Assessment of Hunter Water Corporation Operating Licence · 2014-08-13 · 1 Introduction...

Independent Pricing and Regulatory Tribunal

Assessment of Hunter Water Corporation Operating LicenceApplication of the Licensing Framework

Regulation Review — Case Study August 2014

Assessment of Hunter Water Corporation Operating Licence Application of the Licensing Framework

Regulation Review — Case Study August 2014

ii IPART Assessment of Hunter Water Corporation Operating Licence

© Independent Pricing and Regulatory Tribunal of New South Wales 2014

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

ISBN 978-1-925193-29-9 S9-98

The Tribunal members for this review are:

Dr Peter J Boxall AO, Chairman

Dr Paul Paterson

Ms Catherine Jones

Inquiries regarding this document should be directed to a staff member:

Felicity Hall (02) 9290 8432

Alexandra Sidorenko (02) 9113 7769

Independent Pricing and Regulatory Tribunal of New South Wales PO Box Q290, QVB Post Office NSW 1230 Level 8, 1 Market Street, Sydney NSW 2000

T (02) 9290 8400 F (02) 9290 2061

www.ipart.nsw.gov.au

iii IPART Assessment of Hunter Water Corporation Operating Licence

Contents

1 Introduction 1

2 Background 4 2.1 Licensing Framework 4 2.2 Hunter Water Corporation operating licence 6

3 Stage 1 assessment: Is the licence appropriate? 8 3.1 Is there an ongoing need for the government to intervene? 9 3.2 Does something else address the problem and is specific regulation

required? 14 3.3 Is licensing appropriate to address the policy objectives? 19

4 Stage 2 assessment: Is the licence well designed? 24 4.1 Is the coverage the minimum necessary? 25 4.2 Is the duration the maximum possible? 26 4.3 Are reporting requirements the minimum necessary? 27 4.4 Are fees and charges appropriate? 28 4.5 Are conduct rules and mandatory attributes the minimum necessary? 29

5 Stage 3 assessment: Is the licence administered effectively and/or efficiently? 37 5.1 Are registering and licensing activities efficient? 38 5.2 Are stakeholders well informed? 38 5.3 Is collecting information targeted? 39 5.4 Is receiving and responding to complaints optimal? 40 5.5 Is monitoring and enforcing compliance best practice? 41 5.6 Is the scheme subject to periodic review? 42

6 Stage 4 assessment: Is the operating licence the best response? 43 6.1 Does a preliminary assessment suggest licensing will result in a net

benefit? 43 6.2 Are there alternative options that could deliver the policy objectives? 49 6.3 Conclusion 51

Appendices 53 A Are additional factors present to justify government intervention? 55 B Existing legislation related to policy objectives of Hunter Water operating

licence 62

Contents

iv IPART Assessment of Hunter Water Corporation Operating Licence

C Can targeted enforcement, non-regulatory government actions, or administrative sanctions address the gaps identified? 75

D Summary of Hunter Water Corporation reporting requirements 82

Assessment of Hunter Water Corporation Operating Licence IPART 1

1 Introduction

In recognition of the regulatory burden created by licensing, and driven by its ‘red tape’ reduction target of $750 million by 2015, the NSW Government asked the Independent Pricing and Regulatory Tribunal (IPART) to undertake a review of licensing in NSW. As part of this review, IPART engaged PricewaterhouseCoopers (PwC) to assist in developing a Licensing Framework1 and Licensing Guide2 that assess whether licences in NSW are:

likely to achieve their underlying purpose

the most appropriate means of meeting this purpose.

The Licensing Framework, in conjunction with the Licensing Guide, is an assessment tool for regulators to apply to their existing and proposed licences. It consists of four stages, requiring the regulator to establish the rationale for licensing, assess its design, assess its administration, and confirm that licensing is the best response.

This report provides the result of the assessment, using the Licensing Framework, of the Hunter Water Corporation (Hunter Water) operating licence,3 which is administered by IPART.

Hunter Water is a State Owned Corporation wholly owned by the NSW Government. The operating licence enables and requires Hunter Water to provide, construct, operate, manage and maintain systems and services for:

supplying water

providing sewerage and drainage services

disposing of wastewater

in a defined area of operations in the Hunter region.

The operating licence makes Hunter Water accountable for its performance to the NSW Government.

1 PricewaterhouseCoopers (PwC), A best practice approach to designing and reviewing licensing

schemes, March 2013 (Licensing Framework). 2 PricewaterhouseCoopers (PwC), A best practice approach to designing and reviewing licensing

schemes – Guidance material, March 2013 (Licensing Guide). 3 Hunter Water Corporation operating licence 2012 to 2017.

1 Introduction

2 IPART Assessment of Hunter Water Corporation Operating Licence

The Hunter Water operating licence is a relatively complex instrument, which reflects the nature and scope of the corporation’s operations. We identified multiple policy objectives for government intervention in Hunter Water’s operations, including those related to protecting public health, environment and consumers. Specific policy objectives for government intervention in Hunter Water’s operations, by policy category, are to:

Protect public health:

– ensure drinking water is safe

– ensure availability of drinking water is sufficient

– ensure wastewater services are safe/ minimise overflow events

– ensure recycled water services are safe (where provided by Hunter Water).

Protect consumers (in addition to the public health objectives above):

– ensure prices are not excessive

– ensure quality of service (eg, water pressure, water continuity, wastewater overflow, customer service)

– protect against financial losses (eg, from accidental property damage).

Protect the environment:

– minimise harm to the environment from operations.

Other policy objectives:

– ensure the provision of essential water, wastewater and stormwater drainage services

– water saving and efficiency.

Overall, we found that the Hunter Water’s operating licence has passed the four key stages of the Licensing Framework. This means there is little scope to reform this licence.

In summary, our key findings are:

Stage 1 – Licensing Hunter Water’s operations is appropriate.

– The policy rationale and objectives justify ongoing intervention in Hunter Water’s operations.

– Existing legislation does not adequately address the policy objectives in the absence of Hunter Water’s licence – ie, Hunter Water’s licence covers gaps in the scope and enforcement of existing legislation.

– Licensing provides policy and administrative functions that are required to meet the policy objectives of the Hunter Water operating licence. Therefore licensing is an appropriate option to address the policy objectives.

Stage 2 - The current Hunter Water operating licence is well designed.

Stage 3 - The licence is administered effectively and efficiently.

1 Introduction


Stage 4 - While the policy objectives could potentially be delivered through amendments to a range of legislation, our assessment supports continued licensing of Hunter Water as the most efficient option to administer and ensure compliance and enforcement.

For the next review of Hunter Water’s operating licence, we have identified drinking water quality as an area where legislative changes could result in the licence not being necessary to achieve the policy objectives (by strengthening provisions of Public Health Regulation 2012 (NSW)). However, given that the operating licence currently consolidates a number of reporting requirements into one audited report to a single regulator (IPART), the benefits from removing drinking water quality from the licence conditions are not likely to exceed the additional administrative and compliance costs.

A similar efficiency argument can also be used to support licensing versus an alternative option of strengthening the enforcement provisions in existing legislative instruments. Under this alternative option, a number of regulators would need to make changes to legislative instruments (such as regulations) and these obligations would need to be enforced. Regulators would be required to separately undertake audits and report on Hunter Water’s compliance with relevant obligations to their Minister.

This process is likely to be less efficient than the current licence audit process, which involves only one audit and one report to the NSW Government. In addition, reporting to a single regulator increases the transparency and accountability of Hunter Water’s operations. The costs of the alternative option include making changes to the existing legislative instruments and any additional costs associated with separate auditing, reporting and enforcement activities. These costs are likely to outweigh the benefits when compared with retaining the operating licence.

In the longer term, licensing private and public water suppliers or operators may be considered under a single piece of legislation. Such a reform may include developing a standard licence/ authority/ or regulation that could apply to all water suppliers or operators. The Water Industry Competition Act 2006 (NSW) provides a model of a standard licence that could be developed. This regulatory option still requires a licensing scheme.

We consider that standardisation in water licensing/regulation has the potential to reduce compliance costs but it is a longer term consideration, depending on development of the water industry in NSW. Standardised regulation may be a future option but the feasibility needs to be further evaluated.


2 Background

This chapter provides an overview of the Licensing Framework that is used to assess Hunter Water’s operating licence. It also provides some background on the establishment of Hunter Water as a State Owned Corporation and its operating licence.

2.1 Licensing Framework

The Licensing Framework is an assessment tool for regulators to use when assessing their existing and proposed licences. It consists of four key stages (shown in Figure 2.1 below), which require a regulator to:

justify that government action is required to address a specific problem or risk and that licensing is appropriate (Stage 1)

assess whether the licence is well designed – taking into account how its objectives relate to its coverage, duration, reporting requirements, fees and charges, conduct rules and mandatory attributes (Stage 2)

assess whether the licence is administered effectively and efficiently (Stage 3)

confirm that licensing is the best response when comparing its costs and benefits against other options (Stage 4).

2 Background


The Licensing Framework and Licensing Guide have been guided by, and developed in line with, the former Better Regulation Office’s better regulation principles. They complement current requirements for regulatory proposals, including Better Regulation Statements, Regulatory Impact Statements and ‘Schedule 1’ analysis.4

2.2 Hunter Water Corporation operating licence

Supply of water is an essential service that is regulated in most developed countries. Water supply businesses are commonly government-owned, public utilities and are usually monopoly suppliers within geographic regions.

Several large utilities in NSW, including Hunter Water, were corporatised during the early 1990s as part of wider microeconomic reform of the NSW public sector. As a State Owned Corporation (SOC), Hunter Water is regulated under the Hunter Water Act 1991 (NSW) and the State Owned Corporations Act 1989 (NSW).

The licence was originally established in 1992 to ensure the new corporation would not exploit its natural monopoly position. The current operating licence is the fifth licence held by Hunter Water since it was established as a SOC in 1991.5

The Hunter Water Act 1991 (NSW) specifies that an operating licence, granted by the Governor of NSW, must include certain requirements.6 For example, quality and performance standards in relation to water quality and service interruptions.

The operating licence enables and requires Hunter Water Corporation (Hunter Water) to provide, construct, operate, manage and maintain systems and services for:

supplying water

providing sewerage and drainage services

disposing of wastewater

in a defined area of operations in the Hunter region.

The operating licence has been subject to a number of public reviews, conducted by IPART. The licence was last reviewed in 2011 by IPART. The current licence operates from 1 July 2012 to 30 June 2017.

IPART is responsible for administering the operating licence including the functions of monitoring, auditing and reporting to the Minister on compliance.

4 Better Regulation Office, Guide to Better Regulation, November 2009, p 10. 5 Previous operating licences were issued for the years commencing 1992 and 1995, and then for

the periods 2002 to 2007, 2007 to 2012 and 2012 to 2017. 6 See Hunter Water Act 1991, section 13.

