Michelle Lensink

Water Industry (Third Party Access) Amendment Bill

Second Reading of the Water Industry (Third Party Access) Amendment Bill

Second Reading

Adjourned debate on second reading.

(Continued from 19 March 2015.)

The Hon. J.M.A. LENSINK ( 17:13  ): I rise to make some remarks in relation to this particular piece of legislation, which will provide a legislated regime for third party access to water and sewerage infrastructure in South Australia. In reality, what that means is third party access to SA Water infrastructure, given that they are a vertically integrated monopoly provider of potable water and sewerage services for metropolitan Adelaide households, the majority of industry, and a significant number of country SA customers, and historically have been the provider of these services and also have built the infrastructure to take those services to their customers.

A third party access regime should be designed to enable other players in the water industry to utilise, for a price, an existing supplier's infrastructure (that is, SA Water's) to supply services and therefore provide some level of competition.

In theory, bulk water has been able to be purchased through trade since the liberalisation of water licensing. The most notable scheme that exists is that run by Barossa Infrastructure Ltd., or BIL, which provides approximately 6,000 megalitres of untreated river water to irrigate wine grapes. This scheme was driven through SA Water by the former water minister, the Hon. John Olsen. I am advised that, had it not been for his determination, SA Water would have resisted it and it would not have happened.

Other examples that people mention, which actually are not third-party access, include the Salisbury council wetlands, through aquifer storage and recharge. It is not actually third-party access because SA Water was so intransigent that it led to Salisbury council installing its own pipe network system to service customers. Similar situations exist in and around the River Murray where there is private infrastructure which is also not third-party access because that has been built specifically for those customers and not through SA Water.

Support for a robust third-party access scheme has been a key platform of the Liberal Party over successive elections and continues to be so. Labor has had sort of latent support for third-party access. Competition in the water industry is a requirement under national competition principles, and it was first mooted by the Labor Party through Water for Good, which anticipated that a scheme would be in place by 2015.

The Water Industry Act of 2012 made some minor progress by requiring that a report be undertaken prior to a bill being drafted. The Department of Treasury and Finance report was published in February 2013, with a further round of consultation on the draft bill taking place in November 2013. This bill was tabled again late last year and, most recently, in February 2015.

I will discuss the contents of the DTF discussion paper in a bit more detail because I think it is a bit telling about the government's intention with third-party access. The discussion paper that was released in February 2013 was entitled 'Access to water and sewerage infrastructure'. It raises the option of ESCOSA's—that being the Essential Services Commission of South Australia—regulatory role being extended to include a state-based third-party access regime and how that may occur, from maintaining the status quo, which is negotiation on a case-by-case basis at SA Water's pleasure, to a state-based access regime with oversight by ESCOSA.

In my opinion, the options in the DTF paper are skewed to the outcome that the government was seeking; that is, a replication of the rail scheme, which ESCOSA subsequently argues against. Essentially, there is not the same vertical integration, competition is available through other modes of transport and the ACCC can make binding price determinations, but the rail scheme is the model contained in the bill.

The DTF paper describes a legislative scheme as a 'safety net' which confers, I quote, 'rights on the access seeker in relation to negotiating access and imposing obligations on the infrastructure owner when the access seeker exercises those rights'. Options proposed include setting pricing principles which, I note in the bill before us, only takes place once the issue has gone to arbitration, and also keeping separate accounts, which is contained in the bill.

In my view, the bill before us skews the balance too far towards the infrastructure owner; that is, SA Water. The bill also allows for flexibility for parties to negotiate outside of the access regime. The DTF paper discusses options for light versus heavy-handed regulation, and says the following:

A state-based access regime can provide guidance to the infrastructure owner about the terms and conditions of access, including price.

While light handed models of access regulation generally do not impose on the infrastructure owners or an arbitrator binding guidance on terms and conditions of access, some measures could be included in such a state-based access regime for water and sewerage infrastructure to ensure that sufficient information is made available to the access seeker and arbitrator to assist in negotiation and arbitration.

The paper suggests that a light-handed regime would consist of monitoring commercial negotiation and arbitration yet, even in these elements, my reading of the bill is that ESCOSA's role is quite limited.

In my view, the DTF paper only covers what the government had already predetermined is significant infrastructure, which it defines as: 'not easily duplicated and has a natural monopoly'—which is listed in a table on page 14 of that document—that is, water distribution transport, bulk water transport, local sewage transport and bulk sewage transport. It excludes other areas such as retail services and bulk water supply. The DTF paper also argues for an independent arbitrator.

The submissions to that paper closed in March 2013 with an expectation that a draft bill was to be released 'by mid-2013 for further public consultation' and introduction into parliament in September 2013. There were only six submissions to that paper in total with a preference for light-handed regulation. None of the submissions advocated full retail contestability. ESCOSA's submission argued that the regulatory model should be strengthened, and Treasury said that it anticipated that third party access may lead to greater competition for non-household water users. I quote:

…the connection of the pipelines means that access to these services could stimulate competition in the market for River Murray water entitlements. For larger commercial, industrial and agricultural users, access to SA Water’s bulk water transport infrastructure could also facilitate competition between alternative water sources.

