While resistance to making a declaration under the TPA continued, the New South Wales parliament worked on the development of a state, industry-based access scheme, which is now housed within the Water Industry Competition Act 2006 (WICA).[40] This Act is examined as a case study because some other states are also considering the introduction of legislation setting up state-based access regimes.[41]
WICA is designed to reflect the State government’s 2006 Metropolitan Water Plan [42] and is based on recommendations in the 2005 IPART review of water and wastewater service provision (IPART Water and Wastewater Report, October 2005). The IPART review included recommendations for:
the State government to develop a state-based access regime for services traditionally provided by significant water and wastewater infrastructure;
a review of the legal framework to ensure appropriate obligations were placed on both incumbents and new entrants, as well as ensuring that barriers to competition and private-sector involvement were addressed;
the development of a streamlined regulatory framework for sewer mining which included establishing a formal dispute-resolution process and;
continued IPART price regulation of services to small customers, as well as the continuation of price regulation for large customers, regulation which would be reviewed if an access framework were established.[43]
The Act was designed to encourage competition in the water industry and to promote innovative solutions to the water supply-and-demand balance, particularly in so far as the development of infrastructure for the production and distribution of recycled water is concerned.[44] WICA is, in many ways, only a skeletal framework which needs to be fleshed out by operational and enforcement mechanisms. The Act contains provisions for:
a Licensing Regime for private-sector participation in the water industry (in Part 2);
a third-party access regime to facilitate the negotiation of access to significant water-industry infrastructure (in Part 3);[45] and
binding arbitration of sewer-mining disputes (in Part 4) (DWE, WICA Regulations Consultation Paper 2007: 8).
The detail for the administration of these Parts is provided by the Regulations made under the Act. Section 101 provides for the Governor to make Regulations in respect of a range of issues.
The legislation includes a licensing regime, rather than alternatives such as rules-based regulation, certification or industry self-regulation because the licensing regime was thought to offer the best adaptive capacity, allowing flexible responses to future situations that competition, public expectation and scientific knowledge might present. Accordingly, private entities that seek to provide drinking, recycled and other grades of water, as well as those seeking to provide sewerage services, will need to be licensed. The licensing requirement operates by virtue of a prohibition-and-exemptions approach. The Act makes it an offence to construct, maintain or operate any water-industry infrastructure or supply water or provide a sewerage service by means of any water-industry infrastructure without a licence. There are monetary penalties for non-compliance (WICA s 5).
The Act also establishes a set of principles that are to guide the Minister when he or she is deciding whether to grant a licence. Those principles relate to issues such as the protection of public health, the environment, public safety and consumers; the encouragement of competition in the supply of water and the provision of wastewater services; the ensuring of sustainability of water resources; and the promotion of production as well as the use of recycled water (WICA s 7). Unfortunately, the constraints of this chapter do not permit further exploration of these issues. (See DWE WICA Regulations Consultation Paper 2007.)
Central to this chapter is the third-party access regime under Part III of WICA (MWDCO, Creating a Dynamic and Competitive Water Industry 2006: 18). The access regime is designed to operate in concert with the licensing regime, in that water and wastewater-services providers gaining access under the access regime will also need to be licensed in order to operate. The aim of this industry-specific access regime, like the Commonwealth’s generic one under the TPA, is to facilitate third parties gaining access to the incumbent’s ‘infrastructure service’, thus allowing third parties to become new service providers in the upstream or downstream markets without having to incur the expense of duplicating the infrastructure.[46] Third parties may be interested in seeking access so as to supply drinking water, recycled water or wastewater services, for example.
The regime specifically facilitates the negotiation or arbitration of arrangements for third-party access to the storage and transportation facilities of the incumbent’s water-supply and sewerage networks. The definition of ‘infrastructure service’ (WICA s 4 and dictionary) as the ‘storage, conveyance or reticulation of water or sewage by means of water industry infrastructure’ but not including ‘the supply of goods (including the supply of water or sewage)’ shows that the access regime itself does not create rights for the access seeker to obtain the raw resource of sewage. However, it is anticipated that the execution of a Sewer Network Access Agreement between the sewerage network owner and the access seeker will not only create rights to extract a designated volume or proportion of sewage but will cause that agreed volume or proportion to be extracted.[47] Further, WICA does not create rights to use the incumbent’s treatment plant.
