CENTRAL IRRIGATION TRUST Trustee: Central Irrigation Pty. Ltd. ACN 075 446 810 4 Fowles Street PO Box 34 Barmera SA 5345 Telephone 08 8580 7100 Fax 08 8588 2001 Mr Graeme Samuel Chairman Australian Competition and Consumer Commission GPO Box 3131 Canberra ACT 2601 Dear Mr Samuel Thank you for a copy of your position paper on Water Charge Rules for Termination Fees. Please find attached the CIT submission. Yours truly,

Gavin McMahon for Jeff Parish CEO

Managers of the grower owned Berri, Cadell, Chaffey, Cobdogla, Kingston, Loxton, Moorook, Mypolonga and Waikerie Irrigation Trusts Inc.

PUBLIC SUBMISSION TO WATER CHARGE RULES FOR TERMINATION FEES POSITION PAPER BY

CENTRAL IRRIGATION TRUST

5 SEPTEMBER 2008

1. PREFACE The following response to the ACCC issues paper on Water Charge Rules for Termination Fees presents the position of the CIT group of irrigation infrastructure owners. Our group has taken every step possible to be fully compliant with the major objectives of the National Water Plan as we believe the future of our State and irrigation industry at the bottom end of the river system is so dependent on the achievement of a successful Basin Wide Water Plan. As a business that has complied by choice and has experience with net water being traded out of its districts over a number of years our position is: • That termination fees remain with a minimum multiple of 15 times the annual access fee and

are payable upfront. • Transformation is not introduced. • CIT would support some easing of the 4% trading cap for each district, conditional on the

above two issues being implemented. • All infrastructure operators irrespective of size and turnover should be subject to the same

rules and policies. • Managed Investment Schemes and Urban schemes that supply water to primary producers are

by definition irrigation infrastructure operators and should also be subject to the same rules and policies.

2. INTRODUCTION

Central Irrigation Trust is a company that manages and operates water delivery systems for the Berri, Cadell, Chaffey, Cobdogla, Kingston, Loxton, Lyrup, Moorook, Mypolonga and Waikerie Irrigation Trusts in South Australia. Our submission also includes the Pyap Irrigation Trust to which we provide management services under contract. The eleven Irrigation Trusts we represent pump water from the River Murray in South Australia and deliver it through modern irrigation systems to 1,500 mostly family owned farms producing high value horticultural crops in the highland irrigation districts adjacent to the river. The water delivery systems include fully automated pumping stations, closed pipeline delivery networks and fully metered water supplies to every farm, household and factory. Our assets have an extremely long life with our pipelines having a serviceable time of 100 years, our pumps 50 years, our meters 30 years and electrical equipment 25-35 years.

3. BACKGROUND Our eleven Trusts have a history of being compliant and working with Government initiatives and policy reforms for delivery of water. • Irrigators already had volumetric water allocations when the Government privatised the

districts in 1997. • Consumption based pricing was introduced in 1997 to be compliant with the 1994 COAG

water reforms. The Trust is not aware of any other Water Authority that adopted the reform, even though it has encouraged greater water use efficiency.

• Open water trade was permitted from 1997 and until 2005 was subject to maximum limitations of 25% from each farm and 2% net trade out from each district.

• Removal of all of our barriers to trade was introduced in 2005 to comply with the National Water Initiative Intergovernmental Agreement, accompanied by a requirement for sellers to pay exit fees of $380 per megalitre for water permanently leaving the Trust’s group of districts.

• The Trusts have publicly committed to the process of achieving a register of individual water access entitlements for irrigators to comply with the National Water Initiative. We are currently working towards the best outcome between the register proposed by the SA Government or the National Irrigation Corporations Water Entitlement Register. Completion is being delayed by our need to resolve bulk water license shortfalls inherited from the SA Government and obtaining assurances about capacity of the Government register to provide Water Authorities with knowledge of water transactions and opportunity for providing consent or stipulating conditions on transactions.

• In 2007 exit fees were replaced with termination fees of $303 per megalitre to comply with ACCC recommendations for water permanently leaving the Trust’s group of districts. Net trade out of the district was also limited to 4% in any one year.

• The introduction of exit fees, now replaced with termination fees, has not prevented permanent water trade from our group of districts since 2005. In fact since 1 July 2008, 5 of our 10 districts (Cadell, Moorook, Kingston, Loxton and Lyrup) have reached the cap of 4% (nett) water trade out of the districts. Most of the water sold has been to the SA Government, Commonwealth Government or a superannuation fund.