SA Water's submission to that discussion paper was interesting. It contained quite a few reasons why it would be hard in practice to implement third party access and argued that an internal access regime is the cheapest option. I note that it also stated that the private sector already provides 90 per cent of SA Water's capital projects and more than half of its operating expenditure, with a Productivity Commission report placing that at 65 per cent. It had some interesting comments in relation to bulk water prices. I quote from page 5 of their submission:

The availability of water from access to a large active water market satisfies a very important condition for the development of competition in water supply as substantial quantities of bulk water are readily accessib le, and subject to competition.

My comments in relation to that are that, yes that is correct when the Murray-Darling Basin is not subject to restrictions but, when it is subject to restrictions, that matter is certainly quite different. Continuing the quote from SA Water's submission:

SA Water has no strategic advantage in this area and there are no competitive barriers in the SMDB [southern Murray-Darling Basin] market.

I disagree with that comment, given that SA Water already has existing access to all those assets. It certainly has the market share and historical advantages, so I believe it does actually have advantages in that area.

ESCOSA's submission to the February 2013 DTF discussion paper certainly disagreed that initial regulation should not be very light-handed. There is a nuance between 'light-handed' and 'very light-handed' in terms of regulation. I take it that ESCOSA took the view that the proposed model was very light-handed rather than just light-handed.

When we are talking about these matters it is not just whether it is an internal access regime but also how much of the determination is placed with the regulator. Through its submission, ESCOSA clearly believes that further reform is required and that a 'strong, comprehensive and effective state-based access regime is imperative' in order to fulfil the objects of the Water Industry Act.

It also compares SA Water as a vertically integrated monopoly provider to the situation that we saw several years ago with Telstra which was a monopoly provider of telecommunications, stating that the access regime for the latter—that is, Telstra—was in fact stronger than that contained in this proposed regime. I think we are all aware of the legal disputes that took place over several years where I think it was Optus which was trying to gain access to Telstra's infrastructure.

Continuing with ESCOSA's submission, it presents the view that DTF's report should have gone further and focused on two main matters, firstly the scope of assets and to the light-handedness, specifically criticising DTF's argument of the use of the natural monopoly test as the only criteria for access and that this had indeed been struck down by a High Court ruling in 2012.

In relation to the assets, ESCOSA said that it only covers those four components of the supply chain—that is, bulk water transport, water distribution network, bulk sewer transport and local sewerage transport—and clearly believes that more infrastructure services should be included within the access regime. I will quote from page 3 at paragraph 210 of ESCOSA's submission:

No reasons are given for exclusion of other supply chain elements, other than the suggestion that a 1997 report prepared by Tasman Asia Pacific identified only four elements of the supply chain as meeting the criteria for declaration of access.

It was also critical of the rationale for the proposed model. It said that the market analysis for that had not been released and one of my questions for the government is: will it actually provide the market analysis? It also criticised a lack of reference for access to other resources, specifically a lack of requirement to negotiate bulk supply agreements and also to enable sewer mining.

Again, sewer mining has been something that the Liberal Party has advocated for. ESCOSA's submission also advocates that the regulator should have the discretion as to whether it sets prices directly or whether negotiations are the first step, as is contained now in the legislation, with ESCOSA stepping in to arbitrate or appoint an arbitrator if this fails. As ESCOSA noted:

While a negotiation model is the ideal, it may be unlikely to work without at least a credible threat of regulatory escalation to very strong levels.

ESCOSA also argued that it should be the arbitrator rather than the appointer of an independent arbitrator given its complex and specialist knowledge. It also argued that the minister should not be involved in arbitration because of conflict of interest and the fact that arbitration may provide the minister with access the commercial information of SA Water's competitors.

In my view, the DTF discussion paper asks a number of leading questions such that respondents who are not deeply familiar with the issues would not suggest changes outside of the scope of those questions. There was a low number of submissions. I note that most in the water industry in South Australia are customers of SA Water and bid for work, and therefore do not want to jeopardise their opportunities, and that is certainly the off-the-record advice that I have received from several people within the industry.

I believe that we need transparency in pricing. One of the other things that people who work in the industry tell me is that SA Water are masters at obfuscation and delay. I believe that this bill keeps ESCOSA further away than at arm's length and with an even less significant role than it has in setting of water and sewerage prices. I also note that the Water Industry Alliance in 2011 in relation to comments on the draft of the Water Industry Bill of 2010 stated that a third party access regime inclusive of access pricing should be operational from the time of ESCOSA's first price determination which is now long gone, that being 2013.

The draft bill was tabled in November 2013. At that stage DTF said, 'It was not considered necessary for the regulator to set access prices as explicitly as it does when regulating SA Water's retail services.' I am not sure what the validity or rationale is for those comments, because they were not justified in any way; they were just left there as a statement.

ESCOSA was disappointed (I think that would be an understatement) that there was no change from the previous comments made earlier that year, and in response said, 'the nature, strength and scope of the proposed regime is so limited as to materially impede the delivery of those benefits to South Australians.' On that basis ESCOSA recommended that those provisions be revisited.

ESCOSA also said, 'This provides no certainty to potential access seekers or the community at large.' ESCOSA also noted that in a negotiate/arbitrate model the transaction costs may be increased and transparency decreased. Those are certainly concerns that the independent regulator has had in relation to this piece of legislation.

