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Chapter 4

Water trade

This chapter explores water trade in the Murray-Darling Basin. Questions for this committee related to water trade are whether the water market functions efficiently and transparently; if there are any unintended consequences of water trade, and how these are being managed by governments; and whether there is scope for improvement in existing water trade arrangements generally.
As explained below, the committee is mindful that the above matters will likely be addressed in depth as part of Australian Competition and Consumer Commission's (ACCC) current inquiry into Murray-Darling Basin water markets. While this chapter briefly summarises key features and issues related to water trade in the Murray-Darling Basin, for a more detailed treatment of this subject, submitters may also wish to the refer to the ACCC's issues paper on the subject, released in October 2019.1

ACCC Murray-Darling water markets inquiry

In August 2019, the Commonwealth government tasked the ACCC with conducting an inquiry into the Murray-Darling Basin water market. The inquiry will examine market trends since 2012, the role of carryover arrangements, practices of market participants, adequacy of water market information, barriers to entry, expansion, and exit (such as transaction costs), and the management of constraints on the storage and delivery of water for trades.2 The ACCC was asked to recommend options to enhance markets for tradeable water rights, including options to enhance operations, transparency, regulation, competitiveness, and efficiency. An interim report will be delivered by 31 May 2020 with a final report due by 30 November 2020.
On 17 October 2019, the ACCC released an issues paper and invited written submissions in response to it. Many of the issues covered by the ACCC in its paper are of interest and relevance to this committee. Of particular note, the committee notes that the ACCC has invited submissions that address, among other things:
matters related to market transparency and information, including information gaps affecting participation in water markets, and flaws in information reporting processes that are undermining the accuracy or accessibility of water market information;
regulation and institutional settings, including how those settings support or hinder the efficiency of, and access to water markets; and whether the current division of roles and responsibilities between governments and agencies is the most effective form of governance for the future operation and development of water markets; and
market participant practices and behaviours, including the role of brokers and exchanges, and the impacts of a diverse range of market participants accessing market markets.3
The committee looks forward to the release of the ACCC's interim report in May 2020. The committee also notes that it is due to report on 1 November 2020, while the ACCC final report is not due until 30 November 2020. The committee does not preclude consideration of water trade matters from its work, and still welcomes evidence addressing such matters to the extent they are relevant to the management and execution of the Basin Plan. However, the committee is mindful of the ACCC's current work in this area, and will seek to avoid any unnecessary duplication of that work.

Contextual information

Water trading in the Murray-Darling Basin emerged in the 1980s as a response to deficiencies in Australia's water rights framework. At the time, water resources in the Basin had been fully allocated and the only way water users could access more water was to purchase it from someone who already held a licence. As water licences were tied to land at the time, people were forced to purchase the land attached to the water licence which incurred significant costs and delays. Water trading was introduced to address the problem and created flexibility to trade across connected systems and state borders.4 Annual trade is now worth around $2 billion and generates economic benefits valued at hundreds of millions of dollars per year. Trading has increased agricultural production, helped farmers and communities survive periods of severe drought, and provided a mechanism for recovering water for the environment.5

How is water traded in the Basin?