2 Background


Hunter Water operates in a relatively complex regulatory environment and is regulated under various NSW legislation and national guidelines, including:

Hunter Water Act 1991 (NSW)

State Owned Corporations Act 1989 (NSW)

Public Health Act 2010 (NSW)

Water Management Act 2000 (NSW)

Protection of the Environment Operations Act 1997 (NSW)

Australian Drinking Water Guidelines 2011

Australian Guidelines for Water Recycling 2006.

The licence consists of the following sections:

Licence and Licence authorisation (section 1)

Water quality (section 2)

Water quantity (section 3)

Assets (section 4)

Customers and Consumers (section 5)

Environment (section 6)

Quality management (section 7)

Performance monitoring (section 8)

Memorandum of Understanding (section 9)

End of term review (section 10)

Notices (section 11)

Definitions and interpretation (section 12).

The licence has three schedules which include Background Notes, the Customer Contract and the Area of Operations for the licence.

The licence is supported by a Reporting Manual which outlines all of Hunter Water’s reporting requirements under its licence.7 This Reporting Manual details when Hunter Water should report, what information it must report, and how it should report. This manual was established so that procedural matters associated with the licence could more easily be updated. Any significant changes to the Reporting Manual require IPART to consult with Hunter Water and other interested stakeholders.8

7 IPART, Hunter Water Corporation Reporting Manual, June 2013. 8 IPART, Hunter Water Corporation Reporting Manual, June 2013, see section 1.4.


3 Stage 1 assessment: Is the licence appropriate?

Figure 3.1 Stage 1 assessment

Data source: PricewaterhouseCoopers (PwC), A best practice approach to designing and reviewing licensing schemes, March 2013 (Licensing Framework).

Stage 1 of the Licensing Framework considers what the government is trying to achieve and acts as a screening tool to identify whether licensing should be considered as a potential option. The Licensing Framework provides that licensing should be considered appropriate and therefore a potential option if:

there is an ongoing need for government action (Step 1)

nothing else addresses the problem (Step 2)

there is an ongoing need for specific regulation in this area (Step 3)

licensing is still required to address the policy objectives (Step 4).9

In applying the Licensing Framework to Hunter Water’s operating licence, we have combined Steps 2 and 3 above. As mentioned above, Hunter Water operates in a relatively complex legislative environment and combining these steps allowed us to simplify the presentation of this analysis.

9 Licensing Guide, p 7.



3.1 Is there an ongoing need for the government to intervene?

Step 1: Is there an ongoing need for government action?

The Licensing Framework provides that, for an existing licence, the assessment needs toconsider the operating environment if the licence did not exist. That is, in the absence of a licence:

Would there be a clear and ongoing rationale for the government to intervene?

Is the risk of detriment high in the current market?

Is the ability to remedy poor in the current market?

Is the current market unable or unlikely to provide an adequate response?

Source: Licensing Guide, pp 11-18.

3.1.1 Policy rationale for ongoing government intervention in Hunter Water’s operations

In assessing Hunter Water’s operating licence, we need to consider whether there would still be a policy rationale for the Government to intervene in Hunter Water’s operations if this licence didn’t exist.

We have identified three policy rationales for government intervention in Hunter Water’s operations:

1. Existence of market power

The supply of drinking water and related services (sewerage and stormwater) are essential services for the community. Hunter Water is a natural monopoly, which reflects the cost and complexity in providing water and wastewater infrastructure. This means that Hunter Water’s customers do not generally have an alternative supplier of water, wastewater or stormwater drainage services. Hunter Water as a monopoly supplier provides a strong case for government intervention to protect Hunter Water’s customers from potential abuses of monopoly power. In particular, government intervention is warranted to protect customers from:

excessive (monopoly) prices

an inferior quality product or service supplied (which may have health implications)

restrictions on the supply of products or services.



2. Impacts on third parties

Hunter Water’s operations not only affect their customers but also the broader community eg, ensuring that safe drinking water is supplied in schools and hospitals.

In addition, Hunter Water’s operations could potentially cause significant detriment to the environment. This means that government intervention to protect the environment may be warranted.

3. Government policy

The Government may have other policy objectives that require Hunter Water to undertake certain activities or to operate in a particular manner which may not align with Hunter Water’s commercial intentions. Government intervention may therefore be necessary to ensure Hunter Water acts in a manner that will assist the Government in achieving these other policy objectives.

With these rationales in mind, we have identified relevant policy objectives (see Table 3.1), which we have grouped by the following four categories:

protect customers

protect public health

protect the environment

other policy objectives.

As shown in Table 3.1, a policy objective can be associated with more than one policy rationale.



Table 3.1 Policy objectives for government intervention in Hunter Water’s operations

Policy objectives category

Policy objectives Policy rationales

Protect public health

Ensure drinking water is safe Ensure availability of drinking water is sufficient Ensure wastewater services are safe/minimise

overflow events Ensure recycled water services are safe (where

provided by Hunter Water)

Existence of market powera

Impacts on third partiesb

Protect customers

Ensure prices are not excessive Ensure water pressure is satisfactory Ensure water continuity is satisfactory Minimise wastewater overflow events Ensure minimum level of customer service Minimise financial losses to customers (eg, from

accidental property damage)

Existence of market powera

Protect the environment

Minimise harm to the environment Impacts on third partiesb

Other policy objectives

Ensure the provision of essential water, wastewater and stormwater drainage services

Water saving and efficiency

Government policy

a This relates to impacts on Hunter Water’s direct customers. b This relates to impacts on the broader community.

Our next step is to test whether government intervention is still necessary to achieve these policy objectives.

3.1.2 Additional factors to justify government intervention

According to the Licensing Framework, the following additional factors must be present before we can be confident that government intervention would be needed:

1. there is a high risk of detriment if the policy objective is not addressed

2. the ability to remedy is poor

3. the market is unable or unlikely to respond.

Our first task is to identify negative events we would expect to occur more frequently in a generic water/wastewater market if the policy objectives were not addressed (eg, through licensing).

We have identified three key types of negative events: detriment to public health abuse of monopoly power in terms of pricing, and service quality and

quantity detriment to the environment.



Our analysis of these negative events in relation to the three factors required for government intervention is summarised in Table 3.2. The overall risk of detriment is assessed in terms of the likelihood of the event, and the potential negative impact of the event. For example, an event considered to have moderate or high likelihood, as well as a moderate or high impact, is rated as having a high overall risk of detriment.

In assessing the adequacy of possible remedies, we consider whether the remedies available in absence of the licence are likely to be sufficient to repair, restore or otherwise compensate for the potential impact of the negative event. Financial compensation is frequently the only available remedy, and is often inadequate, especially where the damage is irreversible.

When we assess the adequacy of possible market responses, we consider the likelihood of the market to respond to and address the problem in the absence of an instrument like Hunter Water’s operating licence. We also consider the extent to which these possible market responses could alleviate the problem. In some cases, market solutions could feasibly develop, but their ability to alleviate the problem may be limited.

Appendix A presents a more detailed analysis of each of these factors. Overall, we found that the three additional factors are present for each of the possible negative events, and therefore government intervention is still needed.

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Table 3.2 Is government intervention still needed in Hunter Water’s operations?

Possible negative event Policy objectives category Overall risk of detriment

Adequacy of possible remedies

Adequacy of possible market responses

Is government intervention still needed?

Unsafe drinking water Protect public health High Inadequate Inadequate Yes

Drinking water not available Protect public health Other policy objectives

Moderate-High Inadequate Inadequate Yes

Unsafe wastewater services/ wastewater overflows

Protect public health Protect customers

Moderate-High Inadequate Inadequate Yes

Stormwater drainage services not provided or inadequate

Other policy objectives Moderate-High Inadequate Inadequate Yes

Unsafe recycled water services Protect public health Moderate-High Inadequate Inadequate Yes

Excessive prices for services Protect customers Moderate Inadequate Inadequate Yes

Poor service standards (not including drinking water safety and safety of wastewater and recycled water services)

Protect customers Moderate Inadequate Inadequate Yes

Financial losses to customers Protect customers Moderate Inadequate Inadequate Yes

Detrimental impact on the environment Protect the environment Moderate-High Inadequate Inadequate Yes

Source: Tables A.1, A.2 and A.3 in Appendix A.



3.2 Does something else address the problem and is specific regulation required?

As discussed above, we have combined the analysis in Steps 2 and 3 of the Licensing Framework. We have assessed the extent to which the policy objectives could be met if the operating licence was removed, given the current legislative environment. In other words, we have identified the “gaps” that would need to be addressed by some form of government intervention if the policy objectives are to be met.

Steps 2 & 3: Does something else address the problem or is specific regulation required?

In applying the Licensing Framework, we have assessed what could happen if theexisting licence was removed. To do this, we have considered the following:

The existing generic or specific laws and regulations that relate to the policyobjectives.

The extent to which these existing laws and regulations achieve the policy objectives.Specifically:

– do they fully address the policy objectives and

– are they effectively enforced?

If the policy objectives are not fully addressed by these existing laws and regulations,and we have established that government intervention is needed, could the policyobjectives be met through:

– targeted enforcement of existing legislation and/or

– non-regulatory government action?a

Are additional administrative sanctionsb needed to support effective compliance andenforcement?

If targeted enforcement and/or non-regulatory government action does not fullyachieve the policy objectives, and if administrative sanctions are needed to supporteffective compliance and enforcement, additional regulation will be required.

a For example: education campaigns; clean-up activities in response to environmental pollution. b ie, additional powers for a government agency/regulator to take enforcement action and administerpenalties.

A summary of our analysis of the current gaps in the legislation that would need to be addressed by the Government in order to achieve the policy objectives is provided in Table 3.3.



Table B.1 in Appendix B lists Hunter Water’s obligations under its current operating licence, and obligations under existing legislation grouped by policy objectives category. Where multiple policy objectives could be addressed in the same legal instrument, we have classified it under the most relevant policy objectives category (eg, public health legislation or environmental legislation).

In developing Table 3.3, we have reviewed the existing legislative environment that Hunter Water operates in (summarised in Table B.1 in Appendix B). We have then evaluated whether the existing legislative obligations could address the policy objectives if the licence is removed. In doing this we have identified if there is a gap in the scope of what is covered and if, there is a gap in compliance and/or enforcement.

Table 3.3 also summarises our assessment of whether the gaps in legislation identified could be addressed through targeted enforcement and/or non-regulatory government action (see Appendix C for our detailed analysis). We note that gaps in scope could not be addressed through targeted enforcement, but possibly through non-regulatory actions. On the other hand, where there are only gaps in compliance and/or enforcement, targeted enforcement could address the issue, as could non-regulatory government action. In either case, where both targeted enforcement and non-regulatory actions are insufficient to fully address the gaps, additional regulation (including administrative sanctions) is needed.

The final column in Table 3.3 outlines some examples of obligations in the current operating licence which provide the additional regulation needed to address the gaps.