Turning to other matters in the bill, the process, as I read it, appoints ESCOSA, in a limited role, as the regulator of a negotiate/conciliate/arbitrate model, and the following are steps in the process for what is defined as an 'access seeker', or applicant, to apply for access to a regulated operator—that is, SA Water in most instances.

First, a regulated operator has 30 days to provide an applicant with a brochure (86F of the bill), and the brochure information must contain the terms and conditions on which it is prepared to make its infrastructure available, the procedures it will apply and the information about prices and costs associated with access.

The second step is that, on application, a regulated operator must provide technical information to an applicant regarding current utilisation, the 'likely' price, or reasons why access cannot be provided. I note that in this particular clause at 86G there is no time frame and no penalty for failure. The regulated operator can also charge the applicant for providing this information. I have quite strong concerns about these particular provisions. I think they continue to place a lot of power within the hands of SA Water without any independent or transparent process to provide access seekers with that information.

The third step is that the applicant writes to the regulated operator to outline the access they are seeking and their proposed terms and conditions (so at this stage we are still in the negotiate phase). The regulated operator then has a right to seek more information. The regulated operator has one month to notify the applicant and ESCOSA of its decisions (this is the first reference we have to ESCOSA in the process, and this is clause 86I).

The fourth step, which is 86K, is that if, after two months, the regulated operator and applicant cannot agree, a dispute is seen to exist, which may be referred to ESCOSA by either party. In the fifth step, a dispute which is referred to ESCOSA must, in the first instance, be subject to voluntary or compulsory conciliation (86M of the bill). In step six, if, after six months after referral to ESCOSA for conciliation the dispute is not resolved, ESCOSA can refer the matter to independent arbitration. ESCOSA's role is to appoint an independent arbitrator but it may not appoint itself as arbitrator. If the matter is still not resolved ESCOSA can direct a fresh round of the same (86M).

Clause 7 relates to arbitration, and has long list of matters which must be taken into account. I have some concerns with those, which I will address at a later date (that is 86P of the bill). I also note that the minister can be party to the arbitration (86S). We have a pretty long drawn out process. For those in the industry who say that SA Water are masters of obfuscation, they certainly have plenty of opportunities in this process before us at which they can delay. They can charge the applicant things and they are not subject to penalties for not providing things on time at 86G, so some seven months down the track, when the matter has gone to arbitration, there still may be no resolution.

The point of going through all of this in so much detail is just to say, why would an applicant bother? That is what has been put to me: why would applicants bother? Their preference is for a transparent scheme where SA Water does not have all the cards in its pack, which is certainly the way that this piece of legislation has been designed.

There are key issues. There is the matter of arbitration and the process, which I have just spoken about in detail, and also the key issues, being the scope of assets, which is 86B, which I have spoken about already, and the limited role of ESCOSA, which does not set the access charges for applicants up front. In the initial process of application, it is SA Water's role to send out brochures, set its own prices and report to ESCOSA when it has made a decision about whether to grant access.

ESCOSA has its first dib at this if a dispute arises leading to mediation or arbitration, although it cannot appoint itself as the arbitrator. As I have said, my understanding of this is that ESCOSA's role is even less significant than that it plays in setting water and sewerage prices. With those comments, the Liberal opposition welcomes the debate. We are pleased that the bill has been tabled again, but I will be bringing forward a number of amendments which are still under discussion with a number of stakeholders. I will obtain those for honourable members and for the government at the first practicality and I look forward to the committee stage of the debate.

Second Reading

Adjourned debate on second reading.

(Continued from 5 May 2015.)

The Hon. J.M.A. LENSINK: In relation to consultation matters, two sets of stakeholders have contacted me this year in relation to concerns about potentially being covered by the bill. I will invite the minister to comment in relation to the first stakeholder, the Local Government Association, who on 4 May sent me an email to say, in part:
Following the receipt of legal advice, we understand that C councils will only come within the purview of the B ill if they are subsequently ' proclaimed ' to fall within the ambit of the proposed provisions. I am therefore writing to let you know that we are writing to the Hon Minister Hunter to seek his assurance that C councils will not be ' proclaimed ' under the new provisions , as the B ill does not make any provisions for exempting local government.
I just ask the minister to comment in relation to the LGA's concerns and whether it is the government's intention to proclaim any of their assets.

The Hon. I.K. HUNTER: I thank the honourable member for her question. It is proposed that the access regime will be fully applied to the bulk water transport services provided by the following SA Water pipelines: Murray Bridge to Onkaparinga systems, Mannum to Adelaide, Swan Reach to Paskeville, Myponga to Adelaide, Morgan to Whyalla, Tailem Bend to Keith, Eyre Peninsula, Glenelg to Adelaide. In relation to the LGA's correspondence and their suggestion there should be consultation prior to the proclamation of the infrastructure services of the proposed bill, this government is happy to commit to undertaking consultation on the proposed proclamations before they are made and, indeed, this is what the government has done in the lead-up to this bill, so we will have no problems with that LGA suggestion at all.

The Hon. J.M.A. LENSINK: In relation to the second group of stakeholders, I understand that BHP Billiton and Santos are similarly concerned that they may also be captured by the bill. I understand that consultation has been taking place through the Minister for Mineral Resources and Energy. Can the minister also comment in relation to what the government's intention is?

