is whether the facility is uneconomical to develop if for the likely range of reasonably foreseeable demand for the service, it would be more efficient, in terms of costs and benefits to society as a whole for one facility to provide the service rather than more than one. (NCC paper on Application by Services )

The issue here is water storage/transportation and as such there are limited economical facilities to provide such services.

There is no other water storage facility that can economically and efficiently deliver water into both the Murray and Murrumbidgee River systems. This is most important in terms of the temporary water trade as there are in excess of 1 million megalitres released into the Murrumbidgee River for irrigation, subject to availability, and a much greater amount released into the Murray River system. LRU believe that it is vital to the public interest and storers of water with LRU to be able to use or sell that water, quickly, into both systems for maximum competition and flexibility.

The SHL storages are situated to capture almost all the available water in the vast area it occupies in the Snowy Mountains in the Kosciuszko National Park. It would be impossible for another water storage system to be developed, as there is virtually no water left to fill it. It would not be viable to build another dam in this mountainous region. The ability to get a permit from the State and Federal Government’s to build such a structure in a national park would be extremely unlikely given that there is already a system of dams in the area being underutilized. The storage capacity of SHL is twice the average annual inflow from rain events in SHL water catchments. Only three overflow spill events have occurred in the last thirty years, 1974, 1975 and 1992. L.R.U. storage customers are aware that they will lose their stored water in the event of a spill.

The building of dams on farms offers a very poor alternative to the SHL storage dams. The evaporation on small farm dams is vastly greater than for water stored in SHL storages due to water depth, wind and temperature.

Farm storage dams are costly to construct and use valuable agricultural land and its production for at least the life of the dams. Rehabilitation of the land after use as a dam will be as expensive as it was to construct the original dam and the areas productivity would be reduced for many years until the soil was made fully productive again.

Page 6 Draft – 4th January 2005

The area where the SHL storage’s are was not highly productive farmland and the loss to the national agricultural output was and is minimal.

Farm storage dams are for the farm’s use only and are often used for flood mitigation on farms, that is, a rainfall event after irrigation on the farm. Keeping the dam full can be detrimental to the environment because these full dams cannot catch the nutrient rich farm run off.

Water stored in farm dams cannot be traded and or transferred by the usage of watercourses that are not on the originating farms. There is no mechanism, nor is it allowable to use a river or creek to transfer water intrastate or interstate where that water has originated from farm water storage. These facts and the evaporation rate make farm water storage for carryover water unacceptable.

Page 7 Draft – 4th January 2005

• Point 5 in N CC letter of 1 November 2004.

Promotion of Competition in at Least One Market

Victoria and South Australia have no carry over of irrigation water from one water allocation year to the next. The temporary transfer of water is conducted in these states with both high security and general security license holders availing themselves of the opportunity to trade both intrastate and interstate. This is in line with the COAG decree that water should go to where it has the most value and by definition, the most productive capacity in dollar terms.

LRU would increase the pool of water in the temporary trade. The increase would be directly related to the amount of water that was carried over from one year to the next with LRU. Allocations are set, in the water year, on the basis that all the allocation may be used or transferred. Under this rate (clause5.3 of Murrumbidgee Annual Allocation Plan 2004-2005), it is fair that the allocation holder should be able to store water with LRU because it has already been paid and accounted for through ownership of the allocation.

Temporary Transfer water usually trades much lower in price in the last month of the allocation year. LRU customers would be able to buy and or carry over this water. This late temporary transfer water would increase in price because of the increase in competition between buyers to purchase this valuable water, as it no longer becomes worthless or unusable at the finish of the water year. Under the user pay attitude that prevails in most areas of endeavour, it would be fair if the user was able to keep what they paid for, that is, allocation holders keeping the water that was allotted to their allocation in the allocation year. These allocations have become valuable property over the last fifteen years and legislation to utilize them efficiently and effectively has not kept pace with this increased value. Socializing the water savings is not conducive to creating a saving environment. LRU’s application to declare access to SHL will enable a saving of this precious resource for the allocation holders in Victoria and South Australia and a much improved outcome for New South Wales water allocation holders than the draconian system that now applies to carryover water.