In the absence of an operating licence for Hunter Water, we found that there are significant gaps in the existing legislation across the policy objectives. Some policy objectives are better covered by existing legislation than others. Also in some areas, the legislative environment has recently changed or may change in the near future. We have provided some examples to illustrate our findings:



Drinking water quality – ensuring drinking water is safe

In the area of drinking water quality (ie, ensuring drinking water is safe), the Public Health Act 2010 (NSW) imposes an obligation to supply drinking water fit for human consumption. The Minister has powers to take action or give directions with respect to unsafe water. The Public Health Act mandates safety measures for drinking water, such as requiring suppliers of drinking water to establish and adhere to quality assurance programs that address the elements of the Australian Drinking Water Guidelines (see Appendix Table B.1 for details).10 Hunter Water’s operating licence requires it to maintain a management system that is consistent with the Australian Drinking Water Guidelines (as amended by NSW Health). This requirement provides a foundation for ensuring compliance with Australian Drinking Water Guidelines.

Based on the provisions in the Public Health Act, we have identified that there is not likely to be a gap in the scope of regulation in the area of drinking water quality. However, there are no direct enforcement mechanisms in the Public Health Act to ensure compliance with the requirement for drinking water quality management programs, such as penalties for failure to establish and adhere to these programs. Assuming that compliance with this requirement is optimal, there is a gap between the optimal regulatory environment and that which would exist in absence of the current operating licence. The existing operating licence fills this gap through the requirement for a drinking quality management system.

Recycled water

For recycled water, in the absence of Hunter Water’s operating licence, there are gaps in both scope and compliance between the current requirements of the operating licence and the existing regulatory framework.

The operating licence requires Hunter Water to maintain a recycled water management system consistent with Australian Guidelines for Water Recycling. Recycled water is addressed in the Public Health Act (as ‘any other water’ regarding which the Minister has power to give directions). However, the Public Health Act does not require recycled water to be provided in accordance with the Australian Guidelines for Water Recycling.

The Water Industry Competition Act 2006 (WIC Act) and Water Industry Competition (General) Regulation 2008 impose an obligation on network operators to address the framework for management of recycled water quality based on the Australian Guidelines for Water Recycling. However, the WIC Act and regulation do not apply to Hunter Water. This means that in the absence of Hunter Water’s operating licence, there are gaps in both scope and

10 Public Health Act 2010, section 25 and Public Health Regulation 2012, clause 34.



compliance/enforcement to ensure that the recycled water provided by Hunter Water is safe.

Protect consumers – Customer Contract

In relation to the services supplied by Hunter Water, the Australian Consumer Law (in Schedule 2 of the Competition and Consumer Act 2010 (Cth)) provides basic protection for consumers, in particular, certain consumer guarantees.

Hunter Water’s Customer Contract provides comprehensive consumer protections. We consider that it would be more effective for consumers to rely on, and seek enforcement of the contractual rights available under the Customer Contract than to seek to enforce consumer protection remedies under the Australian Consumer Law.



3.3 Is licensing appropriate to address the policy objectives?

In the final step of Stage 1, we assess whether licensing may be an appropriate response to address the policy objectives.

Step 4: Is licensing appropriate to address the policy objectives?

The Licensing Guide requires the assessment to answer the following questions:

1. What are the objectives of government action in this area?

2. Are any of the following functions of licensing required to achieve the objectives:

Policy functions

– Mandating business attributes or structures?

– Ensuring minimum competency?

– Imposing conduct rules?

– Providing avenues for redress?

– Restricting the quantity of activities undertaken?

Administrative functions

– Enabling policy-making or enforcement?

– Generating funds?

3. If so, which functions?

4. Is licensing necessary to achieve these functions? Or could these functions beachieved by regulatory (or non-regulatory) measures in the absence of licensing?

We have already identified the policy objectives of government action in Step 1 of this assessment (see Table 3.1). The next step is to link these policy objectives to possible licensing functions (see Table 3.4). These functions have been classified as ‘policy’ or ‘administrative’, according to the definitions in the box above.

Where licensing functions closely match the policy objectives, and administrative functions are required, licensing may be appropriate to consider. To provide some context, we have also identified some examples of specific operating licence obligations that relate to the corresponding function.



The Licensing Guide explains that licensing may be necessary if administrative functions are required to achieve a policy objective. Administrative functions include enabling policy-making, compliance and enforcement, and generating funds.11 Where administrative functions (such as, collecting information on licensees and creating administrative sanctions) are required, licensing may be the best way to facilitate these functions.12

For licensing to be considered an appropriate option to address the policy objectives, there must be at least one administrative function for each policy objective. As Table 3.4 shows, each policy objective of the HWC operating licence has at least one administrative function indicating that licensing may be an appropriate instrument to address these policy objectives.

11 Licensing Guide, pp 29-33. 12 Licensing Guide, p 32.



3.3.1 If licensing is appropriate, which type of licensing is needed?

If licensing is the appropriate measure to achieve the policy objectives, then the type of licence would need to be a combination of a privilege and permission licence.13 The privilege aspect of the licence ensures that the licensed water suppliers would not exhaust the available natural water sources. This relates to the licensing function “restricting the quantity of activities” identified above in Table 3.4.

The most licensing functions identified in Table 3.4 would be achieved through permission licensing. This would include specific conditions required for the policy-driven functions (such as mandating business attributes or structures, imposing specific conduct rules and providing avenue for redress).14

13 Licensing Guide, p 32. 14 For complete list of policy functions, see Licensing Guide, p 29.


4 Stage 2 assessment: Is the licence well designed?



This stage of the Licensing Framework looks at whether an existing or proposed licensing scheme is well designed or ‘fit for purpose’. Generally, this means that it should impose the lowest possible level of burden on all parties while still achieving the desired outcomes. Key questions or areas to consider when assessing each design element in this stage include:

opportunities to harmonise

proportionality to risk

engagement and consultation with stakeholders

importance of unbundling licence functions

opportunities to consolidate licensing requirements.15

15 Licensing Guide, pp 35-40.



4.1 Is the coverage the minimum necessary?

Step 1: Ensuring the minimum level of coverage

The Licensing Guide provides that for the coverage of the licence to be the minimumnecessary, the licence should be focused on the product, person or place that represents the true driver of the risk or problem being addressed.

Source: Licensing Guide, p 41.

The coverage of Hunter Water’s operating licence is defined by reference to:

an entity - Hunter Water

its activities – in providing services (ie, supplying water, providing sewerage services and disposing of wastewater), and

a geographical area – Hunter Water’s area of operations in the Hunter Region.

Hunter Water’s operating licence establishes an Integrated Quality Management System which provides a systematic approach to risk management in the provision of water, wastewater and drainage services. As Hunter Water’s provision of services is the driver of risk, the licence achieves the minimum level of coverage.

By licensing the Hunter Water Corporation as a whole rather than workers, work sites, or products, the operating licence minimises the compliance cost of the licence, while still addressing the source of risk.



4.2 Is the duration the maximum possible?

Step 2: Ensuring the maximum duration

The Licensing Guide provides that a licence with no fixed term is the default option. Thisdefault should only be changed if it is likely to improve the efficiency or effectiveness ofthe scheme. For example, a shorter duration may be required where:

characteristics of licensees are likely to change and need to be updated

the level or type of competency, conduct or attributes required of licensees are likelyto materially change or

there is an ongoing need to generate funds to cover the costs of compliance andenforcement activities.


The Hunter Water Act 1991 (NSW) provides that the operating licence may be renewed for a maximum term of five years.16 Hunter Water’s current operating licence has been issued for a five year term, from 2012 to 2017.

This duration balances the established nature of Hunter Water with the need to periodically review the operating licence to ensure it reflects any changes in the water and wastewater industry. A licence with no fixed term would not provide sufficient flexibility and is not appropriate in this case.

16 Hunter Water Act 1991 (NSW), section 15(2).



4.3 Are reporting requirements the minimum necessary?

Step 3: Ensuring the minimum reporting requirements

The Licensing Guide provides that reporting requirements should be intended to:

promote transparency and accountability, and/or

enable policy-making or enforcement.

It outlines the following additional questions relevant to the assessment at this step:

Is accountability to regulators necessary or would making information available be sufficient?

Are reporting requirements focused on outcomes?

Is the reported information being used?

Are there opportunities to consolidate or increase the level of consistency withreporting requirements in other jurisdictions or sectors?


Hunter Water’s reporting obligations under the operating licence are consolidated in a Reporting Manual that details:

when Hunter Water should report

what information it must report, and

how it should report.

In relation to water quality, Hunter Water must prepare a range of reports, including to NSW Health and IPART as well as monthly publicly available reports on its website. Other licence reporting consists of annual or periodic reporting to IPART, including outcomes-focused performance indicators. A summary of Hunter Water’s reporting requirements under the operating licence can be found in Appendix D.

These reporting requirements have been reviewed and consolidated significantly over the past few years to streamline reporting to the various agencies involved in regulating Hunter Water and to avoid duplication.

Reporting requirements under the operating licence serves two purposes (identified by the Licensing Guide):17

Public reporting, including the monthly reporting of water quality ensures the transparency and accountability of Hunter Water’s operations.

17 Licensing Guide, pp 47-49.



Other reporting, including annual or periodic reporting gives regulators (such as NSW Health and IPART) the information necessary to review and update their requirements and conduct audits of Hunter Water’s operations.

With this focus and the recent review and consolidation of Hunter Water’s reporting, we consider that the reporting requirements under the operating licence are the minimum necessary.

4.4 Are fees and charges appropriate?

Step 4: Ensuring fees and charges are appropriate

The Licensing Guide provides that fees and charges for permission licences such asHunter Water’s operating licence should reflect the efficient cost of administering thelicensing scheme and monitoring and enforcing compliance.


Hunter Water does not pay an annual licence fee. It is required to pay only the cost of the operational audit of the licence18 and is not charged for costs associated with administering the licence and other compliance activities. IPART’s regulatory activities as the administrator of the licence (eg, monitoring, reporting and compliance) are separately funded by the NSW Government.

An option would be to charge a separate licence fee to Hunter Water and other public water utilities. This would then require an adjustment to IPART’s budget if we retained the revenue or to Hunter Water’s dividend and tax payments if the fee was paid to the NSW Budget.

18 Hunter Water Act 1991 (NSW), section 18D.



4.5 Are conduct rules and mandatory attributes the minimum necessary?

Steps 5 & 6: Minimum conduct rules and mandatory attributes or structures

The Licensing Guide explains that conduct rules require or prohibit certain activities or behaviours for licensees. They are intended to reduce the risk of misconduct and promote quality and safety. Conduct rules are considered the minimum necessary whenthey:

directly address the risk posed by the licensee

do not duplicate other obligations

are focused on outcomes, and

are enforceable, with the penalties for non-compliance reflecting the severity of the breach and risk of harm.

Mandatory attributes or structures, on the other hand, focus on regulating the specific characteristics or competence of the product, person or place that is licensed. While conduct rules must directly address risks driven by behaviour, mandatory attributes maybe used as an indirect way to address risk. The Licensing Guide provides that mandatory attributes should be:

clearly articulated and measurable

allow for demonstration of prior knowledge

periodically reviewed for relevance

minimise any barriers to entry.