The Hon. I.K. HUNTER: The first part of my answer to this is similar to the LGA in terms of listing those systems. In terms of other companies like BHP and Santos it is worth noting this Productivity Commission note on national access regimes; that is, access regulation is unlikely to increase efficiency where the infrastructure services provider has no ability to affect downstream markets, for example, where prices are determined in world commodity markets. Access regulation would need to lead to more efficient outcomes than would be achieved through negotiation between the parties.

So access regulation should not be used to avoid the duplication of infrastructure per se or to address wider social and economic issues such as income distribution or environmental concerns. These observations suggest that the infrastructure services provided by private sector operators, such as those listed by the Hon. Michelle Lensink, in state mining or agricultural sectors, would face world commodity markets every day of the week, and they would be unlikely to be proclaimed under this access regime into the future because it would not meet the requirements of the national access regime.

The Hon. R.L. BROKENSHIRE: I rise to put on the public record Family First's final position regarding this bill because during the second reading speech I said that we supported the intent but we may either table or look at other parties' or colleagues' amendments. Since then we have been able to carefully look at amendments and also have had meetings with the minister's chief of staff and adviser.

We understand that the South Australian Council of Social Service (SACOSS) is now happy with the way in which the government has things structured. We did look at the opposition's amendments, but this is something that we have wanted to see happen for well over a decade, and in fact it goes back closer to two decades now that we actually got some legislation coming through like this.

We now do have that legislation. It may not be perfect according to what some members may desire, but it is a very strong step in the right direction. When we were advised by the government that with some of the opposition's amendments there could be potentially unintended consequences where people with dams or bores on their farming property may have a situation where they would have to actually—

The Hon. J.M.A. Lensink: That is not true, Rob.

The Hon. R.L. BROKENSHIRE: That is the advice that we have had. That actually is of huge concern, because that goes out of the scope criteria and what we were desiring to have when it came to third party access with respect to the water industry. Having considered it, noting the importance of getting on with this and the time that it has taken, notwithstanding that as a caveat we will monitor and watch this and we will not be frightened and we will be asking questions of the minister, if we do not see people being able to access, we will not be frightened then to either put up private members' amendments or request the government put up further amendments. As a strong step forward, all things being considered, Family First will be supporting the government's existing legislation.

The Hon. J.M.A. LENSINK: I was not going to make any more remarks at this particular clause. I was just going to address some comments in relation to particular amendments, but I have to say that, having heard the Hon. Rob Brokenshire's comments just now, I am incredibly disappointed in him as someone who offers and proclaims that he is a champion of people on the land. For him to use the word 'strong' in relation to this regime I find somewhat staggering. If he talked to anybody in the water sector, he would know that this particular regime has been deliberately designed to ensure there is as little competition as possible and therefore those in primary production are unlikely to benefit from third party access as they might have hoped.

I do note from his comments that I think he has succumbed to two issues the government has raised in relation to some of the amendments that I had drafted. One is that farm dams might be captured. I will put that as a question to the minister, if he would not mind tabling some advice that states that. From my understanding, this bill applies only to the definition of 'regulated operators', which are proclaimed under the act. How that applies to a private farm dam is really beyond me and I will have some more questions following the minister's response on this.

The CHAIR: Minister.

The Hon. I.K. HUNTER: I haven't been asked a question; I thought it was coming later.

The Hon. J.M.A. LENSINK: It was a comment, but there was a question in there, which was: is it the minister's advice that my amendments, particularly 1 and 2, could potentially capture farm dams? Will he table the advice or provide some further comments to explain that, please?

The Hon. I.K. HUNTER: My advice is that it is probably the first set of amendments filed by the Hon. Michelle Lensink which had the potential to cover farm dams. I understand this is a second set of amendments that she has filed, changing a provision under clause 1, and my advice is that with the second set of amendments it is unlikely that farm dams will be covered at amendment No. 2.

The Hon. J.M.A. LENSINK: I will just respond and say that neither the first nor the second version would have captured farm dams, because they are not part of the water industry under the Water Industry Act: they are part of the Natural Resources Management Act. I would assume that somebody in crown law or among the many thousands of people who are employed within the government could have pointed that out to the minister. The second set of amendments made that completely and abundantly clear, just in case the government continued to use that to try to fool people, as they seem to have fooled the Hon. Mr Robert Brokenshire into not being able to support this particular amendment.

In relation to certification of the scheme, if I can just draw members' attention to two documents which are COAG documents: one is the Competition Principles Agreement which is dated 11 April 1995 and which is signed by all jurisdictions, and there is a further document, the Competition and Infrastructure Reform Agreement signed 10 February 2006, and I thank the minister's advisers for providing me with that particular document.

In the Competition Principles Agreement 1995 the relevant clause which has been lifted and inserted into the bill is No. 6 entitled 'Access to services provided by means of significant infrastructure facilities' and, in particular, subclause (4)(i) which I understand mirrors 86P(1) of the bill. Further, in the Competition Infrastructure Reform Agreement, the officers drew my attention to 2.4 which falls under the heading 'Simpler and consistent regulation of significant infrastructure'—and most of that is reflected in clause 7 of the bill as well, at 86P(2). I just make those comments.