Five hundred thousand megalitres could be stored with LRU in the first year of operation, which LRU believes is possible subject to rainfall events from Adelaide through to SHL’s storage catchments. The impact on the temporary market of water in both the Murrumbidgee and Murray systems would be highly conducive to competition in this market as certainty of supply, subject only to environmental constraints, would give this water greater value. This would make water much more productive and enhance the nation’s productivity growth.

Page 8 Draft – 4th January 2005

The expansion of the temporary water market would increase the competition in the temporary water trade. Only SHL water storage’s have the ability to supply both Murray and Murrumbidgee systems and that is why LRU seeks access to SHL storage’s.

The Murray Darling Basin is Australia’s most important agricultural region, supporting irrigation industry worth more than $4.5 billion per annum and over 40% of the gross value of the nations agricultural production comes from this region. SHL’s water storage underpins most of this vast production. The increase in productivity growth afforded by the LRU declaration on SHL storages for the carry over facility would be difficult to quantify though any argument to suggest a decrease in production and a reduction in productivity growth is unsustainable.

The likely production areas where this carry over water will be used are in valuable agricultural pursuits. This in turn will drive competition for contracts to supply, as water users are able to reduce their prices for commodities to gain their contracts because of greater certainty of supply of water in the medium term, 2 to 3 years.

These contracts that water users will be more inclined to enter into are for the production of a vast array of agricultural commodities including fruits, vegetables, milk, wine, cereals and meats. These products change at a rapid rate and opportunities for irrigated agriculture come into the market place at a much greater frequency than the rate that permanent water that is for sale. If the producers of these new and or expanding irrigated agricultural products are not constrained by the permanent water trade in the short to medium term and appreciate the risk reduction offered by the LRU initiative, they will enter into contracts to supply these new and expanding customers.

New producers of commodities are invariably young and keen, not necessarily wealthy; this is what usually drives their keenness to succeed. If these new producers are enabled to commence supplying these profitable new contracts to produce then they will be more inclined to buy permanent water allocation. An example might be a potato farmer needing one thousand megalitres of water to grow one hundred hectares of potatoes.

One thousand megalitres of permanent high security water will cost at $1.7 million, which will probably prevent the potato farmer from producing the five thousand tonnes of potatoes at $200.00, on farm, per tonne. If the potato grower used the LRU storage facility, the grower may be able to buy temporary water for $50 per megalitre and buy two thousand megalitres which will provide water for two years at a cost of $100,000.00 plus costs to LRU.

Page 9 Draft – 4th January 2005

From this example it can be seen that the LRU storage facility will drive competition in the supply of potatoes and the vast array of other commodities, competition in the temporary water market and later on competition in the permanent water market when the enthusiastic producer becomes wealthy. $1.7 million for a producer entering into a new and untried commodity market is a prohibitive risk to most producers.

LRU does not have any knowledge of SHL operating in the temporary water market that currently exists. SHL does lend its “above target” water. Water that is collected by SHL in excess of that required to maintain future minimum notified releases to irrigation is referred to as “above target” water. Usually the amount of above “target water” averages 322 GL per year; this is the difference between average annual releases and minimum notified releases.

Above “target water” has a large proportion of the unused allocation water, which the allocation holders have not used in an allocation year. SHL continues to be the only body to be able to hold and regulate the usage of allocation holder’s unused water. Allocation holders of irrigation water in South Australia, Victoria and New South Wales believe that it is an unfair practice that SHL, lend their water back to them at such extortionate rates, as was demanded by SHL two years ago with a borrow rate of $180 per megalitre in South Australia to be repaid by 2006 with water through the swapping of required release water by SHL and the Murray Darling Basin Commission. This water was likely to have been water that South Australia did not call on for irrigation purposes in previous years

If LRU was granted the ability to store water in Lake Eucumbene it could compete with SHL to loan water to desperate irrigators at reduced rates to these consumers. Over time LRU customers would rely on LRU stored water whether they owned it or knew that they could purchase it when it was required from the increased, reliable pool of water stored with LRU.

