NSW rewrites regulation of private water and sewage infrastructure

In brief

New legislation makes important changes to the regulatory scheme applying to private water and sewage infrastructure in NSW. In particular, the reforms change the way in which water infrastructure is approved and licenced by the NSW Government. Partner Andrew Mansour and Lawyer Jerome Entwisle discuss the amendments and impacts on the water industry in NSW.

The Urban Water Regulation Review

The Water Industry Competition Amendment (Review) Act 2014 (NSW) (the Act) is the culmination of an extended review of NSW's water industry regulatory structure as part of the Urban Water Regulation Review. That review recommended a number of substantial amendments to the current regime under the Water Industry Competition Act 2006 (NSW) (the WIC Act), including:

• separating licensing from scheme approval and making operational and retail licensing entity-based;
• introducing a 'risk-based' approach to regulation of water infrastructure so that only 'high risk' water infrastructure would be regulated by IPART under the WIC Act, leaving 'low-risk' schemes to be regulated by local councils;
• increasing contestability in the retail water market by removing the requirement that retailers purchase sufficient water from a private operator rather than a public utility and by introducing deemed contracts; and
• strengthening 'last resort' arrangements, including introducing the concept of an operator of last resort.

Each of these recommendations have been adopted in the Act, which has now been passed but will only commence on a day proclaimed by the Governor. This will presumably be after related regulations under the WIC Act have been considered.

Licensing

Application of new licensing and approval regime

The Act will repeal the current Part 2 of the WIC Act and will provide for an entirely new licensing and approval regime for 'high risk' water industry infrastructure, which is defined as infrastructure comprising:

• an integrated system for providing water or sewerage services to 30 or more small retail customers (a category A scheme); or
• a facility for the production of:
  • drinking water that has a design capacity of more than 500 kilolitres each day; or
  • sewerage that has a design capacity of more than 750 kilolitres each day;
    
    together with any reticulation network connected to the facility.

The new licensing and approval requirements will not apply to infrastructure within the area of operations of a public water utility (eg Sydney Water) or infrastructure that is already subject to an approval under section 68 of the Local Government Act 1993 (NSW).

Design and operational approval

The WIC Act currently provides for scheme-specific licences that allow the construction, maintenance and operation of the scheme to which they relate. The Act will now require proponents of new water industry infrastructure to obtain two approvals from IPART as part of the construction and commissioning of the infrastructure. These are:

• design approval to construct, install or alter relevant water industry infrastructure; and
• operational approval (to be held by the owner of the infrastructure) to operate relevant water industry infrastructure on a commercial basis.

Neither or these approvals allows the actual operation of the infrastructure or sale of services by means of the infrastructure, as these activities now require separate licences (see below).

Under the new regime, IPART can only grant design or operational approval to an applicant where it is satisfied that the applicant:

• is a 'suitable corporation' by reference to a number of factors, including its financial, technical and organisational capacity and its regulatory record; and
• is a licensed operator or has suitable arrangements in place with a licensed operator; and
• (for operational approval of a category A schemes) is a licensed retailer or has suitable arrangements in place with a licensed retailer to sell the relevant water or sewerage services.

These requirements are reinforced by new mandatory conditions for design and operational approvals.

Approvals will be capable of being transferred with IPART's consent, which may only be refused where the transferee would not be entitled to a grant of the approval.

Operator and retail licensing

The Act also amends the current licensing regime for operators and retailers, providing for:

• an operator's licence (currently known as a 'network operator's licence'), which allows a person to operate approved water industry infrastructure; and
• a retailer's licence (currently known as a 'retail supplier's licence'), which allows a person to sell water or sewerage services by means of a category A scheme or prescribed water industry infrastructure (eg public water infrastructure or infrastructure approved under section 68 of the Local Government Act).

Licences are granted by the Minister, on IPART's advice, and will be entity-based. This means that a licensed operator or retailer no longer needs a different licence for each scheme it operates or sells water or sewerage services from. However, it will be a mandatory condition of an operator's licence that they inform IPART of the infrastructure they are operating and comply with relevant design and operational approval conditions.

Importantly, in a step towards increasing contestability in the retail water market, the Act repeals the current requirement in section 10(4)(d) of the WIC Act that licensed retailers obtain sufficient quantities of water from sources otherwise than from a public water utility. The ability to sell water from public utilities to customers other than large industrial users is, however, still restricted by a mandatory condition on retailer licences that retailers only supply small retail customers from a category A scheme (ie a private approved scheme). The Urban Water Regulation Review indicated that this restriction could later be relaxed (by repealing the condition) if further contestability was to be introduced into the market.

Current licence holders

Holders of current licences under the WIC Act will be automatically transitioned into the new regime. The Act requires IPART and the Minister to grant operational approvals and licences to current licence holders as appropriate for the operation of the infrastructure and sale of water or sewerage services by means of that infrastructure. The conditions of these approvals and licences must, as far as reasonably practicable, reflect current conditions, with the exception that an additional condition may be imposed on licensees to ensure their contracting or subcontracting arrangements are sufficient for them to be a 'suitable corporation' for the purposes of the Act.

Deemed contracts

Another major change to be implemented by the Act is that owners of land will be deemed to have entered into contracts with licensed operators and licensed retailers to provide services to their land, placing private operators on the same footing as Sydney Water.
To regulate the charges under these deemed contracts, it will be a condition of a category A scheme licence that the standard charges under deemed contracts are published on the licensee's website and at least six months' written notice is given to customers of increases in a contract charge that are above CPI increases.

Last resort arrangements

The Act will also substantially amend the last resort arrangements under the WIC Act, making them more detailed and clarifying who is responsible for the cost of these safeguards.

Under the new provisions, a person can be designated as a 'last resort provider' in relation to a retailer or operator of services supplied by particular 'essential infrastructure' (who is known as the 'essential services provider'). The last resort providers will develop contingency plans, in consultation with the relevant essential service provider, and the essential service provider will pay the reasonable cost of this work. Where a failure event occurs, and the last resort provider is required to step in, the last resort provider may apply to the Minister to recover its reasonable costs and expenses under a 'cost recovery scheme', which may require these costs to be paid by the failed licensee, the holder of the operational approval for the relevant infrastructure or, as a last resort, from customers.

Conclusion

When it comes into force, the Act will make key changes to the regulatory regime applying to new and existing private water infrastructure in NSW. The new licensing regime, which separates the role of building water infrastructure from operating the infrastructure and selling services using that infrastructure, will hopefully simplify the process of delivering private water infrastructure. Moving forward, it will also be interesting to monitor whether the NSW Government makes any further moves towards full retail contestability in the water market.