INDUSTRY COMMISSION WATER RESOURCES AND WASTE WATER DISPOSAL REPORT NO. 26 17 JULY 1992 Australian Government Publishing Service Canberra © Commonwealth of Australia 1992 ISBN 0 644 25500 5 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Australian Government Publishing Service. Requests and inquiries Concerning reproduction and rights should be addressed to the Manager, Commonwealth Information Services, Australian Government Publishing Service, GPO BOX 84, Canberra ACT 2601. Printed in Australia by P . J . GRILLS, Commonwealth Government Printer, Canberra INDUSTRY COMMISSION 17 April 1992 The Honourable J Dawkins, M P Treasurer Parliament House CANBERRA ACT 2600 Dear Treasurer In accordance with Section 7 of the Industry Commission Act 1989, we have pleasure in submitting to you the Commission’s final report on Water Resources and Waste Water Disposal. Yours sincerely M L Parker Presiding Commissioner T J Hundloe D R Chapman Commissioner Associate Commissioner COMMISSIONER Benjamin Offices, Chan Street, Belconnen ACT Australia PO BOX, Belconnen ACT 2616 Telephone: 06 264 1144 Facsimile: 06 253 1662 Acknowledgment The commission wishes to thank those staff members who contributed to this report. IV WATER RESOURCES & WASTE WATER DISPOSAL CONTENTS Page ABBREVIATIONS ix PART I : MAIN REPORT TERMS OF REFERENCE xix OVERVIEW AND RECOMMENDATIONS 1 1. THE INQUIRY 21 1.1 Scope of the inquiry 21 1.2 The water sector 22 1.3 The Commission’s approach 27 2. PRICING PRACTICES AND PERFORMANCE 31 2.1 Pricing of urban WSD services 31 2.2 Pricing of irrigation water 40 2.3 Participants’ views on shortcomings in current pricing 43 2.4 Institutional arrangements affect pricing policies 46 3. ARE COSTS OF SERVICE PROVISION TOO HIGH? 47 3.1 Sources of cost reductions 47 3.2 Comparisons of costs across authorities 53 3.3 Institutional arrangements affect the costs of service provision 55 3.4 The gains from more cost-effective service provision 59 CONTENTS V 4. PRICING REFORM FOR URBAN WATER SERVICES 61 4.1 Promoting better investment decisions 61 4.2 New investments in urban infrastructure 62 4.3 Pricing structures 64 4.4 What costs should be covered by prices? 70 4.5 Phasing in cost recovery on existing assets 79 5. PRICING OF IRRIGATION WATER AND DRAINAGE 85 5.1 General issues 85 5.2 Bulk water 87 5.3 Charges for in-system water distribution and drainage 90 5.4 The Burdekin Irrigation Area 92 6. OTHER PRICING ISSUES 93 6.1 Property based access charges 93 6.2 Developer provided assets and charges 99 6.3 Funding community service obligations 100 6.4 Calculation of capital charges 103 6.5 Dividend policies 109 6.6 Capital subsidies 112 7. INSTITUTIONAL AND ADMINISTRATIVE ARRANGEMENTS 115 7.1 Opportunities for introducing competition 115 7.2 General principles for administrative and institutional reform 116 7.3 Urban water and sewerage provision 116 7.4 Corporatisation of urban WSD service providers 126 7.5 Privatisation of urban WSD service providers 129 7.6 Urban drainage 130 7.7 Irrigation water and drainage 132 VI WATER RESOURCES & WASTE WATER DISPOSAL 8. WATER ENTITLEMENTS 137 8.1 Current allocation systems 137 8.2 The value of water entitlements 138 8.3 Improving the system of water entitlements 142 8.4 Auctioning of water entitlements 150 9. ENVIRONMENTAL PRICING AND REGULATION 153 9.1 Sustainability and water use 155 9.2 Using markets to secure better outcomes 157 9.3 Regulatory reform 165 9.4 Monitoring and enforcement issues 173 10. RESOURCE MANAGEMENT AND OTHER ISSUES 177 10.1 Institutional reform 177 10.2 Non-price measures can encourage conservation 184 10.3 Research and extension 186 PART II : RURAL WATER R1 RURAL WATER ISSUES 193 R2 COMMISSION’S RURAL WATER FINDINGS 204 R3 PACE OF RURAL REFORM 207 R4 BURDEKIN RIVER IRRIGATION AREA : CASE STUDY 211 R5 KIMBERLEY PIPELINE PROPOSAL 225 CONTENTS VII APPENDICES A INFORMATION SOURCES 231 B INSTITUTIONAL ARRANGEMENTS 239 C PRICING AND COMMUNITY SERVICE OBLIGATIONS 271 D ECONOMY-WIDE GAINS FROM PRODUCTIVITY IMPROVEMENTS 295 E RURAL WATER ARRANGEMENTS AND ISSUES: STATE SUMMARIES 301 REFERENCES 345 VIII WATER RESOURCES & WASTE WATER DISPOSAL ABBREVIATIONS Abbreviations used for inquiry participants who made a written submission are given in Appendix A. Other abbreviations used in the report are listed below. ABS Australian Bureau of Statistics ANZECC Australian and New Zealand Environment and Conservation Council AWRC Australian Water Resources Council BAT Best Available Technology BATEA Best Available Technology Economically Achievable BOD Biological/Biochemical Oxygen Demand BRIA Burdekin River Irrigation Area CBD Central Business District CMC Catchment Management Committee CMT Catchment Management Trust COWSIP Country