SHL would be able to sell more risk management products, including options, derivatives and hedges if SHL had more water that was in the “above target” class in storage. LRU customers could enter into arrangements with SHL through LRU to loan water to SHL or even sell the water to SHL for SHL’s consumption. This extra water in SHL’s Lake Eucumbene would enable SHL to reduce fees for these risk management charges. Today as far as LRU is able to ascertain SHL has not reduced these charges as it deems there is not enough water to do so.

If there was more water in Lake Eucumbene because of LRU’s customers then SHL’s customers would be able to negotiate a lesser price for more products over time, knowing that SHL had more “above target” water. This would be in the national interest.

Page 10 Draft – 4th January 2005

• Point 6 of NCC letter of 1 November 2004.

Institutional Constraints That Affect the Scope for Competition

There are many institutional arrangements that affect the scope for promotion of competition in the water trade within the MDBC. Some of these rules by both State and private institutions are related to physical restraints. These physical restraints include:-

• The Barmah Coke in the Murray River, 8,500 megalitres/day, at 9000mgl/day and at 10,000mgl/day measured at Tallandoor.

• Channel capacity of the Murray River between the Hume Dam and Yarrawonga –25,000mg/day

• Channel capacity of the lower 9,000mgl/day

• The outfall from the Canal to the at 2400mgl/day

• Different parts of the system become critical under different seasonal conditions, or under particular storage and demand combinations.

• Tumut River to Blowering Dam 9,300mgl/day

All the above conditions are physical constraints. D.I.P.N.R. has limited the amount of water that may be transferred out of Murray Irrigation Limited during peak flows in the Murray River because of the Barmah Choke. Murray Irrigation Limited has the capacity to bypass the Barmah Choke into the Edward River. This is an impost on the temporary trade of water enforced by D.I.P.N.R. and causes a distortion in the temporary water price when it occurs, particularly in peak times. This applies to the permanent trade as well. Murray Irrigation Limited holds 1.445 million megalitres of Murray River water entitlement and that is 67% of New South Wales’s Murray River allocation.

Murray Irrigation Limited has the ability to bypass the Barmah Choke; D.I.P.N.R. rents the /Edward River method of bypassing the Choke from Murray Irrigation Limited. Murray Irrigation Limited owns the Mulwala Canal and its members should not be penalized by D.I.P.N.R. limiting both permanent and temporary trade of water when Murray Irrigation Limited’s system bypasses the Barmah Choke. The Barmah Choke is a D.I.P.N.R. problem, not a Murray Irrigation Limited problem.

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Murray Irrigation Limited members suffer as this reduces the value of their water and impacts on efficiency of water usage.

Murray Irrigation Limited deducts up to 15% of the temporary water transfer water coming into Murray Irrigation Limited for losses it alleges it sustains during transport of the water from the Yarrawonga off take. Murray Irrigation receives 150,000mgl from D.I.P.N.R. for this loss however when Murray Irrigation Members trade out temporary water they are not credited with a reversal of this loss. The temporary water traded out by Murray Irrigation Limited members did not enter the Murray Irrigation Limited system and would still be in the Murray system. This is a gain to Murray Irrigation Limited and a loss for Murray Irrigation Limited members trading water out of Murray Irrigation Limited, which is an impediment to competition in the temporary water trade.

In the Murrumbidgee system D.I.P.N.R. and State Water impose a range of institutional limitations on temporary transfers of water.

High security water transfers must be lodged with State Water by no later than 1st September during the allocation year. This is not conducive to efficient water use or competition in the temporary water market and is an impost on high security allocation holders by taking them out of the market for 75% of the trading year. The D.I.P.N.R. in the Murrumbidgee Annual Allocation Plan for, 2004-05 in Section 8.2.1. Limit the temporary transfer of water into the Murrumbidgee Valley.

The limitation is for no net increase in water volume into this system which relates to a physical constraint for supply, during peak demand periods, this is regardless of the amount of allocation water allotted to the water user at that time. LRU believes it should be enabled to allow water to be transferred to and from the Murrumbidgee and Murray systems, subject only to water availability and system capacity.