In our assessment, we assumed that mandatory business structures are put in place to address the risks in a system where the product, person and/or place drive the risks.Such systems include multiple interdependent elements and behavioural links.Overarching requirements such as quality management systems and other riskmanagement systems are classified as ‘mandatory business structures’. They include provisions related to both behaviour (conduct) and attributes of the components.

Source: Licensing Guide, pp 53 and 57.



Hunter Water’s operating licence imposes a wide range of obligations through mandatory attributes/structures and conduct rules to address the policy objectives of the licence. We have separated the operating licence obligations into mandatory attributes and conduct rules using the guidance provided by the Licensing Guide and more specific category descriptions outlined below. These category descriptions highlight the difference between the two categories of obligations in the context of this licence:

Mandatory attributes or structures – require the development of relatively complex business systems, procedures, processes and competencies that indirectly address risk (or the policy objective).

Conduct rules – require certain conduct that directly addresses risk (or the policy objective).

Table 4.1 shows our separation of Hunter Water’s operating licence into mandatory attributes and conduct rules using these category descriptions.

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Table 4.1 Separation of Hunter Water operating licence into Conduct Rules and Mandatory Attributes

Policy objectives category Conduct rules Mandatory attributes

Protect public health Drinking water management system consistent with Australian Drinking Water Guidelines (s 2.1 OL).

Recycled water management system consistent with Australian Guidelines for Water Recycling (s 2.2 OL).

Protect environment Compliance with water conservation target (s 3.1 OL).

Determine the economic level of leakage from its drinking water network (s 3.2 OL).

Develop and implement an environmental management system consistent with AS/NZS ISO 14001:2004 by 30 June 2017 (s 4.1 OL).

Protect consumers – quality of service

(Assets/ technical quality)

Water pressure standard (s 4.2.2 OL). Water continuity standard (s 4.2.3 OL). Wastewater overflow standard (s 4.2.4 OL).

Maintain a management system consistent with the BSI PAS 55:2008 Asset Management standard (s 4.1 OL).

Develop a management system consistent with AS/NZS ISO 9001:2008: Quality management systems – Requirements (QMS) (s 7.1 OL).


(Customer service quality)

Customer contract (s 5.1 OL). Consultative forum (s 5.5 OL). Internal complaints handling procedure (consistent with AS

ISO 10002-2006 s 5.6 OL). External dispute resolution scheme (s 5.7 OL).

Protect consumers – pricing Maximum fees and charges as determined by IPART (s 1.9 OL).

Note: Abbreviation: OL – Hunter Water Corporation operating licence 2012 to 2017.



4.5.1 Conduct rules

Having identified the conduct rules in Hunter Water's operating licence, we used the Licensing Guide’s criteria to assess whether they are the minimum necessary. This assessment is at Table 4.2. It highlights two areas in which the conduct rules may duplicate other obligations:

Consumer protection

Consumer protections provided by the Hunter Water Customer Contract partially duplicate provisions of the Australian Consumer Law 2010. The Hunter Water Customer Contract was last reviewed in 2010.19

We have noted this partial duplication in section 3.2 and found that the Hunter Water Customer Contract provides more comprehensive and specific consumer protections. We consider that the impact of any duplication on Hunter Water and customers is minimal.

However, there may be potential to reform the requirement of the licence to attach the Customer Contract as part of the operating licence and the fact that any change to the contract requires a licence variation. A lighter-handed approach could be developed, whereby the minimum requirements for the Customer Contract are set out in the legislation, enabling the business to develop the detail of the contract. The benefits of this approach would need to be balanced against the potential costs of amending the legislation.

Pricing

Under the IPART Act 1992, Hunter Water must ensure that its prices for government monopoly services do not exceed the maximum prices determined by IPART. Hunter Water must also report on how it has implemented IPART’s price determination. IPART can monitor Hunter Water’s performance to establish and report to the Premier on its compliance with IPART’s price determination.

The Hunter Water Act 1991 outlines the minimum terms and conditions for the operating licence. One of these conditions is in relation to price levels. Price levels are addressed in clause 1.9.1 of the operating licence. As a licence condition, Hunter Water’s compliance with it can be enforced by IPART in accordance with the procedures in the Act.

19 IPART normally reviews the contract as part of its end of term review. However, the Hunter

Water Act 1991 and Hunter Water Corporation Operating Licence 2007 to 2012 provide for the review and amendment of the Customer Contract during the term of the Operating Licence. IPART (2010), Review of Hunter Water’s Customer Contract 2010, http://www.ipart.nsw.gov.au/Home/Industries/Water/Reviews/Licensing_-_Hunter_Water_Corporation/Review_of_Hunter_Waters_Customer_Contract_2010, accessed 17 December 2013.



We recognise that the conduct rule ‘to ensure that prices do not exceed the maximum prices determined by IPART’ is duplicated in other legislative instruments. However, the enforcement of this rule by IPART can only be achieved through the inclusion of clause 1.9.1 in Hunter Water’s operating licence.

Our assessment shows that the conduct rules in Hunter Water’s operating licence are the minimum necessary.

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Table 4.2 Assessment of Hunter Water operating licence conduct rules


Conduct rules (obligations) Assessment: are the conduct rules the minimum necessary?

Directly address risk?

No duplication of other obligations?

Focused on outcomes?

Enforceable?

Protect environment

Compliance with water conservation target (s 3.1 OL).

Determine the economic level of leakage from its drinking water network (s 3.2 OL).



Water pressure standard (s 4.2.2 OL).

Water continuity standard (s 4.2.3 OL).

Wastewater overflow standard (s 4.2.4 OL).



Customer contract (s 5.1 OL).

X

Protect consumers – pricing

Maximum fees and charges as determined by IPART (s 1.9 OL). X



4.5.2 Mandatory attributes

We have also assessed the mandatory attributes in Hunter Water’s operating licence against the Licensing Guide’s criteria to determine whether they are the minimum necessary. This assessment is at Table 4.3.

Two of the criteria for mandatory attributes are not relevant to Hunter Water’s operating licence:

Allow for demonstration of prior knowledge – this criterion is most relevant to occupational licences.

Minimise any barriers to entry – Hunter Water is a natural monopoly and its operating licence is designed to specifically address the risks arising from its operating environment. Other water utilities wanting to provide services in Hunter Water’s area of operations may apply for licences under the Water Industry Competition Act 2006 (NSW). Therefore, an assessment of barriers to entry is appropriate under that Act, and not in relation to the Hunter Water operating licence.

We note that the systems standard approach to many areas of Hunter Water’s operating licence has been adopted to identify a particular framework Hunter Water should follow to achieve identified outcomes. This approach was implemented as a result of the most recent end of term review of Hunter Water’s operating licence in 2012 to replace the prescriptive conditions in the previous licence.20 The systems standard approach was intended to:21

enhance the clarity of the licence

remove duplication

address issues that arose in previous operational audits of Hunter Water.

Our assessment shows that the mandatory attributes in Hunter Water’s operating licence are the minimum necessary.

20 IPART, Hunter Water Corporation Operating Licence – End of Term Review, April 2012, pp 7-10. 21 Ibid, pp 7-10.

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Table 4.3 Assessment of Hunter Water operating licence mandatory attributes


Mandatory attributes (obligations) Assessment: are the mandatory attributes the minimum necessary?

Clearly articulated and measurable?

Allow for demonstration of prior knowledge?

Periodically reviewed for relevance?

Minimise barriers to entry?

Protect public health

Drinking water management system consistent with Australian Drinking Water Guidelines (s 2.1 OL).

Recycled water management system consistent with Australian Guidelines for Water Recycling (s 2.2 OL).

N/A N/A

Protect environment

Develop and implement an environmental management system consistent with AS/NZS ISO 14001:2004 by 30 June 2017 (s 6.1 OL).

N/A N/A



Maintain a management system consistent with the BSI PAS 55:2008 Asset Management standard (s 4.1 OL).

Develop a management system consistent with AS/NZS ISO 9001:2008: Quality management systems – Requirements (QMS) (s 7.1 OL).

N/A N/A



Consultative forum (s 5.5 OL). Internal complaints handling

procedure (consistent with AS ISO 10002-2006 s 5.6 OL).

External dispute resolution scheme (s 5.7 OL).

N/A N/A

Note: Abbreviation: OL – Hunter Water Corporation operating licence 2012 to 2017.


5 Stage 3 assessment: Is the licence administered effectively and/or efficiently?


Data source: PricewaterhouseCoopers (PwC), A best practice approach to designing and reviewing licensing schemes, March 2013 (Licensing Framework), p 59.

This stage of the Licensing Framework focuses on determining whether the licence is being implemented effectively. This is a separate question to whether the design of the licence is fit for purpose. In assessing this stage, the basic steps are the same. A series of practices are listed that should be undertaken by the regulator and a more detailed breakdown of options suggest methods of improving the efficiency and effectiveness of administration.

At each stage the following questions should be answered:

Are the practices that are outlined undertaken by the regulator?

Are there any feasible options to increase the efficiency or effectiveness of administration?22




5.1 Are registering and licensing activities efficient?

Step 1: Best practice registration and licensing activities.

Under the Licensing Framework the licence is considered best practice if:

the regulator captures application details accurately and promptly

there are convenient mechanisms for applicants to contact the regulator and lodgeapplications

the applications are assessed against the requirements of the scheme

the impact of decisions on third parties is considered and if relevant, they are informedof the decision

licensing decisions are communicated to applicants within approved timeframes.


This step is particularly relevant for new licensing schemes and for evaluating the application process for existing licensing schemes where more than one licence is issued.

The original HWC operating licence was granted to Hunter Water Corporation under the Hunter Water Act. There was no application process to obtain the licence, although as part of the corporatisation process, the NSW Government established an operating licence and Customer Contract.

5.2 Are stakeholders well informed?

Step 2: Informing stakeholders

Under the Licensing Guide stakeholders are generally considered to be well informedwhen:

the licence has clear objectives

information provided to stakeholders is current

compliance obligations are clear and direct

data is collected on the effectiveness of information campaigns

standards and expectations of the regulator are communicated clearly.


The broad objective of the operating licence is outlined in Section 1.1 of the licence. The compliance obligations are specified in different sections of the licence, such as water quality, assets, and customers and consumers.



The operating licence and supporting documents (such as the Customer Contract, and the Reporting Manual) are publicly available via IPART’s and Hunter Water’s websites. Hunter Water is also required to provide an annual summary of the Customer Contract which is included with the bills sent to customers.

The standards and expectations of IPART are communicated via licence obligations, the Reporting Manual, and through recommendations to the Minister on any licence compliance issues. Hunter Water, as the licence holder, is considered to be well informed.

The operating licence provides information on the Customer Contract, complaints handling, financial hardship and payment difficulties. This provides a solid foundation for customers and consumers to be well informed about HWC’s and their own rights and obligations.

