ACCC To Examine The Murray Darling Basin Water Markets

This article was written by Simon Cooke and Sharon Henrick.

Government direction

The Federal Government has announced that it will direct the Australian Competition and Consumer Commission (ACCC) to conduct a market inquiry into the water markets operating in the Murray Darling Basin (MDB).

While the official terms of reference have not yet been released, an 'outline' of the terms announced jointly by the Treasurer and the Minister for Water Resources, Drought, Rural Finance, Natural Disaster and Emergency Management indicates that the ACCC will be tasked with examining the function of the MDB's water markets, which are estimated to be valued at approximately $2 billion.

The ACCC will have approximately 15 months to examine the MDB water markets, including "the role and practices of market participants, including water brokers, water exchanges, investment funds and significant traders of water allocations and entitlements", with the goal of reporting on how to improve the overall transparency and efficiency of the markets.

The ACCC is being directed to hold the inquiry under section 95H(1) of the Competition and Consumer Act 2010 (Cth) (CCA). This means the ACCC will have a broad range of information gathering powers to conduct the inquiry, including the ability to compel parties to produce documents, furnish information and / or provide evidence under oath/affirmation at a public or private hearing.

Why is this inquiry being held?

While the state of the MDB has been a source of national policy and political attention for some time, an inquiry into the MDB water markets was promised by the Coalition Government as part of the 2019 Federal election campaign. The policy promise came about, at least in part, following pressure from regional communities that claimed 'non-farming investors' had driven up prices they must pay for water, subsequently driving up the price consumers pay for produce.

In announcing the inquiry, the Federal Minister for Water Resources, Drought, Rural Finance, Natural Disaster and Emergency Management, David Littleproud, said the Government had listened to the concerns of farmers in delivering on this election commitment. He also pointed out that "farmers told [him] they had concerns around changes in water use, trade between valleys and the effect speculators have on the water market", and that it is "important to make sure the market is operating as intended".

Importantly, the ACCC's role in this inquiry will be carried out as a separate and additional exercise to its existing legislative roles in enforcement, price setting, monitoring and reporting under the CCA and the Water Act 2007, including its role in annual reporting on the status of the MDB water system.[1]

What will be investigated?

According to the announced outline of the terms of reference, the ACCC will be tasked with examining the following non-exhaustive list of matters:[2]

• market trends since 2012, including the demand for water, changes in the location where water is used, the quantity of water traded, water availability, water users and their communities, development of new trading products, and the number of participants and sectors participating in the water markets;
  
  
• the role of 'carryover allocation' practices in water markets;
  
  
• the role and practices of market participants, including water brokers, water exchanges, investment funds and significant traders of water allocations and entitlements;
  
  
•  the availability to the public of information on water market activities and tradeable water right holdings;
  
  
• the timeliness, accuracy, and completeness of public information released on water market activities and tradeable water right holdings, including true trade price reporting and the types of trade (for example, immediate purchases, forward contracts, leases);
  
  
• barriers to entry, expansion and exit, including transaction costs; and
  
  
• the management of constraints on the storage or delivery of water, including adjustments made to give effect to trades and intervalley transfers.

While the full terms of reference are not yet known, our experience with current and previous market inquiries tells us that the ACCC is willing to take a 'broad brush' approach to informing itself about all operational, functional and dynamic aspects of any industry it is directed to examine.

What are the next steps?

• Issues paper: Once the terms of reference and formal direction are published, the ACCC will develop an "issues paper", which will include a call for public submissions.
  
  
• Public and private hearings: The ACCC will also conduct public and private hearings as part of its inquiry, and we would expect this will include public hearings in locations along various parts of the Murray Darling Basin in New South Wales, Victoria and South Australia.
  
  
• Statutory notices: Industry participants should be prepared for statutory notices compelling them to produce substantial amounts of documentation and information to the ACCC. It's common in these inquiries for the statutory notices to appear to be far broader than what might be expected under the terms of reference.
  Once the ACCC has issued the first tranche of statutory notices, further notices to probe particular areas more deeply should be expected, including to explore potential recommendations for reform in the ACCC's preliminary and final reports.
  
  
• Claims for confidentiality: Where information and documents provided to the ACCC are subject to claims for confidentiality, the ACCC may override the claim for confidentiality and publish the information or all or part of the document in its interim and/or final reports if it considers it would be in the public interest to do so.   In our experience, the ACCC will provide the company making the confidentiality claim with an opportunity to convince it not to publish the information before doing so.
  
  
• Preliminary and final reports for Government: Based on the announcements to date, the ACCC will be required to submit its preliminary report by 31 May 2020, with the final report due to be delivered by 30 November 2020.

The ACCC's market inquiry powers are getting a workout

The announcement of the MDB inquiry marks yet another assignment for the ACCC in a key and contentious Federal policy area. It comes on the back of the ACCC's well-publicised final Digital Platforms Inquiry report, which was released on 26 July 2019, as well as its ongoing market inquiries into building insurance in Northern Australia and the East Coast Gas markets.  

Much like the ACCC's role in other inquiries, the MDB investigation looks set to task the ACCC with examining issues and making recommendations about markets and policy issues that sit across a number of statutory regimes and legal disciplines, not just competition law.

In particular, the ACCC will need to examine the range of policy goals underpinning the MDB water markets in the context of the Murray Darling Basin Plan, which has been developed with the aim of improving the environmental health of the river system by recovering water rights from irrigation farmers, and was always recognised as being likely to put upward pressure on water prices.[3]

As we've previously noted, the use of the ACCC's statutory market inquiry and price monitoring powers by the Federal Government has increased significantly since 2016, and there are currently 10 market inquiries and price monitoring activities being undertaken by the ACCC (including the ongoing Digital Platforms work).[4]

This latest inquiry into the MDB shows a continuation of this trend, and the willingness of the Federal Government to engage the ACCC to examine and report on a challenging and complex market which is central to the Australian economy.

While this must be seen as a strong vote of confidence from the Federal Government in the ACCC, our consistent experience in these inquiries has been that each time it is industry participants that will be asked to commit significant resources to supply the ACCC with the information it needs to complete its inquiry.

[1] See: https://www.accc.gov.au/regulated-infrastructure/water

[2] Available via the ACCC website: https://www.accc.gov.au/focus-areas/inquiries/inquiry-into-murray-darling-basin-water-markets

[3] See for example, Hone, S (et all) Assessing The Future Impact Of The Australian Government Environmental Water Purchase Program - ABARE Research Report 10.03 (April 2010) http://data.daff.gov.au/data/warehouse/pe_abarebrs99014438/waterbuyback.pdf

[4] See https://www.accc.gov.au/focus-areas/inquiries