Again, there has been some fairly deliberate misinformation put about in relation to some of my amendments. Can the minister say what advice he has received from the National Competition Council and whether these specific amendments were brought to their attention in attempting to assess whether the scheme would be certified if my amendments were included in the final legislation?

The Hon. I.K. HUNTER: There are a couple of points. I am grateful to the Hon. Michelle Lensink for further elaborating because she has really made my point for me. The issue about her amendment is simply this: it is not clear what the consequences will be because what her amendment does is to take away the ability of government or parliament to actually determine what will be covered and what will not be covered, and hand it to an unelected body, ESCOSA.

I have already made the point that ESCOSA has pursued before, and possibly will again, some fairly economically devastating policy positions which would impact vulnerable people and vulnerable communities far more than it would impact on anybody else. What the Hon. Michelle Lensink's amendments are trying to do is to take away the ability of government to set the parameters and give it to an unelected body.

The question she asked me earlier about BHP and Santos, about whether I could give a commitment that they are captured, under her amendments I could not give that commitment because I would not have that power—because she wants to hand it to ESCOSA. This is the key crux of her amendments: she wants to take away the ability and hand it to an unelected body that has no consideration or no concern about impacting on community. They take a very narrow, dry, economic window and that is what they pursue. That is fine; that is what they are there for, but it is the government's role and the parliament's role to take into consideration other aspects, and one is the social impact. That is why we are opposing the Hon. Michelle Lensink's amendments.

In terms of whether I had passed her amendments to the National Competition Council for any remarks, the answer is no. I sought my own advice internally about the potential for changes that she has elaborated in these amendments to cause us some difficulty with certification. My advice is that there is that potential. However, the key crux of the matter is this: the Hon. Michelle Lensink's amendments will give power to ESCOSA with no direction from government. It could pursue its own schemes for its own purposes, which is economic efficiency and support that from that perspective, but government would not be able to give a direction—and we oppose that position.

The Hon. J.M.A. LENSINK: I note with interest that ESCOSA are now the bad guys, even though their charter is protection of consumer interests. Nevertheless, I move on. The minister has an amendment himself to one of these principles. Has he also sought advice from the NCC on whether that will have any impact on certification?

The Hon. I.K. HUNTER: My advice is that, of course as we move further and further away from the core principles that have been set out for us to adopt, the risk increases that we may not get certification. My advice is simply that, in terms of the undeveloped market we have at the minute, this amendment that I propose to move at clause 7 should be acceptable. I stand to be corrected if we find out ultimately that it is not certifiable, but our strong view is that it probably will be.

The Hon. J.M.A. LENSINK: I take it then that, no, it has not actually been checked with the NCC, and that the government also cast similar concerns about some of the Greens' amendments as potentially jeopardising certification without having checked. Nevertheless, my final point that I would like to raise at this particular juncture is in relation to certification. From what I understand at the moment through national laws, various parties are able, if they feel aggrieved through competition or lack thereof, to take action through the ACCC or through the National Competition Council, but that once the scheme is certified that avenue is closed off to them. Could the minister comment on that particular matter?

The Hon. I.K. HUNTER: My advice is that the whole process on which we are embarking is actually designed to make sure that the access regime we are instilling in this bill will be complied with, so the national access regime will no longer be available once this regime is in place.

Clause passed.

Clauses 2 to 4 passed.

Clause 5.

The Hon. J.M.A. LENSINK: I move:

Amendment No 1 [Lensink–1]—

Page 3, lines 21 to 24, page 4, lines 1 to 7—Delete subsections (1), (2) and (3)

These amendments arise from ESCOSA's strong view in relation to consultation. Amendments Nos 1 and 2 (No. 2 being at clause 7) relate to the same issue, that is, the scope of assets. ESCOSA—as the minister described them, the unelected body (mind you, the commissioners are all appointed by the government)—said that they clearly believe there was more infrastructure that should be included within the access regime. I will quote from one of their submissions. It stated:

No reasons are given for exclusion of other supply chain elements, other than the suggestion that a 1997 report prepared by Tasman Asia Pacific identified only four elements of the supply chain as meeting the criteria for declaration of assets.

In relation to this, ESCOSA at the time had been critical that the government had not actually released the market analysis. I understand that still has not taken place.

One of the areas that the Liberal Party has advocated before is, for instance, sewer mining, and we believe that ESCOSA ought to be the body that can make the determinations about which assets should be included. As I have said before, they are there to protect consumers and we believe they are the body best placed to make these sort of decisions. I think the government is going to continue without any amendments to this piece of legislation to continue to itself cherry-pick which parts of our water and related segments participate in this scheme. Therefore, we think that ESCOSA ought to have a greater scope under this particular regime.

The committee divided on the amendment:

Ayes8

Noes11

Majority3

Amendment thus negatived; clause passed.

Clause 6 passed.

Clause 7.

The Hon. J.M.A. LENSINK: The next amendment is consequential to No. 1 so my explanation should suffice, and I will not divide on this one. I move:

Amendment No 3 [Lensink–2]—

Page 5, after line 29—Insert:

86BA—Pricing principles

The pricing principles relating to the price of access under this Part are as follows:

(a) That access prices should be set so as to generate expected revenue that is no more than necessary to meet the efficient costs of providing access;
(b) That access prices should allow multi-part pricing and price discrimination when it aids efficiency;
(c) That access prices should not allow a vertically integrated operator to set terms and conditions that would discriminate in favour of its upstream and downstream operations;
(d) That access prices should provide incentives to reduce costs or otherwise improve productivity.