5.3 Is collecting information targeted?

Step 3: Information collection

Information collection should aim to minimise the cost of collection while maximising theutility of existing sources of information. In order to be considered best practice the following practices should be met:

information is only collected from licensees where it cannot be collected elsewhere

comprehensive data is only collected if it is required to achieve licence outcomes

scope of data collected is appropriate

information is only requested once

there are convenient processes for annual reporting or information provision to theregulator.


Hunter Water is required to report on its obligations under the operating licence. The licence also includes a Reporting Manual which outlines all reporting requirements under the licence and identifies: when, what and how Hunter Water should report this information. This manual can be updated as required to ensure that requirements are relevant and targeted.

Following the 2011 licence review, the overall level of reporting was reduced with the implementation of an Integrated Quality Managements System (IQMS). This limits duplicative reporting across several areas (such as environmental management and asset management).



However, there were some new reporting requirements introduced following the 2011 review in the areas of drinking water quality and asset management. For example, Hunter Water is now required to report quarterly to NSW Health on the quality of drinking water, and on an exception basis for recycled water. In the previous operating licence, Hunter Water was required to report annually to NSW Health on drinking water quality.

Overall, information collection and reporting under the licence is targeted to areas of greatest risk in Hunter Water’s operations.

5.4 Is receiving and responding to complaints optimal?

Step 4: Complaints handling

Receiving and responding to complaints is considered optimal when:

consumers have access to methods of making complaints or enquiries

accurate and timely information is provided in response to any complaints or enquiries

procedures are clearly outlined to complainants

established protocols are used to resolve complaints.


Hunter Water’s customers have a number of avenues for making complaints ranging from contacting Hunter Water directly via phone and email, to making a complaint with the Energy and Water Ombudsman of NSW (EWON). Hunter Water’s procedures and protocols are available on its website along with copies of the customer contract and links to EWON, IPART and other regulatory bodies. Given this, receiving and responding to complaints by Hunter Water is considered to be optimal.



5.5 Is monitoring and enforcing compliance best practice?

Step 5: Best practice monitoring and enforcement

Best practice monitoring and enforcement policies outlined in the Licensing Guide includethat:

a risk based approach is used when identifying priorities and objectives and when establishing a monitoring or enforcement plan

breaches and other non-compliant behaviour are addressed in an appropriate mannerwith sanctions/penalties that focus on regulatory objectives

regulators have an understanding of the reasons and context for non-compliance

reasons for enforcement outcomes are provided at the earliest opportunity

appeal mechanisms are transparent.


IPART uses a risk-based approach to the annual operational licence audit for Hunter Water. A risk based methodology, consistent with AS/NZ 4360:2004 Risk Management, was developed to audit the requirements of the operating licence and to determine audit priorities. A five year risk based audit program has been developed for Hunter Water’s operating licence.

The operational audits reports for Hunter Water are publicly available on IPART’s website. Any licence breaches or non-compliant behaviour by Hunter Water would generally be analysed in the audit and the auditor would make recommendations. The auditor can also identify opportunities for improvement that may further improve Hunter Water’s procedures and practices.

As part of the annual report to the Minister on Hunter Water’s compliance with the licence, IPART may make recommendations (and identify opportunities for improvement) which are based on the audit findings. The Minister can accept, modify or reject these recommendations and can direct Hunter Water to take specific actions.

IPART can impose monetary penalties or require actions to correct contravention of Hunter Water’s operating licence.23 Hunter Water can appeal these decisions by applying to the Administrative Decisions Tribunal (from 1 January 2014, this will be integrated into the NSW Civil and Administrative Tribunal), for a review of the decision.24

IPART’s monitoring and enforcement policies are in accordance with best regulatory practices.

23 Hunter Water Act 1991, section 17A. 24 Hunter Water Act 1991, section 17B.



5.6 Is the scheme subject to periodic review?

The operating licence is reviewed prior to the end of its term, currently every five years. The licence has been subject to a public review process a total of four times. IPART conducted the most recent review in 2011 and the review included a Cost Benefit Analysis (CBA) of changes to the operating licence in accordance with best regulatory practice.


6 Stage 4 assessment: Is the operating licence the best response?



The aim of Stage 4 of the Licensing Framework is to assess licensing against other options, as a final step to determine that licensing is the best approach.25 We make this assessment by answering the following questions:

Does a preliminary assessment suggest licensing will result in a net benefit?

Are there alternative options that could deliver the policy objectives?

6.1 Does a preliminary assessment suggest licensing will result in a net benefit?

6.1.1 Cost benefit analysis or preliminary assessment?

For an existing licence, like Hunter Water’s operating licence, the Guide advises that Stages 1 to 3 offer a targeted way to review a licence without undertaking a full cost benefit analysis. After progressing through Stages 1 to 3, if it appears that there are net benefits from the licensing scheme, the final steps in Stage 4 (that require a full costs benefit analysis of licensing against other options) may not be necessary.26

25 Licensing Guide, p 71. 26 Ibid.



Our assessment so far has:

identified that licensing is an appropriate option to address the policy objectives (Stage 1)

confirmed that the Hunter Water operating licence is well designed (Stage 2)

confirmed that the Hunter Water operating licence is administered effectively and efficiently (Stage 3).

In particular, our Stage 1 assessment confirmed that government action is needed for all the identified policy objectives (eg, ensuring drinking water is safe, ensuring availability of drinking water is sufficient, ensuring prices are not excessive and minimising harm to the environment). We assessed that, in a generic water/wastewater services market, the overall risk of detriment is moderate to high if the policy objectives are not fully addressed. We found that available remedies for the possible negative events are generally inadequate and there is limited potential for market responses. As a result, licensing was identified as an appropriate option for addressing the policy objectives. Importantly, licensing is the only instrument that provides the compliance and enforcement functions we consider necessary to fully address the policy objectives.

In light of this assessment, it appears that there are net benefits from licensing Hunter Water. In accordance with the Guide, we have therefore, through our assessment of Stage 1 to 3, conducted a preliminary assessment of the licence’s net benefits, rather than a full cost benefit analysis.



6.1.2 Conducting a preliminary assessment

Step 1: Conducting a preliminary assessment

This step involves a preliminary assessment of whether licensing is likely to result in a netbenefit. Important issues for consideration include:

How significant is the problem that is being addressed by licensing?

What impact does licensing have on the problem – how significant are the benefits from the licence?

How costly is licensing?

If the preliminary assessment indicates there are clear net benefits from the (existing) licensing scheme, it may not be necessary to assess the scheme any further.

If the preliminary assessment indicates the (existing) licensing scheme is leading to net costs, or the net impact is unclear, further assessment under the Licensing Framework is required.


How significant is the problem?

Our Stage 1 assessment of Hunter Water’s operating licence identified a range of negative events that could occur in the absence of the licence:

unsafe drinking water

drinking water not available

unsafe wastewater services/wastewater overflows

stormwater drainage services not provided or inadequate

unsafe recycled water services

excessive prices for services

poor service standards

financial losses to customers

detrimental impact on the environment.27

These negative events are examples of the ‘problems’ the licence addresses.

We assessed that the overall risk of detriment from these negative events occurring ranged from moderate to high, and that possible remedies and market responses to these events would be inadequate.

27 See Table 3.2.



This demonstrates that the problems addressed by the Hunter Water operating licence are significant.

How significant are the benefits from the licence?

We have established in Stage 1 that Hunter Water’s operating licence is likely to deliver significant public and private benefits by:

protecting public health

protecting consumers

protecting the environment

delivering other government policy objectives (eg, provision of essential services).

We have not quantified the value of these benefits, but note they are likely to be significant when we consider that Hunter Water delivers essential services to approximately 570,000 people.28 In other words, if the policy objectives are not met there are likely to be significant costs to the community in the Hunter region.

28 Hunter Water Corporation, Annual Report 2012-13, p 6,

http://www.hunterwater.com.au/Resources/Documents/Annual-Report-Current/Annual_Report_1213_Web.pdf, accessed 25 November 2013.



To illustrate the nature of the benefits, we have considered the literature in relation to one of the policy objectives – protecting public health by ensuring drinking water is safe (see Box 6.1). We found that there are likely to be significant net benefits from the operating licence imposing drinking water quality management requirements on Hunter Water.

Box 6.1 Benefits of protecting public health by ensuring drinking water is safe

Most of the benefits in terms of protecting public health come from Hunter Waterimplementing the licence’s drinking water quality system requirements.

Available literature on net benefits in this area indicates there is scope for the net benefitsto be significant.a Data available from Victoria and New Zealand indicates that:

Introducing the Safe Drinking Water Regulations in Victoria, which contained drinkingwater quality standards, would yield significant, yet unquantified, benefits. In relation to costs, these would likely total $68 million over 10 years (including $40 million for drinking water standards compliance and monitoring, and $18 million for implementing risk management plans).b

Raising the drinking water quality in New Zealand would generate significant netbenefits, quantified to be $105 million over 40 years (from compliance with bacteriological standards). The estimated population benefitting from the improved water quality standard was 775,000 which is a similar order of magnitude to thepopulation in the Hunter Water.c

a NHMRC, NRMMC (2011) Australian Drinking Water Guidelines Paper 6 National Water QualityManagement Strategy. National Health and Medical Research Council, National Resource Management Ministerial Council, Commonwealth of Australia, Canberra, pp 1-8, http://www.nhmrc.gov.au/_files_nhmrc/publications/attachments/eh52_aust_drinking_water_guidelines.pdf, accessed on 25 November 2013. Referenced source Productivity Commission (2000), Arrangements for Setting Drinking Water Standards: International Benchmarking. Commonwealth of Australia, Canberra. http://www.pc.gov.au/__data/assets/pdf_file/0019/9190/drinkw.pdf, accessed on 25 November 2013. b State Government of Victoria (2004), Drinking water quality regulatory framework for Victoria – Regulatory Impact Statement for the Safe Water Regulations 2004, p 4. http://www.vcec.vic.gov.au/CA256EAF001C7B21/WebObj/sdwr-ris/$File/sdwr%20-%20ris.pdf, accessed on 28 November 2013. c LECG (2010), Cost benefit analysis of raising the quality of New Zealand networked drinking water, June 2010, p 4, http://www.srgexpert.com/cba-raising-quality-of-networked-drinking-water-jun2010%5B1%5D.pdf , accessed on 25 November 2013.

How costly is licensing?

The operating licence involves costs to Hunter Water from managing its operations, as well as administrative, audit and compliance costs associated with the licence. These costs can be significant, and include:

audit costs of around $86,000 for the 2011/12 financial year29

29 The 2011/12 Operational Audit for Hunter Water Corporation cost $85,850. See IPART, Annual

Report 2011/12, October 2012, p 129.



administration and compliance costs of around $100,000 to $200,000 per year30

costs in managing Hunter Water’s operations.

As an indication of these operational costs, the most significant change to the operating licence in 2012 was requiring Hunter Water to implement an Integrated Quality Management System (IQMS) over a four year period. A cost benefit analysis undertaken at the time estimated that this would cost about $4.53 million over five years.31 (It was assessed that the benefits of adopting the IQMS – such as efficiency and productivity gains, better levels of service and reduced risk of system failure - were likely to outweigh these costs.)

