06 August 2020

ACCC releases Murray-Darling Basin inquiry interim report

This article was written by Simon Cooke and Jeremy Tan.

After being delayed by almost a month, the ACCC’s much-anticipated interim report for its inquiry into the Murray-Darling Basin (MDB) water markets was released on 30 July 2020.

The ACCC’s preliminary findings reveal a myriad of issues with the way the MDB markets currently operate. The key themes that emerge from the interim report include concerns about high levels of operational complexity; overlapping and fragmented regulation; a lack of transparency and effective oversight; and inconsistency between different regulatory regimes.

In a telling observation, the ACCC has stated that “the current markets’ rules are deficient; enforcement of them is inconsistent and limited; and the overall governance of the Basin’s water trade is troubled”

Recommendations

To address the issues identified, the ACCC has recommended a range of options for reforms that are aimed at allowing participants to realise more of the potential benefits of water trade.  Many of the proposed reforms - if enacted – would have a significant impact on the way MDB water is traded and the regulatory obligations that market participants would have.  Pointedly however, the ACCC has not recommended reforms to reverse the de-coupling of water rights from land ownership.

The ACCC is still considering which reform proposals should be pursued, and is currently seeking feedback on the options presented in the interim report.  Feedback is also being sought on suggestions for alternative options to address the concerns identified.

The ACCC’s recommendations for reform fall across four broad categories, being:

  • improved regulation of the conduct of market participants;
  • improving trade processes and market transparency;
  • improving market architecture; and
  • changes to market governance.

We’ve briefly examined the reform proposals for each of these areas below.  

Improved regulation of the conduct of market participants

The ACCC has recommended three options for reconsidering the MDB governance frameworks to address issues with the water market regulatory environment.  The recommendations are targeted toward addressing perceived issues such as the fragmentation of rules across jurisdictions (which creates regulatory gaps), uncertainty and inconsistency in application of regulations, a lack of confidence in the stability of the markets, and lack of compliance and enforcement of regulations. 

The three options canvassed in the interim report can be summarised as follows:

  • A government-initiated licensing scheme - This option proposes a compulsory licensing regime at either the federal or the Basin State level, which sets out the relevant requirements for intermediaries and is supported through civil penalties for non-compliance. Such a scheme could mandate that brokers and intermediaries be licensed, set standards for professional conduct, include elements of market integrity rules and clarify the role of intermediaries and their obligations to clients.

  • The application of the financial-regulation framework to water products - This option involves applying the existing financial regulation framework under the Corporations Act 2001 (Cth) to tradeable water rights. According to the ACCC, this could be achieved by declaring basic tradable water rights (and arrangements to buy and sell them) to be a derivative.  If this were the case, an entity dealing in or providing advice on such products, or selling them on their own behalf, would need to hold an Australian Financial Services Licence (AFSL).  Further, a person operating a market for these products would be required to have market operating rules in place and to hold an Australian Market licence.  This would be a significant change for the water industry, which has previously benefited from exemptions from AFSL regulatory requirements.

  • An independent, market-focused regulator - This option envisages a regulatory body (like the Australian Energy Regulator) overseeing the market, prescribing fit-for-purpose rules and standards (such as a licensing regime and market integrity rules) and enforcing them under the law. The ACCC believes this option would address the compliance and enforcement issues arising from the fragmentation and overlap of roles between different regulators.  To achieve this, the ACCC considers that it is essential that such a regulator has access to comprehensive, accurate and up-to-date data (see further below).

The ACCC has not yet decided whether these solutions would be limited to water brokers, or could cover other market participants as well. 

Improving trade processes and market transparency

The ACCC’s second key recommendation aims to improve the harmonisation, transparency and accessibility of information necessary to participate in the market, including timely and accurate trade data.  This includes providing higher-quality information to market participants and providing it more quickly, and also the streamlining of trade processes.  The three key elements to the ACCC’s recommendation include:

  • Making practical changes to trade processing to improve the quality and timeliness of core market data - This would include updating trade processes to better reflect current market developments, and to ensure generation and transmission of core market data is more ‘joined up’.  As well as updating trade application forms and back-end systems to ensure all relevant information can be reported, captured and stored.

  • Underpinning those practical changes with clear and comprehensive mandates – Those mandates would provide efficient trade services and high-quality information to market participants. Proposed changes here include:
    • standardisation of Basin State registers,
    • implementation of standards for trade processes and reporting requirements; and
    • reporting of contracts for leases, forwards and carryover parking to registers.
  • Implementing digital technologies to streamline trade services, while also improving information quality and availability - A number of options considered by the ACCC include an open digital protocol to allow for greater interoperability between Basin State registers and a single water market information platform for publishing water availability and trade information. Interestingly, options put forward by the ACCC in this area include reform proposals borrowed from centralised markets in other key industries, such as the option to centralise spot water trading by matching buyer and seller bids into a structure similar to the current form of the National Electricity Market; or taking an ‘ASX-like’ approach of establishing a single clearing house to administer trades, supported by a suite of interoperability protocols to connect multiple trading platforms and the underlying Basin State registries.

The ACCC’s preliminary view is that while governance is currently distributed between Basin States and other actors, options which deliver “harmonisation” and “co-ordination” are more suitable than options which deliver “centralisation”.  Therefore, the ACCC has suggested that the digital protocol option combined with a water market information platform, which brings together (but does not replace) diverse information sources, is the most appropriate pathway.

Improving market architecture

The ACCC is also considering reforms to improve the design of key elements of the market architecture.  These reforms will aim to achieve better management of trade activity and address pressures from trade and delivery arrangements by improving the rules and regulatory settings that govern water supply (allocation), storage and delivery, trading and other operational decisions. 

The ACCC has identified issues with some of the current policies and rules which it believes may not efficiently, and in some cases fairly, manage the underlying physical constraints of the water supply and river system and allocation of scarce resources.  While still exploring a range of potential market architecture reform, the ACCC is considering the following options:

  • improvements to policy transparency and consultation processes;
  • alternative approaches for allocation and carryover policies, such as continuous accounting and capacity sharing;
  • the creation of formal markets for storage and delivery capacity;
  • application of transmission loss factors to water deliveries in the southern connected basin;
  • removal of the exemption for ‘grandfathered’ tags (or removing entitlement tagging altogether);
  • alternative and more dynamic mechanisms to manage inter-valley trades;
  • changing all allocation trade to tagged allocation trade; and
  • improving consistency across Basin States’ accounting and metering requirements.

Changes to market governance

Finally, the ACCC has recommended the realignment of governance frameworks to focus on the development, oversight and regulation of markets, and to promote open and fair trading across the basis.  Options to improve market governance could include:

  • separating market governance roles from broader water management governance to enable clear and independent decisions on the development of market settings;
  • consolidating or harmonising fragmented roles and/or institutions, to assist in improving trade processes, transparency, market oversight capability, and enforcement and compliance activities;
  • reducing regulatory gaps by creating and assigning new roles or functions;
  • addressing conflicting roles; and
  • committing resources to support effective collaborative governance models or move away from consensus-based decision-making models.

Next steps

Given the amount of optionality canvassed in the ACCC’s interim recommendations, it is not clear at this stage what the nature or the extent of its final recommendations will be.  

As noted, the ACCC is currently seeking further feedback from stakeholders in response to the interim report, with submissions due by 28 August 2020.

The ACCC’s final report must be provided to the Treasurer by 30 November 2020.

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