Towns Water Supply Improvement Program CPI Consumer Price Index CSO Community Service Obligation DASET Department of Arts, Sport, Environment and Territories EC Electrical Conductivity EPA Environment Protection Authority EWS Engineering and Water Supply Department FWRAP Federal Water Resources Assistance Program GBE Government Business Enterprise HEC Hydro-Electric Commission HIA Highland Irrigation Area ICM Integrated Catchment Management ABBREVIATIONS IX LWRRDC Land and Water Resources Research and Development Corporation MDBMC Murray-Darling Basin Ministerial Council MEA Modern Equivalent Asset NHMRC National Health and Medical Research Council NPV Net Present Value NRMS Natural Resources Management Strategy NSCP National Soil Conservation Program PAWA Power and Water Authority QWRC Queensland Water Resources Commission RAS Rural Adjustment Scheme RCMC Regional Catchment Management Committee RRR Real Rate of Return RWC Rural Water Corporation RWSC Rivers and Water Supply Commission SCMCC State Catchment Management Co-ordinating Committee SCS Soil Conservation Service SDS Salinity and Drainage Strategy SEPP State Environment Protection Policies TCM Total Catchment Management TWE Transferable Water Entitlements VDWR Victorian Department of Water Resources WSD Water, Sewerage and Drainage X WATER RESOURCES & WASTE WATER DISPOSAL CONVERSION TABLE: Gigalitre (GL) = 1 000 ML = 1 000 000 KL = 1 000 000 000 Litres Megalitre (ML) = 1 000 KL = 1 000 000 Litres Kilolitre (KL) = 1 000 Litres ABBREVIATIONS XI PART I: MAIN REPORT TERMS OF REFERENCE OVERVIEW AND RECOMMENDATIONS 1 THE INQUIRY 2 PRICING PRACTICES AND PERFORMANCE 3 ARE COSTS OF SERVICE PROVISION TOO HIGH? 4 PRICING REFORM FOR URBAN WATER SERVICES 5 PRICING OF IRRIGATION WATER AND DRAINAGE 6 OTHER PRICING ISSUES 7 INSTITUTIONAL AND ADMINISTRATIVE ARRANGEMENTS 8 WATER ENTITLEMENTS 9 ENVIRONMENTAL PRICING AND REGULATION 10 RESOURCE MANAGEMENT AND OTHER ISSUES XIII TERMS OF REFERENCE I, JOHN CHARLES KERIN, in pursuance of my powers under Section 7 of the Industry Commission Act 1989, hereby: 1. refer water resources and waste water disposal for inquiry and report within twelve months of the date of receipt of this reference; 2. specify that the Commission report on institutional, regulatory or other arrangement subject to influence by governments in Australia which lead to unsustainable and inefficient resource use and advise on how these institutional, regulatory or other arrangements might be revised; 3. specify that the Commission in dealing with Item 2 is to have regard to the established economic, social and environmental objectives of governments; and 4. specify that the Commission is to avoid duplication of any recent substantive studies undertaken elsewhere. JOHN KERIN 18 JULY 1991 XIV WATER RESOURCES & WASTE WATER DISPOSAL OVERVIEW AND RECOMMENDATIONS Water, sewerage and drainage (WSD) services are vital to the health and well-being of Australians. The challenge facing governments around Australia is to provide services to the current generation while ensuring that quality water supplies are maintained for future generations. This report seeks to promote more efficient and sustainable water use. It recognises the strengths of the reforms already underway; it builds on the current foundation of public ownership of service providers; and it accepts that a mix of market incentives and regulation is required. Reform is urgent. The problems now confronting Australia in the water area demand an end to the political expediency which has so often thwarted worthwhile reforms in the past. Sustainability of Australia’s water use Water required for household supply and waste water disposal accounts for around 10 per cent of water use in Australia. Most of the remainder is used to irrigate crops and pasture. Most of Tasmania and parts of northern Australia have abundant water supplies. However, in many of the major population centres and in the Murray-Darling Basin, the continued availability of quality water is under threat. Salinity and waterlogging in many irrigation areas are major environmental problems and recent outbreaks of toxic blue green algae have highlighted the adverse impacts of nutrient contamination of rivers and water storages. In urban centres, there are problems of disposing of sewage, trade waste and stormwater without excessive impacts on the environment and at reasonable cost. Developing new water supplies is extremely costly. And in any event, water storages and the regulation of river flows generally affect ecosystems and environmental amenity. Thus, making better use of water is becoming ever more important. OVERVIEW AND 1 RECOMMENDATIONS Undercharging for water and waste water disposal