Licensing Hunter Water also involves costs to the regulator – IPART. These costs, on average, total about $250,000 per year and include the cost of monitoring and reporting on Hunter Water’s compliance with the licence, conducting annual operational audits and end of term licence reviews.

The operating licence also involves costs of about $100,000 per year32 to NSW Health in terms of monitoring compliance with the water quality requirements in the operating licence.

The cost of licensing Hunter Water reflects the risks and complexity in providing water and wastewater services and the significance of these services to the community.

Comparing the potential benefits (see above) with the costs, our preliminary assessment suggests that there are likely to be net benefits from the licensing the operations of Hunter Water.

30 Hunter Water Corporation, letter to IPART, 26 March 2014. 31 IPART, Hunter Water Corporation Operating Licence – End of Term Review, April 2012, p 9. 32 Hunter Water Corporation, letter to IPART, 26 March 2014.



6.2 Are there alternative options that could deliver the policy objectives?

Step 2: Alternative options to deliver the policy objectives

This step is to identify whether there are any alternative regulatory or non-regulatory options that could deliver the policy objectives. The Licensing Guide notes that consideration should be given to a range of factors such as enforceability, compliance issues, potential cost, potential regulatory failure and adverse consequences ofgovernment action. Examples of alternative options include:

targeted information or education campaigns

targeted enforcement of generic laws and regulations

imposing conduct requirements through regulation without licensing

imposing mandatory attributes through regulation without licensing.


We have identified two alternative options that could potentially achieve the policy objectives:

Amend existing legislation to fill the gaps in scope and enforcement that are currently provided by the operating licence.

Develop a standard licence/ authority/ regulation for all water suppliers/operators (whether public or private).

6.2.1 Amending existing legislation

Our Stage 1 assessment of Hunter Water’s operating licence identified that existing legislation partially addresses most of the policy objectives. The operating licence fills the gaps in scope, compliance and enforcement of the existing legislation to ensure the policy objectives are achieved.33

Amending existing legislation to fill these gaps could be an alternative to the operating licence. This would require, for example:

Amendments to public health, environmental, water sectoral, consumer protection and Hunter Water specific legislation to impose requirements that are currently provided only in the Hunter Water operating licence.

Empowering other regulators and government agencies to undertake compliance and enforcement activities currently undertaken by IPART to ensure Hunter Water’s obligations and therefore the policy objectives are met.

33 See section 3.2.



Hunter Water’s operations cut across a number of policy areas, such as public health, environment and consumer protection. Therefore, relying on regulation through (amending) existing legislation would require the involvement of a number of regulators and could introduce the risk of duplication and overlap. Further, the costs of amending legislation can be significant in some cases.

Under this option, a number of regulators would be required to undertake audits of Hunter Water’s compliance with a subset of its obligations and separately report to relevant Ministers. This is unlikely to be as efficient as the current licence audit process that involves one audit and one report to the NSW Government.

It may also be more complex to enforce obligations in legislation compared with conditions of licence. For example, if legislation makes the breach of an obligation an offence, that offence would need to be prosecuted in a court, which involves considerable time and money. Alternatively, legislation could provide the ability for regulators to take action and/or fine Hunter Water for breaches of particular obligations. This is likely to be less onerous than prosecuting an offence but merely replicates the current licence provisions.

While amending legislation is a potential alternative to the operating licence, it would need to be explored further to understand the feasibility. The current Hunter Water operating licence addresses multiple policy rationales and objectives, such as ensuring drinking water is safe and ensuring availability of drinking water is sufficient. We have identified gaps between the operating licence provisions and the existing legislative instruments in the absence of a licence. It is not clear that there would be net benefits from amending multiple pieces of legislation as opposed to maintaining all obligations under a single licence. Licensing appears to be a more efficient option in terms of compliance and administration for both the licensee and regulators.

6.2.2 Developing a standard licence/authority/regulation

Regulatory efficiency can also achieved by developing a standard licence/ authority/ or regulation that could apply to all water suppliers or operators. The Water Industry Competition Act 2006 (NSW) provides a model of a standard licence that could be adapted to apply to public and private operators.

The operating licences of public water utilities (eg, Hunter Water and Sydney Water Corporation) are provided for under separate Acts. The operating licence provisions could be removed from these Acts and replaced by licensing of public water utilities under the Water Industry Competition Act 2006. Alternatively, the Hunter Water and Sydney Water Corporation Acts could be removed altogether and combined in a whole of water industry Act (which could also be combined with the Water Industry Competition Act 2006).



We consider that standardisation in water licensing/regulation has the potential to reduce compliance costs but it is an alternative to consider in the longer term, depending on development of the water industry in NSW. Standardised regulation may be a future option but the feasibility needs to be further evaluated.

6.3 Conclusion

The current operating licence brings together the obligations imposed on Hunter Water under the Hunter Water Act 1991 and requirements prescribed by other legislation relevant to the administration of the operating licence. In effect, the operating licence is an overarching regulatory instrument which recognises the significant impact that a business like Hunter Water can have on consumers, public health, and the environment.

By combining these obligations in one instrument, the operating licence allows for monitoring, auditing and reporting of Hunter Water’s performance to be undertaken by one regulator (ie, IPART) rather than by a number of individual regulators (ie, NSW Health, NSW Environment Protection Authority, IPART). This means that the annual auditing and reporting of Hunter Water’s performance can be more efficiently delivered to the NSW Government through one process and one report. In addition, one report makes it more transparent for the NSW Government, as the shareholder, to evaluate Hunter Water’s performance.

From an administrative perspective, it is also easier for a regulator to take enforcement action for breach of a licence condition rather than prosecuting a breach of a particular legislative requirement or alternatively imposing a fine.

On balance, we consider that the operating licence provides the best response as it is more efficient to administer and enforce than the alternative options. We considered two alternatives – amending existing legislation and developing a standard regulation that could apply to all water suppliers or operators. For the former, the incremental costs of making the required regulatory change and enforcing the new powers by a number of regulators are likely to outweigh the benefits of removing the operating licence. The latter option might be considered further but it still requires licensing that addresses the policy rationale and objectives discussed in Stages 1 of the Licensing Framework assessment.



In summary, Hunter Water’s operating licence passes Stages 1, 2 and 3 of the Licensing Framework and is, by definition, an efficient and effective instrument. In addition, reporting under the licence makes Hunter Water’s performance clearly accountable to the NSW Government. Our Stage 4 assessment has therefore identified that:

there are likely to be net benefits from the Hunter Water operating licence

there are no feasible alternative options to licensing.

As such, the Hunter Water operating licence is the best response.


A Are additional factors present to justify government intervention?

In section 3.1.1 we identified the policy rationales for the government to intervene in Hunter Water’s operations. According to the Licensing Framework, this is only an initial step. It also requires the following additional factors to be present in order to justify the government intervention:

there is a high risk of detriment if the policy objective is not addressed

the ability to remedy is poor

the market is unable or unlikely to respond.

In section 3.1.2, we outlined our analysis of these additional factors. We present our detailed analysis in this appendix.

Risk of detriment

The risk of detriment depends on both the likelihood of a negative event occurring and the consequences of this negative event (ie, the size of the detriment that would occur as a result of that event).34

Our assessments of the risk of detriment for each of the negative events identified in section 3.1.2 are presented in Table A.1. As shown in the table, we consider each of these potential negative events to have an overall risk level between Moderate and High.




Table A.1 Potential detrimental events in the absence of Hunter Water’s operating licence

Negative event Likelihood of event

Potential severity of event Overall risk level

Unsafe drinking water Low-Moderate High depending on how unsafe the water is; consumers’ awareness of the problem; and the ability for consumers to remedy (eg, through boiling the water before drinking).

High

Drinking water not available

Low High if drinking water unavailable for extended period, and alternative sources are not easily available (or overly costly).

Moderate-High

Unsafe wastewater services/wastewater overflows

Moderate Moderate-High as any public health impact will be highly localised.

Moderate-High


Moderate-High Moderate-High as can cause significant property damage and also be detrimental to public health if it results in wastewater overflows.

Moderate-High

Unsafe recycled water services

Low-Moderate High if causes widespread public health impact.

Moderate-High

Excessive prices for services

High Low-Moderate if adding significantly to financial hardship experienced by some customers. Moreover, the number of customers unable to pay for sufficient drinking water to maintain health would likely be low.

Moderate

Poor service standards (not including drinking water safety and safety of wastewater and recycled water services)

High Low-Moderate if not meeting customers’ desired service level but still meeting minimum necessary (eg, in the case of low water pressure, or poor customer service).

Moderate

Financial losses to customers

Moderate

Moderate depending on the extent of the losses, eg through damage to customer’s property. Property damage is likely to be highly localised.

Moderate

Detrimental impact on the environment

Moderate Moderate-High depending on the extent of the damage.

Moderate-High



Ability to remedy

The Licensing Guide provides that, depending on the nature of the risk and possible detriment involved, the presence of effective remedies (ie, after the negative event has occurred) can often alleviate the need for government intervention.35 Table A.2 presents our assessment of the possible remedies available for each of the potential negative events considered.36 As shown in the table, we consider the possible remedies will not be adequate for any of the negative events.

35 Licensing Guide, p 16. 36 Note that this assessment is based on our high-level understanding of what may be possible

remedies. Detailed analysis would only be required where there’s uncertainty about the adequacy of these possible remedies.



Table A.2 Potential for remedies in the absence of Hunter Water’s operating licence

Negative event Possible remedy Adequacy of remedy

Unsafe drinking water Potential for financial compensation to affected consumers.

Inadequate remedy if has caused harm to human health.


Potential for financial compensation to affected customers (eg, if terms of contract are breached). Otherwise no remedy available if no obligation to supply drinking water.



Potential for financial compensation to affected parties.



No remedy if no obligation to provide stormwater drainage services.

Inadequate


Potential for financial compensation to affected consumers.



Potential for financial compensation to affected customers eg, if deemed to be abusing monopoly power.

While the remedy itself would be satisfactory, it would likely be difficult and costly to pursue through the court, eg, by proving that monopoly power has been abused. Therefore, the remedy would likely be inadequate.

Poor service standards (excluding drinking water safety and safety of wastewater and recycled water services)

Potential for financial compensation to affected customers (eg, if terms of contract are breached).

While the remedy itself may be satisfactory, it would likely be difficult and costly pursue. Therefore, the remedy would likely be inadequate.

Financial losses to customers (eg, due to property damage)

Potential for financial compensation to affected customers.

Pursuing remedy via the court-system may be difficult and costly for customers. Therefore, the remedy may be inadequate.


Potential for financial compensation to Government (eg, to cover clean-up costs).

Remedy may not be adequate if the damage is irreversible. Seeking the remedy through the courts may also be difficult and costly. Therefore, the remedy would likely be inadequate.