This is in relation to who should set access prices. This is a key issue in that we strongly believe that ESCOSA should be the price setter. The current process, which is outlined in the bill, for anyone who applies for access is as follows: apply to SA Water and then negotiate with SA Water. If this fails, ask ESCOSA to mediate or, if that fails, ESCOSA can then appoint an arbitrator.

In our view, ESCOSA's role as independent regulator is limited. In its submissions, ESCOSA recommended that it should have the discretion as to whether it sets prices directly. What amendments 3, 7 and 11 standing in my name have the effect of doing is enabling ESCOSA or the access seeker to go to ESCOSA to seek a price rather than undergo this long, convoluted and incredibly expensive and obfuscated process in order to get a price.

In relation to concerns that SACOSS have had which have been expressed to a number of members, myself included, Professor Dick Blandy, in providing evidence to the Budget and Finance Committee, was asked about assets and the like. He made the point that regulators, that is ESCOSA, are not going to cause the utility to have financial difficulties because they recognise that that is not in their interests. He described ESCOSA as a very reasonable body looking at these matters and, 'if I can say so, very professional.' He also said, 'I have huge admiration for the work that ESCOSA did over the time I was there.'

My understanding is that ESCOSA certainly does not have the view that they are there to make life difficult for the utility: they are there to provide fair prices, and that is something that they have fought for very hard. This particular clause is probably the most important one that I have had drafted, and I will be dividing on it.

The Hon. I.K. HUNTER: The government will oppose this clause. It is probably the second most dangerous, I suppose, of the set of amendments that the Hon. Michelle Lensink is moving today. I just want to back pedal a bit and talk about ESCOSA. No-one has made any assertions that ESCOSA are not in the business of looking after the consumer, or protecting consumers, but they do it through a very tight lens of economic efficiency. That is their job. That is our expectation of them. It is not their role to consider social impacts of the decision-making—

The Hon. J.M.A. Lensink: Yes, it is.

The Hon. I.K. HUNTER: That is our role.

The Hon. J.M.A. Lensink: No, that's not true. You read the act.

The Hon. I.K. HUNTER: Social impacts do not come into their purview. This amendment inserts the pricing principles as relating generally to the price of access under this access regime, rather than matters that the arbitrator must take into account when making an award. It is difficult to consider this amendment on its own, so I will refer in part to coming amendment Nos 7, 8 and 11 by the Hon. Michelle Lensink to explain our opposition to this amendment.

This raft of proposed amendments introduce a new untested model, one that perhaps could be described as: negotiate, regulate and then arbitrate. It is an untested model. It is totally new. The South Australian water industry, in our view, should not be the guinea pig for this untested model—

The Hon. J.M.A. Lensink: So is your bill.

The Hon. I.K. HUNTER: No, our model has been tested in other regulatory regimes.

The Hon. J.M.A. Lensink: Yes, and it hasn't been very successful there either.

The Hon. I.K. HUNTER: At least it has been tested and we know where the bumps in the road are to be ironed out. This is a totally new proposition and it is a very risky proposition at that. The negotiate-arbitrate model we are preferring would require SA Water to develop its pricing and access terms and conditions. This would enable SA Water to adopt a retail price, less avoidable cost approach. This approach has been adopted in other states and for other infrastructure services. It is suitable for a retail market that is subject to regulation and with requirements like statewide pricing.

The government, as owner of SA Water, retains the capability under section 6 of the Public Corporations Act to direct, if required, SA Water to adopt this approach. I have already said that that will be our intention. The proposed amendments of the Hon. Michelle Lensink hand the access pricing model decision to the regulator. It is clear from ESCOSA's report on pricing structure that it prefers, from a pure economic perspective, a pricing structure that will have a significant negative impact on the welfare of small and vulnerable customers.

Under the proposed amendment of the Hon. Michelle Lensink, the regulator would have the power to pursue a pure economic approach, and they have done it already. They have done it already, and the government has rejected that approach because it hurts the people that we should be looking after the most.

Proposed amendment No.11, which I said needs to be considered in conjunction with this amendment, would require the regulator to make a price determination in relation to access if a dispute is referred to arbitration. Given that access applications may vary significantly in terms of their number and complexity, this approach to access regulation could come at quite a significant cost to SA Water customers.

The proposed amendment would prevent the arbitrator from having any discretion in relation to price and weighing up the matters that it has to consider in making an award. For these reasons, I strongly urge the committee to oppose this amendment by the Hon. Michelle Lensink and subsequent ones.

The Hon. J.M.A. LENSINK: If I could just respond: my, how the rhetoric changes. When ESCOSA was first set up by former Premier Mike Rann in 2003, I do not think he quite described them as the Eliot Ness of regulation of utilities, but certainly they were going to be a strong regulator. We have seen through the whistle-blower comments of Dr Paul Kerin (now Professor Paul Kerin) how the government has managed to hamstring the so-called independent regulator on the pricing of water and sewerage. The minister has referred several times to their particular report.