Initially, the third-party access regime is only available to access seekers in the Sydney and Hunter regions but that could be extended (WICA s 22 and Schedule 1 of Act). An infrastructure service would become the subject of the access regime if:
the Minister makes a ‘coverage declaration’ in respect of it;[48] or
a service provider gives an ‘access undertaking’ in respect of it (WICA s 38.)
Where a service provider has given an ‘access undertaking’ for the infrastructure service, IPART must still approve the access on the basis of statutory criteria in cases where the undertaking is lodged with it (WICA s 38(a)–(d)). Once approved, the access provider is required to negotiate in good faith to accommodate the access seeker’s requirements. If commercial negotiations break down and agreement is not reached, the matter may be referred to IPART for arbitration.[49]
The access seeker will need to request that the Minister declare the service covered by the access regime where: (a) the service provider has not agreed to access by suitable private arrangements (that is, without lodging an access undertaking with IPART) and the service provider has not given an access undertaking which has been lodged with IPART; or (b) the service has not been previously been declared. IPART will advise the Minister on whether he or she should declare the service.
A declaration will only be made if the service meets the ‘declaration criteria’ in WICA s 23. They reflect those in the TPA’s generic model and require that the infrastructure be of State significance; it would not be economically feasible to duplicate the infrastructure; access is needed to promote a material competition in an upstream or downstream market; the safe use of infrastructure can be ensured at an economically feasible cost and; access would not be contrary to the public interest. A service will not be the subject of a coverage declaration if it is subject to a binding non-coverage declaration (WICA s 25(5) (a) and Division 4), subject to a voluntary access undertaking (WICA s 25(5) (a) and Division 5) or IPART has determined, with the consent of the Minister, that it is a frivolous or vexatious application (WICA s 25(5) (b)).
If a declaration is made, the requirement to negotiate the terms of access using all reasonable endeavours will be triggered. If the commercial negotiations as to terms break down, the matter may again be referred to IPART for arbitration (WICA s 40).
In practice, the issue of access pricing will play an important role in the effectiveness of the access regime. This is discussed later in this chapter.
Part 4 (ss 45 & 46) of WICA creates a mechanism to resolve disputes about sewer-mining access, both as to the terms of a proposed agreement and as to the application of an established agreement. It provides for disputes between the sewerage-service provider and the sewer miner to be arbitrated by IPART or a person nominated by IPART, but only if the service provider has lodged a notice with IPART setting out the provider’s policy on sewer mining. The arbitrator must give effect to the service provider’s policy and, subject to that policy, any other matters prescribed by regulation. WICA does not require or authorise IPART to review or approve a sewer-mining policy.
The statutory policy would seem to be that sewer mining can only occur with the in-principle agreement of the sewerage-service provider that it is willing to consent to the extraction of raw sewage. The service provider may decide to manage sewer-mining access according to its own policy and entirely outside the WICA regime, just as it could before the enactment of that Act. WICA does not provide a mechanism to compel the service provider to grant access to the sewage resource itself, as opposed to the sewerage infrastructure. Sydney Water retains control over the amount of wastewater that may be extracted from its sewerage network so that it can ensure the effective operation of the network. That said, Sydney Water’s policy is to refer sewer-mining disputes to IPART for arbitration (Sydney Water, How to Establish a Sewer Mining Operation 2006: 8).
Yet, it would also seem equally possible for a potential sewer miner, whose activities are thwarted by the infrastructure owner, to achieve its end by going into competition with the infrastructure owner as a competitor in the provision of wastewater services. This method requires that the service is the subject of a coverage declaration and that a price determination has been made for the use of the infrastructure. However, by using this route the third party gains direct access to the sewage resource from the sewerage customers and is able to by-pass the infrastructure owner’s resistance to its sewer mining.