This enhancement to the temporary water trade would increase competition within the temporary trade of water and increase efficiency in irrigated agriculture in both the Murrumbidgee and Murray Valleys, all the way down to the Murray mouth.

High security water allocation holders are not allowed to carry over unused water from one allocation year to the next.

There is a restriction on temporary trades of water into and out of the Murrumbidgee Valley. Applications for interstate transfers must be received by the 31st January 2005 and intrastate transfers by 28th February. This is a severe limitation on the flow of water to go to where it will be best utilized and is in direct opposition to the C.O.A.G. principles of freeing up the water trade.

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Under this restriction, an allocation holder of either general or high security Murrumbidgee Valley water could not possibly predict what the likely rainfall events would be for the next few months, that is, February to April. As such they would lose any ability to operate in the temporary interstate and intrastate water trade for their water requirements outside of the Murrumbidgee Valley and for those outside the Murrumbidgee Valley to participate in the water trade within it. Under this rule in the water allocation plan for the Murray and Lower Darling River Valley’s 2004-2005 there would be a greatly reduced ability for LRU to offer its services for the benefit of the water users in the river systems it would supply. These are impediments to competition and are not in the public interest.

Goulburn Murray Water in Victoria allows the trading of water right but only up to 30% of sales water between one customer and another. Irrigators in the gravity system are then not allowed to use any additional sales water, above 30%, that may become available if they have temporarily traded any water in the allocation year. River pumpers and other diversion licence holders will receive no sales water if any of their water right or licensed volume is temporarily traded. The cut off date for temporary trades into NSW is on 28th February 2005 for processed transfers which may take up to two weeks to complete.

Water traded from an unregulated river or stream will incur a loss factor of 2 0% of the licensed volume transferred. These are some of Victoria’s institutional constraints and impede competition in the temporary water trade, intrastate and interstate both in timing and volume. S.A. has no institutional constraints on the temporary transfers of water within S.A. or interstate. S.A. runs its temporary water trading on the financial year basis and has environmental constraints in place. The transfer fee of $255 for a temporary transfer interstate is at least 300% higher than NSW &VIC and seems unjust in view of these other states charges.

The lending of ’ Above Target’ water by SHL is viewed by a lot of allocation holders as lending water that is not SHL’s to lend. This ‘Above Target’ water would normally flow through the turbines of SHL during peak electricity generation then on into the MDBC storages to increase the general allocation. Under the current ‘Above Target’ system, water is kept out of the general allocation to the detriment of the vast majority of allocation holders. SHL has a monopoly on this type of water and the system it utilizes to operate in this market. LRU would operate in this market if granted access and remove the impediments to competition caused by this restriction. LRU would be operating in this market with water that is owned by the allocation holders in SA, NSW &VIC. and would be lent to SHL for a fee. The benefits derived from this trade would be spread across the allocation holders that lent their water for this purpose as opposed to being denied the use of this water except in a very wet year when SHL’s storages spill. This event will occur when water is unlikely to be required by the general allocation holders and will suffer productive loss because of it.

Page 13 Draft – 4th January 2005

The cost of water reform is being borne by irrigators and it is very difficult to find evidence where vast amounts of money spent in tranche payments under the N.C.P. to the states for water reform has actually gone to help water users rearrange their affairs to cope with the rapid change in water policy.

This relates particularly to the New South Wales General Security Allocation holders who have and will continue to lose water availability as State and Federal Governments demand and legislate that water be returned to the environment. Because of this dislocation, it is imperative that a temporary water market, free of all the institutional constraints throughout the Murray and Murrumbidgee Systems, be allowed to operate for the efficient and effective use of this valuable resource.

Page 14 Draft – 4th January 2005

• Point 7 of NCC letter of 1 November 2004.

Public Interest Criterion

There are many constraints placed on water users within the MDBC with regard to environmental objectives. LRU believes that declaration of SHL storages will enhance these environmental objectives. Some of the environmental water that is released each year may well be stored with LRU for release at more opportune times for the benefit of fish or salt flushing or just stored for later use if ample water is being released at the time of scheduled use.