The evidence we have been provided by former commissioners and the former CEO, Professor Kerin, who I am more inclined to believe, is that they were basically forced into a position where they did not have any ability to make recommendations that would have been much broader. So, I do find some of the comments in relation to this debate rather extraordinary, in that the independent regulator, which has the charter and which has an act of parliament which clearly state that its role is protection of consumers, is suddenly being portrayed as some sort of economic rationalist in all this debate. I will read some further comments of Professor Blandy who, when asked about third-party access, said:

Access by competitors is of course... incredibly important … in terms of keeping pressure on prices. So far I think there is very restricted access by competitors on the South Australian water network. A good model of regulation would be for SA Water to provide access to its pipes for anybody who wants to put the water down the m to provide for consumers. Of course, if they could do so at a much lower cost than SA Water, this would put real pressure on SA Water in terms of its customer base.

That customer base, of course, includes all the people who are covered by it, including the people SACOSS particularly has concerns about. I just find the way that this debate has been twisted rather extraordinary, but nevertheless we will continue to argue the case.

The committee divided on the amendment:

Ayes8

Noes11

Amendment thus negatived.

The Hon. J.M.A. LENSINK: I move:

Amendment No 4 [Lensink–2]—

Page 7, line 18— Delete '$20 000' and substitute ' $200,000’

All honourable members in this place will appreciate that I can count the numbers, and I will not be calling 'divide' on any more of these, but I think those two particular issues were very important for us to get on the record. These ones fall into the category of what I would call obfuscation and delaying opportunities. Many honourable members would be familiar with the experience nationally in telecommunications and the way in which Telstra caused undue delay to access to its infrastructure as a way of keeping our competitors such as Optus, and that got dragged on through the courts for some time.

I believe there are many elements of this bill which also fall into that category. This one, in particular, amendment No. 4, is in relation to the information brochure. The new proposed 86F, which will be inserted into the act, provides that the regulated operator must provide a brochure within 30 days and there is a maximum penalty of $20,000, which is kind of not really much of an incentive at all. So for that reason we are proposing that this particular one should be increased to $200,000 as a greater incentive to ensure that that is done in a timely manner.

The Hon. I.K. HUNTER: The government opposes the amendment, notwithstanding the intent of the Hon. Michelle Lensink in this matter, but we need to consider what this might do for a provider who wants to engage at this very early stage in a very undeveloped water market, designing new systems, testing those systems and having to respond to these requirements. Setting such a heavy penalty at this stage of the legislation and the market is, we consider, far too onerous. It might be something that you will revisit after you do a review of it after a couple of years, but at this stage such a heavy penalty we think is not commensurate with the objective of trying to make this access regime work.

Amendment negatived.

The Hon. J.M.A. LENSINK: I move:

Amendment No 5 [Lensink–2]—

Page 7, after line 42—Insert:

(3) The information must be provided within 30 days (or a longer period allowed by the regulator) after the regulated operator receives the application.

(4) If a regulated operator fails to comply with this section in any respect, the regulated operator is guilty of an offence.

Maximum penalty: $200,000.

Similarly, this relates to proposed 86G which will be inserted into the act, which provides for information that is requested by the access seeker. I note that the government has not introduced either a time limit or a penalty into this particular clause which we think is reasonable to do so. So we have inserted that the time limit for providing that information back to the access seeker be 30 days (which is the same as has been put in 86F) and that a penalty of some $200,000 be applied for failing to do so.

I do note that the 'poor little organisation' that the minister was referring to in his previous explanation was SA Water rather than some sort of small utility. I think even $200,000, it could be argued, is probably not enough incentive for that. But, be that as it may, we believe that this amendment has merit.

The Hon. I.K. HUNTER: Again, we oppose this amendment. In the same manner as amendment No. 4, imposing a penalty of $200,000 at this very undeveloped stage of the water market, when the systems need to be put in place to actually affect these changes in terms of third-party access, we think is putting the cart before the horse. This is something you would do after you have had a review of the act and its efficiency, and if you need to impose these sorts of penalties, that is when you would do it; you would not do it now at the outset.

Amendment negatived.

The Hon. J.M.A. LENSINK: I move:

Amendment No 6 [Lensink–2]—

Page 10, line 20—Delete '6 months' and substitute ' 3 months’

This amendment relates to the time permitted for arbitration before it is considered not resolved. The advice that I have received in relation to arbitration is that it is better if it is done in a shorter time frame. Again, in relation to the ability for the regulated operator to obfuscate and delay, we believe six months is too long and so we have sought to make that three months.

The Hon. I.K. HUNTER: Again, we are basically taking a model that already works in terms of, I understand, the railway access legislation process. That model has worked; that time frame seems to have been appropriate. We think, at least in the very early stages, we should model that on the previous successful railway access legislation. We do believe three months is too short, again, for the reasons I have stated in relation to the other two amendments. We are just setting this process up. We need to work our way through it. We have a successful model that works with the railway access legislation; let's copy it. We believe that is the appropriate way forward.

Amendment negatived.

The Hon. I.K. HUNTER: I move:

Amendment No 1 -

Page 11, after line 33—Insert:

(ia) any direction given to the regulated operator (in the case of a regulated operator that is a public corporation) by its Minister under the Public Corporations Act 1993 that is relevant to the arbitration; and

Whilst I said earlier that I consider this bill sufficient in its current form, in response to some concerns raised by particularly SACOSS and some crossbench legislative councillors, I have moved this amendment that would provide further comfort that existing retail customers will not be impacted by new access contracts.