4. SUBMISSION DETAILS

Termination Fees Whilst CIT has supported the National Water Plan and liberated our water trade rules we have also seen the trade cap of 4% nett water traded out of a district reached in five districts, (Cadell, Moorook, Kingston, Loxton and Lyrup). The Loxton irrigation system was converted from a channel system to a modern pipeline system at a cost of $ 40 million and commissioned in 2003. The Loxton system is seen as one of the most advanced systems in Australia, if not the world. This system is also a blue print for many of the modernisation projects occurring within Southern Australia. We have attached as appendix 1 a map showing the properties that have sold water entitlements from the Loxton system and who have ceased irrigation. As all of our pipelines use a closed looped system it is difficult to see how our assets could be rationalised. If the same trade pattern occurs over the next 5 years it is still difficult to see how this closed system could be rationalised with any significant savings. $1Million was spent at Lyrup in 2004 upgrading its pumping station to a modern automated system capable of servicing its current area of horticultural plantings. CIT growers currently pay a termination fee when exiting the system. We believe that this is a legitimate obligation on those leaving the districts to pay their fair share of the infrastructure costs/encumbrances before leaving. We have determined the fee using a multiplier of 15 times the shadow access fee as outlined in Schedule E of the MDB Agreement. The termination fee is then invested in secure investments and an amount returned as income to the Trust each year to cover the fixed charges that would have been paid. When CIT was established in 1997 we sought advice from an Investment Banker on a number of issues, which included long term inflation and interest projections to be used in our business model for determining appropriations to our asset replacement fund. Our calculations (appendix 2), using our investment banker’s advice on long term investment returns and inflation, indicate the current termination fee (calculated as per schedule E of the MDB Agreement and assuming a 1% per annum reduction in fixed costs) would be exhausted after 22 years. This is a significantly shorter time than the life of our assets which is for pipelines 100 years, our pumps 50 years, our meters 30 years and electrical equipment 25-35 years. Our assets are valued by a commercial valuer on a three to five year cycle which provides a current value and an independent determination of the life or our assets.

As a business we are commencing the process for replacing the Berri Pumping Station switchboard at a cost in excess of $1 million. This asset is currently 35 years old and once replaced would also have a life of 30 years. However the current termination fee (as per schedule E of the MDA Agreement) only covers 20-22 years of this investment and the ACCC proposal only 10-14 years.

The issues that we as a company must address are - do we make this investment, if so what capacity must the switchboard be and are there upgrades that are required to modernise the equipment. For this piece of equipment the reliability and obsolescence of the components necessitates immediate replacement. We have continued to repair and nurse this infrastructure beyond its scheduled life as one strategy to cope with the drought. However the reliability of this plant is now not providing an acceptable service to our customers/owners and it must be replaced. Currently there has been very little water entitlement sold form Berri and as a result the switchboard must be of a similar size. The equipment will also have to modernise as advances in electronics, automation and surge protection along with changing customer demands with precision irrigation dictates a number of upgrades to meet customer expectations and future service standards. Thus we will have to commit to an investment at today’s required capacity that will incur fixed costs for 30 years and we can only have confidence of between 9 (using a termination fee with a multiple of 8) and 22 (using a termination fee with a multiple of 15) years of the appropriate revenue to service the expense.

The proposed lower termination fees will not promote efficient investment as the uncertainty of future income will most likely reduce or eliminate investment or impede an operator’s borrowing capacity. Discussion with local bankers also confirm that irrigation infrastructure operators ability to borrow is not on the value of the assets but rather the future flow of funds as much of the asset is not considered disposable. CIT has been a very successful operator of modern irrigation infrastructure and, with our customers, does not want to return to days of government operations where infrastructure was not upgraded and the assets run down until they were unserviceable. This is currently the case in some states where it is now necessary for the very large investment of public money to refurbish their systems. Our business has 120 year business plans to maintain our infrastructure without government assistance and termination fees at the current multiple will enable us to continue being a vibrant viable business into the future whilst still providing the incentive to rationalise where possible. CIT also does not support the ongoing fixed charges being applied to abandoned land in place of termination fees through any mechanism. If this occurs we believe that as time progresses and ownership of land changes our business will be in the unenviable position of collecting money from someone who does not take our service.