Water in the Murray–Darling Basin can be bought and sold through the water market. Anyone holding a right to water can trade, and water can be traded within and between catchments (where possible) and along river systems. 'Permanent trade' is the trade of water entitlements and 'temporary trade' is the trade of water allocations (a distinction explained below).6
Water entitlements are rights to an ongoing share of water within a system. Each entitlement stipulates a set of conditions under which water can be accessed. As noted in Chapter 2, each jurisdiction has its own suite of water entitlements and there are over 150 different classes of entitlement within the Basin. The entitlement framework is responsive to climatic conditions—more water can be taken in wet years, less water in dry years.7
Water allocations are the amount of water provided to entitlement holders in a particular year. Allocations change according to rainfall, inflows into storages, and how much water is already stored. Some water entitlements allow allocations to be carried over to the next year. Each Basin state sets its own rules regarding prioritisation of water allocations.8
States are responsible for maintaining their own retail water accounts and allocating the available water to entitlement holders. These functions are carried out either by state departments or state water authorities depending on the jurisdiction.9 States hold information on storage volumes, river flows, and water orders for the systems they are responsible for and their water accounts provide information on water availability and use at catchment scale. The actual amount of water used by an entitlement holder is debited from the entitlement holder’s water account and, at the end of each year, state governments assess how much water was used and report this information to the MDBA.10
Water is traded in accordance with state trading rules based on physical constraints and water supply considerations. As a result, there are differences in water trading rules across jurisdictions.11 State water registers provide information on water allocations similar to land title records. Registers are used by Basin states to record the trade of entitlements or temporary allocations against entitlements.12
Concerns raised by some parties in relation to current water trading arrangements include:
different companies operating their own water trading platforms, making it difficult for the market to find a single price; 13
the lack of a single trading platform to buy and sell water across the Murray-Darling Basin;
deficiencies in the existing licensing and regulation of water brokers; 14
the lack of a National Water Register; 15 and
the lack of basic trade data available to assist traders in making decisions, transaction costs, long approval times, and trade application fees.16
Carryover refers to the option to store a portion of unused seasonal allocations for use in a subsequent year. During drought, speculators allegedly anticipate future price rises and hold onto much needed water. According to media, agricultural groups are thus calling for temporary bans on non-landowning water investors from buying and carrying over water.17 The same media cited that California, among other jurisdictions, has banned non-farmers from owning agricultural water precisely to avoid speculation.
Irrigation infrastructure operators (IIOs) own or operate infrastructure that delivers water for irrigation. IIOs also create and maintain trading rules, and trade according to these rules within their irrigation networks. IIOs also enable trade into and out of their area by trading onto their bulk licence on behalf of their customers, processing transformation applications and trading in their own right.18 IIOs are required to provide their trading rules to the MDBA to ensure they are consistent with the Basin Plan.19
The Basin Plan requires sellers to report the price of their trades to relevant state agencies. These agencies, in turn, are required to report this price information to the Bureau of Meteorology (BoM) which manages the National Water Account.20 The MDBA's 2017–18 water trade audit examined how effectively each state collects, validates, records, and reports water trade price information and found that none of the Basin states have robust arrangements in place. Basin trade data was found to be dispersed between various authorities which capture prices on different systems for different purposes. The MDBA is currently working with states to improve compliance, information, and transparency in this regard.21 Accurate reporting of water trade prices will be a compliance priority in 2018–19.
The BoM assists the MDBA and the CEWH in the execution of the Basin Plan by gathering and collating data on water allocation and entitlement trade. It also provides insight on the supply and demand for water in the Basin by assessing the data for trends to understand, for example, changes in use over time.22 As mentioned in Chapter 2, the BoM has previously worked to simplify the exchange of data between agencies. However, Dr Robert Argent, General Manager, Water Program, BoM, conceded that 'there are some individual data types, such as water market trades, which lend themselves less easily to electronic exchange'.23
How water is delivered depends on location. The Southern Basin is largely a regulated system in which flow of water can be controlled. Entitlement holders receive an annual allocation and can order this water from an upstream storage.24 However, only some parts of the Northern Basin are regulated and many public storages are relatively small. As a result, entitlement holders in certain areas will access water depending on river conditions, annual limits, and pumping rates. In some catchments, a central river operations body will announce how much water is available for take, while in other catchments, entitlement holders can take water as they wish subject to the conditions of their entitlement.25
In the River Murray system, the MDBA holds information on storage volumes, river flows, and water orders for the systems and how much of the total water available belongs to each state. The MDBA manages water accounts at the bulk level to record how much each state has used to date and provides forecasts on how much water will be available for the remainder of the year. The BoM’s Australia-wide historic water dataset is used to inform planning and operations. Basin states use this information to make allocations to entitlement holders, the MDBA releases the water from storage when state orders arrive, and water authorities in each state conduct the physical operation of structures to deliver the water in each state.26
The MDBA adjusts state bulk water accounts to reflect water trade of entitlements and allocations between states and within the River Murray system. The MDBA monitors trade across the Barmah Choke and if necessary, can restrict trade to protect water delivery to entitlement holders.27 However, the MDBA plays no role in the trade of water between the New South Wales and Queensland Border Rivers; instead, this trade occurs according to rules set by these two states.28
The MDBA is considering how to improve the processes that adjust state water shares when water is traded between states. Previously, the practice was to make all trade adjustments in Hume Reservoir, which was a simple method that suited the small to moderate volumes of inter-state trade.29 From July 2019 for a period of three years, it will trial new ways to account for water trade between states by adjusting volumes closer to the trade location. This is the known as the Trade Adjustments Project.30