This amendment would require the arbitrator to take into account any direction that I give to SA Water under section 6 of the Public Corporations Act 1993. These directions currently include non-commercial activities performed by SA Water, such as fluoridation and state-wide pricing. It is my intention to provide SA Water with a direction regarding the basis for negotiating access prices with an access seeker, which would include retail minus avoidable costs.

Through the current regulatory framework, the government will also have the ability to ensure this bill does not impact prices for small retail customers, as well as ensuring that there continue to be adequate arrangements for concessions and community service obligations. This government is confident that this bill would not have significant adverse price impacts on small customers. However, this amendment does give extra comfort for those people who continue to have those concerns.

The Hon. J.M.A. LENSINK: I note that this is one of the amendments that the government is making to the pricing principles and has not been checked by the MCC, and therefore under its rationale of opposing other amendments they could potentially ensure that the regime is not certified.

The Liberal Party was going to support some of the Greens' amendments, those ones that would have sought public openness and transparency. We thought they were actually a very good solution and we are very happy to support those, so we are a bit disappointed that those ones are not going to be included.

It is unsurprising that the government prefers that the default position for these hearings should be held privately. I do note that the Greens also had an amendment that if there were commercial in confidence requirements that they should be adhered to. My concern with this particular amendment, which the minister's office only sent to me at 10 minutes to 5 yesterday, knowing that our process is to have things submitted to our own party room by Monday so that they can be considered at 3 o'clock on a Monday afternoon, is that this clause may be much broader than what the government intends to do. My understanding is that the concerns of SACOSS relate to CSOs and that there is nothing really to undo the community service obligations that would come about by the passage of the bill as it is. My concern is that this direction is going to be given, potentially, much more broadly.

My question to the minister is: how broad is this? I do not think there are any restrictions on any matters, so perhaps I am answering my own question, but it really does allow the minister to give directions in relation to any matter. Why did the minister not consider that it could have been drawn more tightly and refer specifically to CSOs or done in some other manner that referred to CSOs so that it directly addressed the concerns raised by SACOSS?

The Hon. I.K. HUNTER: My understanding is that section 6 of the Public Corporations Act gives me incredibly wide powers now. I can give a direction to a public utility such as SA Water in any manner that I consider fit as long as it is not illegal, as I understand it. So, this is actually confining that ability in this respect somewhat more and, as I just said, other than CSOs I would also be intending to provide SA Water with a direction regarding the basis for negotiating access prices with an access seeker, which would include retail minus avoidable costs.
I agree with you: I think that the bill as it stands is sufficient protection, but it has been raised with me that there are further concerns. This amendment, we believe, will give people comfort to understand that directions under CSOs, or the one I just outlined, would be not impacting on our customer base.

The Hon. J.M.A. LENSINK: I think the minister's explanation actually gives me even more cause for concern—having admitted that it is incredibly broad. What this clause is doing is telling the arbitrator that the minister can give any direction under the Public Corporations Act to SA Water and the arbitrator will have to take that into account. So, Treasury comes along and says, 'We'd like some more money, please, minister,' and the minister makes some sort of thing, as we have been seen done, but I will not digress into the number of areas in which the government has chosen to gouge the pockets of all sorts of consumer groups in South Australia. That is what I can potentially foresee if this amendment is supported. I urge all honourable members to oppose it, and I am sorry to break my previous commitment but I will be calling a division on this one.

The Hon. I.K. HUNTER: Just a slight correction: I did not say this amendment was incredibly broad: I said the existing section 6 legislation under the Public Corporations Act is already incredibly broad, and the things that the Hon. Michelle Lensink just contemplated about Treasury instruction can already be done. This amendment does not impact any of those decisions whatsoever. What it does do is—

The Hon. J.M.A. Lensink interjecting:

The Hon . I.K. HUNTER: —instruct the arbitrator—you are quite right—that we must take into consideration impacts on the most vulnerable community members. I do not think there is anything wrong with that.

The Hon. T.A. FRANKS: The Greens will be supporting the government amendment and welcome it.

The committee divided on the amendment:

Ayes 12

Noes 7

Majority 5

Amendment thus carried.

The Hon. J.M.A. LENSINK: My next amendment, No. 7, is consequential. I will not move my amendments Nos 8 or 9. I move:

Amendment No 10 [Lensink–2]—

Page 16, line 8—Delete '6 months' and substitute ' 3 months’

This also applies in relation to my comments on obfuscation and delaying. It seeks to limit the time for arbitration, the period in which the dispute is referred to arbitration, so the relevant new section within the bill is 86ZC, from six months to three months.

The Hon. I.K. HUNTER: The government opposes this amendment, and whilst I might share with the Hon. Michelle Lensink a desire to have an award made within that timeframe I cannot imagine any arbitrator that I have ever experienced being able to make such a decision in such a complex area with only three months. To have this amendment would make, I believe, the bill unworkable. We oppose it.

Amendment negatived; clause as amended passed.

Remaining clause (8) and title passed.

Bill reported with amendment.

Third Reading

Bill read a third time and passed.

 

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