Regular releases of environmental water has been practiced in past years though in this current climate of minimum water inflows to SHL and MDBC storages, a more prudent release program maybe adopted in the future.LRU will offer its services to the environmental water allocation holders for the benefit of the environment. The current arrangements for water allocation are made with the intention of the water allocation holder either using all the water allocated to them or trading it out to somebody who will. All the allocated water is not used and the unused allocation water is reallocated the following year. The allocation holder currently has no option to store their unused water and this allocated water is seized by the state at the end of the allocation year.LRU believes this practice to be inefficient and ineffective, the water allocation user has paid for the privilege to use this precious resource and the use of the water is denied to them .

These water allocations are initially made on the basis that the water is in storage and is there to be allocated with no reliance on guesstimates of future inflows. Under the “user pays “principle, the user has paid for the water allocation and been allocated the water and is then denied the capability to use the water. LRU intends to rectify this inequality by providing these prudent water users the ability to carryover the unused allocated water for use at a much more beneficial time in the future.

The current arrangements for water allocations are not conducive for the maximum benefit to be derived from the water allocated to the allocation holder or the nation. The allocation arrangement that is now in operation punishes the prudent water user which is not in the public interest. LRU believes that its proposal to rent unused airspace in SHL water storages will be the greatest advance, in the efficient and effective use of water, since temporary water trading commenced. Temporary water trading will be opened up to full competition under the LRU proposal and the artificial barriers restricting the temporary water trade both intrastate and interstate must be removed, water will then flow to where it is the most productive.

Page 15 Draft – 4th January 2005

• Point 8 of NCC letter of 1 November 2004.

Graeme Pyle telephoned Snowy Mountains Hydro Electricity Authority in 1993 asking S.M.H.E.A. if they would sell water to Graeme Pyle. S.M.H.E.A.’s unrecorded spokesman at the time said S.M.H.E.A. did not negotiate with farmers directly and did not sell water at all.

On the 23/9/99 a fax was sent to S.M.H.E.A. inquiring as to how much electricity could be produced from one mega litre of water passing through the S.M.H.E.A. system as it makes its way west to the Murray River. A reply the same day indicated on average one mega litre produces 1:8 megawatts of electricity in the Snowy system plus a bit more including the Hume Dam’s hydro plant.

On the 12/7/2000 Graeme Pyle visited the offices of S.M.H.E.A. by appointment and produced a confidentiality agreement which was signed by Gabriele Barbaro for Snowy Hydro Trading P/L. After this document Graeme Pyle presented a document containing provisions to lease water in lots up to 100gigalitres over a period of five years. Electricity that was produced from these releases was to be marketed by Graeme Pyle as the electricity produced would have enabled Snowy Hydro Trading P/L to exchange base value electricity prices for peak. Snowy Hydro Trading believed that this deal would be possible when S.M.H.E.A was corporatised and that was to take place shortly. At least two follow up phone calls where made concerning corporatisng. Problems concerning federal elections among other aspects were discussed with Mr Gabriele Barbaro, manager Strategy and Risk and Mr Paul Johnson, Manager of Business Development and Marketing of Snowy Hydro Trading P/L on these occasions.

On the 25/1/2002 Graeme Pyle visited by appointment the offices of Snowy Hydro Trading P/L and had a confidentiality agreement signed. A heads of agreement was presented to Stephen Mikkelsen, Chief Financial Officer and Dr Nenad Tufegdzic, Manager, Portfolio and Risk Management. This document remains private and confidential. At this meeting the prospect that Mr. Pyle would use the open access regime to gain access to SHL was raised.

Hank Spier and Graeme Pyle sent an application to SHL, which was replied to on the 3rd May 2004. These documents were forwarded to N.C.C. Hank Spier and Graeme Pyle by then had formed a company certified by the A.S.I.C. on the 4th May 2004 as LRU Pty. Ltd. Over the years the names of the companies have changed but the intent Graeme Pyle had in 1993 to trade water with Snowy Hydro still remains and believes that the declaration of SHL by LRU will present a paradigm shift in water usage within the Murray Darling Basin for the effective and efficient use of water.

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