Legislation and codes such as the Local Government Act 1993, the Public Health Act 1991, the Protection of the Environment Operations Act 1997, the Sydney Water Act 1994, the Environmental Planning and Assessment Act 1979, the Australian Drinking Water Guidelines and the NSW Plumbing Code of Practice 2006 currently provide public health, public safety and environmental protections for the water industry. All service providers, whether they are continuing public utilities or new third-party entities gaining infrastructure access, will be bound to comply with these requirements. Hence, the access regime under WICA will operate subject to these prior protections. Technically, there is no question that health, safety and environmental protection standards will be by-passed by the introduction of private-sector, competitive involvement. Indeed, the Regulations Consultation Paper suggests that ‘the various legislative and regulatory drivers can therefore be viewed as supplementing the commercial drivers of suppliers to ensure that they deliver services at the level, quality and reliability customers need, at the lowest long-term cost (while also meeting health, safety and environmental obligations)’ (DWE, WICA Regulations Consultation Paper 2007: 11).
However, critics of water-industry competition question whether this objective is realistically achievable or whether the drive for profit necessarily compromises the ability to deliver services at the lowest long-term cost, while meeting health and environmental standards. They cite Sydney’s Cryptosporidium and Giardia scare (which the McLellan report found was probably, in part, linked to problems at the privatised Prospect treatment plant)[50] and Adelaide’s ‘big pong’[51] (which also involved a private entity in the form of United Water) to highlight the tensions of private-sector involvement in the industry. Critics also question whether the wider legislative frameworks beyond WICA are sufficiently stringent to deal with new problems that may arise as a result of third parties gaining access to public-utility infrastructure, for example. In that regard, it has been suggested that the Public Health Act 1991 be amended to introduce new offences prohibiting the supply of water which is a risk to public health and the supply of non-drinking water in circumstances where it could reasonably be mistaken for drinking water (MWBCO 2006, Creating a Dynamic and Competitive Water Industry).
The Regulations give the Act further shape, form and substance and the capacity to supplement the public health, consumer and environmental protections of the other legislation. WICA authorises the Governor to make Regulations pertaining to water quality and public health; construction and maintenance of water-industry infrastructure; consumer protection; licensing administration and licence conditions, for example (WICA s 1001 and Schedule 2).[52] The potential effect of regulations on these issues will not be explored here.
However, it is opportune to note a draft Regulation applying specifically to the access regime. The NSW Cabinet Office released its draft Water Industry Competition (Access to Infrastructure) Regulation in mid September 2007.[53] The draft nominates the persons whose submissions are to be invited in relation to coverage applications for an infrastructure service and these persons include the incumbent service provider along with various relevant Ministers. The Regulation also sets out the process for negotiating disputes concerning access determinations. It places an onus on the service provider to use all reasonable endeavours to accommodate the access seeker’s requirements but interestingly does not require those requirements to be reasonable themselves (NSWCO, Access to Infrastructure Services Regulation 2007: Div 2, 8 (3)). Further, it sets out a timeline for dispute resolution and outlines the basis on which disputes may be determined. The Regulation does not include a definition of ‘capacity’ or ‘spare capacity’, presumably recognising these as site-specific.[54]
As part of the process of developing the WICA Regulations, the New South Wales government endorsed some best-practice principles of regulation (DWE WICA Regulation Consultation Paper 2007: 11). One of those principles is that of periodic review and reform. Given the changing landscape of regulation, this is welcome.
Regulatory models are diverse and may embrace approaches including ‘centred’ regulation, a ‘hollowing out of the state’[55] or ‘smart’ regulation amongst others.[56] Although a discussion of regulatory theory and practice is well beyond the scope of this chapter, it is perhaps useful to observe, as does Julia Black, that regulation has developed into a multi-layered phenomenon which may be transnational, supranational, national or sub-national, for example. Regulation is ‘thus not simply an activity carried out by the state using laws backed by sanctions; it is a broader enterprise consisting of a sustained and focused attempt by state or non-state actors to alter the behaviour of others with the intention of producing a broadly identified outcome or outcomes’.[57] This will need to be borne in mind when assessing WICA’s effectiveness as a regulatory regime, particularly in relation to how well it deals with issues of proportionality, accountability, consistency and transparency, as well as its ability to target areas of risk.