The CIT position is that Termination fees with a minimum multiple of 15 times the annual access fee and payable upfront be adopted. We will not willingly give up on this position. Transformation CIT does not support transformation. We believe that if growers are able to trade and encumber their water entitlements permanently it matters little whether they are part of a community entitlement, strata entitlement, bulk water entitlement or individual entitlement. Transformation appears to be a mechanism for some to reduce the impact of the 4% trade cap on their business. For our business that is complaint with the current water trade rules transformation will burden us with more overheads for no gain to either the business or the customer. CIT does not support the concept of transformation. If the termination fee remains at its current multiple and transformation is not introduced CIT would support some easing of the 4% trading cap rule.

All infrastructure operators irrespective of size and turnover should be subject to the same rules and policies It is the belief of CIT that all irrigation infrastructure operators should be subject to the same rules and policies. This means that any costs, burdens or impacts associated with changes to rules and policies are felt equally by all operators. CIT has made a significant effort in reducing and minimising our costs and particularly our overheads. We have done this by introducing technology, automating our systems and removing any unnecessary procedures. We are finding that the National plan for Water Security and its subsequent activities and recommendations are adding procedures and overheads back into our business and this can only be reflected in increase prices to our customers. We also believe that some of the larger irrigation operators share a greater burden of the cost. One example is the current benchmarking program which is imposed only on the larger operators at their own cost. We perceive no value in this program to our business but are forced to participate and absorb the cost. Any changes required by governments to the operations of our business should not unfairly impose costs or regulations on one or a selected group of irrigation infrastructure operators.

CIT believes that all infrastructure operators irrespective of size and turnover should be subject to the same rules and policies Managed Investment Schemes and Urban schemes that supply water to primary producers are by definition irrigation infrastructure operators Many of these enterprises are larger than our Trusts and we know some who operate under irrigation legislation and would appear to meet your definition of an irrigation infrastructure operator. Some urban water supply businesses also supply water to irrigators through their distribution system. These entities should also be subject to same rules and regulations as other irrigation infrastructure operators. If such rules do not apply to all operators then some operators may be placed at a competitive disadvantage when attempting to attract new business to their areas. CIT believes Managed Investment Schemes and Urban schemes that supply water to primary producers are by definition irrigation infrastructure operators

5. SUMMARY The CIT group has a Board of Directors elected by the members of our ten Trusts. It also has 25 staff with over 500 years experience in delivering water services to 1500 farmers. We have the most technically advanced irrigation water delivery systems in Australia and have contained our water price increases below CPI over the eleven years since privatisation. Our farmers are consulted on works programs, budgets, technology improvements and vote on changes to water prices and policies. That puts us in the best position to know what our irrigation community expect from the operator of their water delivery system. We have made every endeavour to adopt the objectives of the National Water Plan by choice and now that we can demonstrate that we are compliant with the objectives of the plan, we consider you should leave us to use our longstanding experience and record of success in water delivery to get on with the management of our business.

CIT is adamant that termination fees with a multiple of 15 currently agreed by the state governments and the water industry under schedule E of the MDA Agreement remains. We strongly oppose any introduction of transformation as we believe there is no benefit for organisations, or customers of such organisations, where permanent trade is allowed, only added overheads in introducing and maintaining the concept.

In being fair and just the rules and policies must be applied to all operators irrespective of their size, turnover or ownership status. If termination fees with a multiple of 15 remain and transformation is not introduced, CIT would be prepared to support a negotiated easing of the 4% trade rule.

Gavin McMahon for Jeff Parish Chief Executive Officer 9 May 2008 Copies to: Senator the Hon. Penny Wong Malcolm Turnbull MP Senator Nick Xenophon Patrick Secker MP Hon. Karlene Maywald MP Mitch Williams MP

Appendix 1 Loxton Irrigation District indicating the areas where water has been sold

In the image above the yellow outlines show farms that have sold the permanent water entitlements since 1 July 2008 and will cease operations. The white lines represent cadastral boundaries, blue lines our irrigation pipelines and the purple lines our drainage pipelines. In this system we use closed looped pipelines which means that flow to a property can come from a number of directions in the system. If any major pipeline is removed from the system it will impact adversely across many parts of the system. The water supply for our largest customer in the bottom right of this system will come from a number of pipelines to the south, east and the north of the property and depends on the demand across the system. Thus the removal or resizing of any of the main arterials will influence the flows and pressure for many irrigators in the system. This is significantly different from the main arterial and spur line system used in many channel delivery operations where closing the spurs have no impact on others on the system. We believe the first chance in restructuring the Loxton Irrigation System would occur at the replacement of the pumps scheduled to occur in approximately 45 years.

Appendix 2 CIT Calculation of Termination Fee Expiration