Potential for market responses

The Licensing Guide also recognises that markets often develop their own solutions for market or regulatory problems.37 Table A.3 presents examples of existing and potential market responses that could contribute towards:

preventing the negative event

reducing the likelihood of the negative event, or

reducing the impact of the negative event.

As shown in the table, we do not consider any of the possible market responses to be adequate.


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Table A.3 Potential for market responses in the absence of Hunter Water’s operating licence

Negative event Possible market response Adequacy of market response

Unsafe drinking water

There’s potential for market response if the problem is enduring. For example, there could be small household scale filtration systems, or larger systems servicing larger developments/office towers.

Potential market responses inadequate to ensure safe drinking water to all customers. Not all customers could afford the additional costs of such systems. Moreover, these systems may still not fully address the problem.


The potential for market response depends on the reason why the water is not available. If it’s because: Hunter Water’s not willing to supply to a particular

customer (eg, if providing the infrastructure is not economic for Hunter Water), a third-party provider could step in.

Bills have not been paid and service has been withdrawn, there’s unlikely to be a market response.

Potential market responses inadequate to ensure supply of drinking water to everyone. If servicing a particular customer or area is not economic for Hunter Water, it’s highly unlikely to be economical for a third-party provider.


There’s potential for market response if the problem is enduring. For example: onsite wastewater treatment systems third-party provider/operator of “last mile” service third-party collection and disposal of wastewater.

Potential market responses inadequate to ensure safe wastewater disposal for everyone, because these solutions are likely to be too costly for many customers, especially when already connected to Hunter Water’s network. In addition, solutions like onsite wastewater treatment systems carry a high public health risk, and therefore would not fully alleviate the problem.


The market already provides stormwater drainage solutions, in particular when on private property or as part of a development.

If stormwater drainage was provided entirely by the market, it would be underprovided due to its public good nature. The potential market response is therefore inadequate to ensure the optimal level of stormwater drainage.


The potential for a market response depends on the commercial attractiveness for a third-party to take over the supply of recycled water services to the affected properties.

If taking over the delivery of recycled water services currently provided by Hunter Water is not commercially attractive, there would be no market response. The potential market response is therefore inadequate to ensure that all recycled water customers will be provided with safe recycled water services.


No likely market solution, as third party provider would be unlikely to be able to provide services cheaper than Hunter Water. The ability for Hunter Water to price its services lower than a third party provider makes the threat of a new entrant unrealistic.

Inadequate market response (no response).

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Negative event Possible market response Adequacy of market response

Poor service standards (excluding drinking water safety and safety of wastewater and recycled water services)

There’s potential for market response if the problem is enduring, depending on the type and severity of the problem. For example: third-party providers could provide better services, eg,

by taking over the delivery of services on a specific part of the network (last mile) or by taking over the part of the business that interacts directly with customers

on-site solutions could alleviate some problems (eg, water pressure boosters and rainwater tanks).

Potential market responses inadequate to ensure satisfactory service standards all around. Also, many customers would be unable or unwilling to meet the expense of on-site solutions.

Financial losses to customers (eg, due to property damage)

The availability of property insurance is a market response which will reduce the cost of seeking remedy for property damage.

Using insurance to seek remedy through the court system can still be a costly and time-consuming exercise. Insurance is therefore likely an inadequate market response.


Insurance is a potential market response. There are likely many types of environmental damage for which an insurer would not be willing to offer insurance. Insurance could also only provide a financial remedy after the event, which would not be adequate where the damage is irreversible (as per Table A.2). Therefore, insurance is likely an inadequate market response.


B Existing legislation related to policy objectives of Hunter Water operating licence

Table B.1 provides a summary of the existing legislation related to the policy objectives of the Hunter Water operating licence.

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Policy objectives Protect public health Protect environment Protect consumers

Regulatory instrument

Quality of services Pricing

Hunter Water Act 1991 Obligations Governor may grant HWC an operating licence

(OL) (s 12) which must include a minimum set of terms and conditions (T&Cs) (s 13), including to ensure that the systems and services meet the quality and performance standards specified in OL in relation to water quality, service interruptions, price levels and other matters set out in OL (s 13(1)(c)).

Minister can give directions to HWC’s Board under s 20P of the State Owned Corporations Act if warranted on public health grounds (s 64A).

Obligations (on other persons) No unauthorised connections, alterations and

use of HWC’s works (s 30A). No unauthorised discharges into HWC’s works

(s 31). Penalties imposed for offences under s 30 – 31

(s 31A). IPART must ensure that the operational audit of

HWC is prepared in accordance with the operating licence (s 18C).

Compliance and reporting If, in the opinion of the Minister, HWC

contravenes the operating licence (OL), the Governor may direct one of the following actions: – a letter of reprimand by the Minister is to be

served on HWC (s 17(1)(a) – HWC to pay monetary penalty (not exceeding

$150,000, s 17(1)(b)) – Governor cancels HWC’s OL in accordance

with s 18 (s 17(1)(c)). If HWC has knowingly contravened the OL

(s 17A(5)), IPART may: – impose a monetary penalty (s 17A(1)) not

exceeding $10,000 for the 1st day of contravention and a further $1,000 per day up to a max of 30 days (s 17A(6))

– alternatively, require HWC to take such action as IPART considers appropriate (s 17A(2)).

IPART must comply with the requirements in s 17A for enforcement action.

HWC may apply to have IPART’s decision to take enforcement action reviewed by the Administrative Decisions Tribunal (s 17B(1)).

Obligations Governor may grant HWC an operating licence

(OL) (s 12) which must include a minimum set of terms and conditions (T&Cs) (s 13), including to ensure that the systems and services meet the quality and performance standards specified in OL in relation to water quality, service interruptions, price levels and other matters set out in OL (s 13 (1)(c)).

If a public road or public reserve is damaged by a leakage from a HWC main, HWC can be required to make good the damage without delay (s 23(3)).

Obligations (on other persons) Environmental levy can be charged by HWC on

the landowner for new sewer connection (s 45). No unauthorised connections, alterations and use

of HWC’s works (s 30A). No unauthorised discharges into HWC’s works

(s 31). IPART must ensure that the operational audit of


A person must not do any water supply, sewerage or drainage works to connect to HWC’s pipes, sewers or drains unless licensed (s 69).

Consent authority within HWC’s area of operations must notify HWC if it receives a development/building application that may significantly: damage/interfere with HWC’s works, adversely affect HWC’s operations, adversely affect quality of HWC’s water supply (s 51).


contravenes the operating licence (OL), the Governor may direct the following actions: – a letter of reprimand by the Minister is to be



with s 18 (s 17(1)(c)). If HWC has knowingly (s 17A(5) contravened the

OL, IPART may impose a monetary penalty (s 17A(1)) not exceeding $10,000 for the 1st day of contravention and a further $1,000 per day up to a max of 30 days (s 17A(6)).

HWC may apply to have Tribunal’s decision reviewed by the Administrative Decisions Tribunal (s 17B(1)).



Terms and conditions of customer contract are to be set out in operating licence (s 35(1)).

Owner of land connected to HWC water or sewer main taken to have entered into a contract with HWC (s 36(1)).

Contract is not unconscionable, harsh or oppressive for the purposes of any law (s 36(2)).

T&Cs may be varied on six months’ notice (s 38). IPART must ensure that the operational audit of




served on HWC (s 17(1)(a) – HWC to pay monetary penalty (not

exceeding $150,000, s 17(1)(b)) – Governor cancels HWC’s OL in accordance






T&Cs must include particulars of charges for HWC’s provision of water supply or sewerage services to customers (s 35(3)).

IPART must ensure that the operational audit of HWC is prepared in accordance with the operating licence (s 18C).








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quality and water treatment methods (s 19). Minister can take necessary action or give

necessary directions to deal with public health risks and possible consequences, including during state of emergency (ss 7, 8).

Minister can direct HWC to take specified action to minimise or rectify adverse consequences of any public health risk (s 9(1)).

General enforcement powers in Part 8 (eg, power to inspect HWC’s public health documents) include powers to direct HWC. Offences apply for failure to comply (s 113).

Penalties for supply of drinking water unfit for human consumption (s 15), not complying with Ministerial direction (s 17) or Director-General’s direction (s 20), not conveying the Chief Health Officer’s drinking water advice to the public (s 22) and not correcting misleading information about water safety as directed (s 23).

Public Health Regulation 2012

Obligations Part 5: Safety measures for drinking water: Quality assurance programs to be established by

HWC under the Act (cl 34): “a quality assurance program must address the elements of the Framework for Management of Drinking Water Quality (as set out in the Australian Drinking Water Guidelines published by the National Health and Medical Research Council)”.

Records to be kept by suppliers of drinking water in relation to water carters (cl 35).

Compliance and reporting Penalties under cl 35 (Records to be kept by

suppliers of drinking water (water carter)).

No obligation on HWC No obligation on HWC No obligation on HWC

Fluoridation of Public Water Supplies Act 1957

Obligations HWC may add fluorine to public water supplies

under its control with approval/direction of Secretary (s 6(1), (2)).

HWC must add fluorine to public water supplies under its control if directed by the Secretary (s 6(1A), s 6A).

HWC must not discontinue adding fluorine (once approved/directed) unless the approval or direction is revoked (s 6B).

Compliance and reporting HWC can be directed to add fluorine to public

water supplies under its control (s 6(1A), s 6A). Penalties for not complying with direction

(s 6A(5)) or discontinuing fluorine without revocation of approval/direction (s 6B(2)).

No obligation on HWC No obligation on HWC No obligation on HWC

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water (Part 5.3) and other types of pollution (Chapter 5).

HWC must comply with various investigative functions/powers of the EPA under Chapter 7, eg, providing information and/or records (s 191).

Penalties for failing to comply with EPA’s investigative functions/powers in Chapter 7 (s 211).

If HWC’s EPL requires reporting of monitoring data, it must publish the data and other information on its website or alternatively provide a copy of the data for free to persons on request (s 66(6)).

Protection of the Environment Administration Act 1991

No obligation on HWC If HWC is considered a ‘public authority’ under

the Act, the Environmental Protection Authority (EPA) may: – advise HWC on performance targets relating

to environment protection (s 11) – direct HWC to do anything within the powers

of HWC which will contribute to environment protection (s 12 (1)(a))

– direct HWC to cease doing anything which adversely affects environment protection (s 12(1)(b)).

No obligation on HWC No obligation on HWC

Environmental Planning and Assessment Act 1979

No obligation on HWC Obligations Various obligations are imposed on HWC as a ‘determining authority’ for environmental assessments (Part 5). Eg, requirements to consider/have regard to various matters before approving certain activities (Act, ss 111, 112A).

Compliance and reporting Minister may direct HWC to exercise functions

under the Act or in an EPI (s 117). Minister may impose conditions on project

approvals to require monitoring, environmental audits, or other audits to the Minister’s satisfaction(s 122C). Penalties apply for various offences in relation to these audits (s 122E). This is relevant to projects approved under Part 3A, State significant developments with Part 4 consent, and State significant infrastructure approved under Part 5.1.