Basin Plan trading rules

The Basin Plan sets out water trading rules that came into effect on 1 July 2014. Basin Plan water trading rules operate alongside existing Basin state rules and irrigation infrastructure operator rules. The rules are designed to improve consistency and ensure a level playing field by subjecting water markets to uniform rules, managing restrictions on surface water trade, and improving access to market information. Additionally, water resource plans (WRPs) require groundwater trade arrangements to be implemented for the first time.31
The ACCC provides advice to the Commonwealth Water Minister and the MDBA on the development of water trading rules (intended to free up trade and regulate costs of monopoly infrastructure) and is responsible for monitoring and enforcing water market rules32 and water charge rules33 and managing complaints. The ACCC also provides reports on the results of its monitoring efforts to the Minister and publishes these reports on its website.34
The MDBA is responsible for providing information on water trading and works with Basin state governments to ensure that state rules comply with the Basin Plan’s trading rules. States are required to provide their trading rules to the MDBA which publishes the rules on its website.35
The MDBA is also responsible for enforcing compliance with the Basin Plan water trading rules. The MDBA ensures that restrictions on trade are compliant; water announcements are disclosed appropriately; Basin states comply with information and reporting requirements; reporting of water trade prices is accurate; and there is compliance by irrigation infrastructure operators; and compliant use of exchange rates.36 The MDBA has powers to conduct audits and can compel information for investigations, and began publishing complaints about compliance in 2017.37
As explained in Chapter 2, the MDBA has several compliance tools and enforcement options available to it, for example, it can enter into enforceable undertakings to make good an area of compliance, apply to a court for a declaration that the regulated entity has not complied with water trading rules, or apply to a court for an injunction to prevent current or future non-compliance.38

Productivity Commission review and recommendations

However, in its 2018 review, the Productivity Commission found that, of the potential compliance matters raised by the MDBA with the Basin states regarding inconsistency with the trading rules, many had not been resolved. It also found that the MDBA often pursued information from Basin states through informal processes and had a tendency to seek further information rather than make a determination on compliance.39
The Productivity Commission also raised concerns that the MDBA's role in determining Basin states' compliance with trade restrictions requires detailed analysis and judgment. For example, in the case of surface water, trade can only be restricted due to physical constraints, water supply considerations, environmental protection, or groundwater connectivity.40 The Productivity Commission noted that MDBA has identified that trade restrictions and disclosure and management of water announcements are high priority areas in its compliance work program.
The Joint Basin Governments response to the Productivity Commission advised that the MDBA has commenced working on developing and publishing an assessment framework for evaluating the consistency of state trade restrictions against the Basin Plan. The framework will explain how the MDBA will consider costs and benefits of trade restrictions. The MDBA also intends to publish its findings after assessing state trading restrictions, and the reasons provided by states for surface water restrictions.41
The Productivity Commission recommended ways to improve water market and trading across implementation, compliance, and market information. For example, the Productivity Commission recommended setting timeframes for resolving matters, and improving transparency by publishing audit, risk management, and policy change information.42 It also recommended addressing conflicting roles at the MDBA by institutional separation of its compliance and agent of government functions. This separation would, it argued, create incentives for each institution to pursue its functions effectively and develop the appropriate culture for delivery of these functions (discussed further in Chapter 6).43
The next chapter considers the compliance functions of Basin states and the MDBA, including the process toward implementing compliance reforms, the potential role for a water audit, and the establishment of an Inspector-General of Murray-Darling water resources.

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