Environmental Planning and Assessment Regulation 2000

No obligation on HWC Obligations Various obligations are imposed on HWC as a ‘determining authority’ for environmental assessments. Eg, requirement to prepare report on activity for which an environmental impact statement has been prepared (Regulation, cl 243).


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(up to max 25 days) (s 16(1)(a)). Minister may require action (s 16(1)(b)), cancel

the licence (s 16(1)(c)), suspend the licence (s 16(1)(d)), declare that the licensee is a disqualified corporation for the purposes of WICA (s 16(1)(e), declare that specified persons are disqualified individuals for the purposes of WICA (s 16(1)(f)).

conditions of: – up to $500,000 for the first day, and – additional $20,000 for each subsequent day

(up to max 25 days) (s 16(1)(a)). Minister may require action (s 16(1)(b)) cancel

the licence (s 16(1)(c)), suspend the licence (s 16(1)(d)), declare that the licensee is a disqualified corporation for the purposes of WICA (s 16(1)(e), declare that specified persons are disqualified individuals for the purposes of WICA (s 16(1)(f)).

Water Industry Competition (General) Regulation 2008

No obligation on HWC

Obligations (on other persons) Network operators Applicants for a network operator licence must

address: – the framework for management of drinking

water quality, as detailed in the Australian Drinking Water Guidelines (cl 6(1)(d)(i))

– the framework for management of recycled water quality and use, as detailed in the Australian Guidelines for Water Recycling (cl 6(1)(d)(ii)).

Licensed network operator must ensure that water or sewerage infrastructure is properly designed and constructed, operated in a safe and reliable manner and maintained in a proper condition, having regard to: – the purposes for which it is licensed – the licence conditions and – any publicly available standards or codes

relating to its design, construction, operation and maintenance (Sch 1, cl 4).

Licensed network operators must prepare water quality plans addressing: – for drinking water - how the elements of the

framework for the management of drinking water quality based as detailed in Australian Drinking Water Guidelines (Sch 1, cl 7(1)(a)) have been addressed and will be implemented

– for recycled water - how the elements of the framework for the management of recycled water quality and use as detailed in the Australian Guidelines for Water Recycling (Sch 1, cl 7(1)(b)), have been addressed and will be implemented.

Water quality plans must be consistent with the Australian Drinking Water Guidelines and Australian Guidelines for Recycled Water (Sch 1, cl 7(2) and (3)).

Licensed network operators for the supply of drinking water must ensure it is fit for human


Obligations (on other persons) Network operators Licensed network operators must comply with the

requirements of: – the Environmental Planning and Assessment

Act 1979 and any environmental planning instruments and

– the Protection of the Environment Operations Act 1997 and any regulations under that Act (Sch 1, cl 4).

Licensed network operators with sewerage infrastructure must prepare a sewage management plan including the manner in which health and ecological assessments will be undertaken (Sch 1, cl 14(1)).

Retail suppliers Licensed retail suppliers must comply with

requirements of: – Environmental Planning and Assessment

Act 1979 and any environmental planning instruments

– the Protection of the Environment Operations Act 1997 and any regulations (Sch 2, cl 7).

Obligations If Minister declares HWC a retailer of last resort

(ROLR): – HWC’s contingency plan must indicate any

limitations and consequential effects on ability to supply water or provide sewerage services (cl 20(e)); and

– HWC must cause notice of ROLR declaration, together with a copy of relevant special circumstances contract, to be sent to the customer (cl 24).

HWC must comply with any water industry code of conduct, which may include provisions with respect to: – responsibility for water quality (cl 25(3)(a)); – liability in the event of unavailability of water

(cl 25(3(b)); – liability in the event of infrastructure failure

(cl 25(3(c)); – fees and charges payable for infrastructure

use (cl 25(3)(d)); and – responsibility for handling consumer

complaints (cl 25(3)(e)). HWC must comply with any transfer code of

conduct (cl 27).

Compliance and reporting Penalties for contravening water industry and

transfer codes of conduct (cls 25 and 27).

Obligations (on other persons) Marketers Marketers must comply with marketing code of

conduct (cl 26). Retail suppliers Licensed retail suppliers must:

– implement any relevant government policy with respect to social programs (Sch 2, cl 2);

– notify customers of translation services (Sch 2, cl 3);

– establish and comply with a code of practice


Obligations (on other persons) Retail suppliers Licensed retail suppliers must not supply water to

a small retail customer otherwise than under a water supply contract. (Sch 2, cl 14(1) and (2)).

Licensed retail suppliers must not provide a sewerage service to a small retail customer otherwise than under a sewerage service contract (Sch 2, cl 19(1) and (2)).

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consumption, complies with any requirements of the licence conditions and complies with any requirements under the Public Health Act 1991 (Sch 1, cl 9).

Licensed network operators with sewerage infrastructure must prepare a sewage management plan including the manner in which health and ecological assessments will be undertaken (Sch 1, cl 14(1)).

Licensed retail suppliers Licensed retail suppliers must immediately notify

IPART, relevant Ministers, licensed network operators, of any incident in the conduct of its activities that threatens, or could threaten, water quality, public health or safety (Sch 2, cl 1).

for customer complaints (Sch 2, cl 4(1)(a)) that conforms to AS/ISO 10002-2006 Customer Satisfaction – Guidelines for complaints handling in organizations; and

– establish and comply with a code of practice for debt recovery (Sch 2, cl 5(1)) that includes provision for the deferment of payments owed by customers suffering financial hardship (Sch 2, cl 5(2));

– prepare a retail supply management plan (Sch 2, cl 7A);

– ensure that non-potable water matches customer’s needs (Sch 2, cl 9);

– not over-commit (Sch 2, cls 10 and 16); – not supply water to a small retail customer

otherwise than under a water supply contract. (Sch 2, cls 14(1) and (2)); and

– not provide a sewerage service to a small retail customer otherwise than under a sewerage service contract (Sch 2, cl 19(1) and (2)).

Water Act 1912 No obligation on HWC Obligations HWC is a ‘water management authority’ (s 187

and Sch 3). Water Administration Ministerial Corporation

(WAMC) may grant a water management licence to HWC (s 188) subject to conditions (s 189). The licence would authorise HWC to take and use water from any water source and construct a water management work subject to the licence conditions (s 191).

HWC is liable to pay water management charges to the Water Administration Ministerial Corporation (WAMC) including for WAMC’s costs in monitoring water extraction from, and the flow of water along, the rivers and lakes affected by HWC’s work and activities (s 194).

WAMC can direct HWC to take action to protect a water source from any adverse effects of HWC’s activities, mitigate any adverse effects that have arisen from HWC’s activities, or prevent wastage or water pollution from HWC’s water management works (s 197).

Compliance Penalties for HWC to use a water management

work that is not the subject of a water management licence (s195).

If WAMC is satisfied that HWC has contravened a provision of its water management licence or failed to comply with an order under s 197, it can order HWC to pay a maximum penalty of $500,000 (plus $20,000 for each day the contravention continues) (s 198).


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Water Management Act 2000


Obligations – The activities of HWC (as a ‘major utility’ under

Sch 2) may be reviewed at any time, and at specified times (s 282).

– HWC must hold water access licences in order to share and take water from specified areas/sources (WAL) (s 56).

– HWC must hold water use approvals (s 89) and water management work approvals where relevant (s 90(1)).

– HWC must hold a water management work approval to construct and use water supply works, drainage works and flood works (s 90, ss 91B-91D).

– Before undertaking “controlled activities” or “aquifer interference activities”, HWC must obtain the relevant activity approval (s91, ss 91E-91F).

– Metering provisions if applicable (s 91H). – If ‘protective works’ (s 254) are undertaken,

HWC must contribute to the cost incurred by the Minister in constructing and maintaining any protective works (s 261(1)).

– HWC must not construct any protective works without Minister’s approval (s 269).

– If HWC has control/management of water management works, the Minister may give directions to protect environment or overcome a threat to public health (s 331), or to protect water sources (s 333).

Compliance and reporting Penalties for: – Offences related to water access licences/

WALs conditions (ss 60A – 60D). – Offences related to water use approvals/ water

management approvals (ss 91A - 91D, including constructing or using water supply, drainage and flood works without relevant approval, and for constructing or using those works otherwise than as authorised by the approval (ss 91B-91D).

– Contravening term or condition of approval when constructing or using water management work (s 91G).

– Failing to comply with Minister’s directions under ss 331 and 333 (s 336C).

The Minister may suspend or cancel an access licence (s78).

The Minister may suspend or cancel an approval (Part 3 Div 4 s109).

If HWC has control/management of water management works and constructs or uses them


No obligation on HWC The Minister may impose fees and charges for

the purposes of this Act (eg entitlement and bulk water usage charges) (s 114).

Under the IPART Act 1992, any fees and charges imposed by the Minister cannot exceed any relevant IPART determination.


C Can targeted enforcement, non-regulatory government actions, or administrative sanctions address the gaps identified?

This appendix presents:

Table C.1: which assesses the potential for addressing gaps in scope.

Table C.2: which assesses the potential for addressing gaps in compliance/enforcement.

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Policy objectives

Could the gap be addressed by: Are additional administrative sanctions needed to effectively ensure compliance and enforcement?

Comments

Targeted enforcement?

Non-regulatory government action?

Combination of both?

Additional/tougher sanctions could strengthen the incentive for the utility to further minimise its impact on the environment.


D Summary of Hunter Water Corporation reporting requirements

Table D.1 Summary of Hunter Water reporting requirements

Area of reporting Reporting agency

Frequency/ reporting obligations

Drinking water quality Public Monthly (online Monthly Water Quality Monitoring Report).

Drinking and recycled water quality

NSW Health Monthly (fluoride monitoring). Quarterly (quality of drinking water and

recycled water on an exception basis. Immediate incident notification (drinking and

recycled QMS definition).

IPART Annually – drinking water and recycled water quality management activities completed and planned, critical control points as per QMS.

Annually - Risk-based operational audit.

Drinking water: quantity and security of supply

IPART Annually – water conservation targets, capacity of water storages, constraints on extraction of water to the water storages, conditions in water sharing plans.

By 31 January 2014 - Proposed economic level of leakage methodology and report (s 3.3.1 RM).

By 30 June 2017 - implement and achieve third party certification of the environmental management system.

Environmental protection EPA As per Environment Protection Licences.

Consumer protection: technical quality

IPART Annually (on asset management system, on compliance with water pressure standard, water continuity standard and wastewater overflow standards).

By 1 September 2014 and 1 September 2016 - report on the state of assets.


Consumer protection: customer service quality

IPART Annually (on customer and consumer management, including the activities of the Consultative Forum, proposed changes to customer contract and complaints/ dispute resolution procedures).


Assessment of Hunter Water Corporation Operating Licence · 2014-08-13 · 1 Introduction...

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Transcript of Assessment of Hunter Water Corporation Operating Licence · 2014-08-13 · 1 Introduction...