Simplifying Complexity: A Framework for the Rationalisation of Water Entitlements in the Southern Connected River Murray System

Transcription

1 Simplifying Complexity: A Framework for the Rationalisation of Water Entitlements in the Southern Connected River Murray System Tian Shi Policy and Economic Research Unit, CSIRO Land and Water CSIRO Land and Water Technical Report 03/05 March 2005

2 Copyright and Disclaimer 2005 CSIRO This work is copyright. It may be reproduced subject to the inclusion of an acknowledgement of the source. Important Disclaimer: CSIRO Land and Water advises that the information contained in this publication comprises general statements based on scientific research. The reader is advised and needs to be aware that such information may be incomplete or unable to be used in any specific situation. No reliance or actions must therefore be made on that information without seeking prior expert professional, scientific and technical advice. To the extent permitted by law, CSIRO Land and Water (including its employees and consultants) excludes all liability to any person for any consequences, including but not limited to all losses, damages, costs, expenses and any other compensation, arising directly or indirectly from using this publication (in part or in whole) and any information or material contained in it. Cover Photograph: From CSIRO Land and Water Image Gallery: File: CSA_AGR001_004.jpg Description: Murrumbidgee River with lucerne and wheat crops near Wagga Wagga, NSW Photographer: Gregory Heath 2005 CSIRO

3 Simplifying Complexity: A Framework for the Rationalisation of Water Entitlements in the Southern Connected River Murray System Tian Shi Policy and Economic Research Unit, CSIRO Land and Water CSIRO Land and Water Technical Report 03/05 March 2005 CSIRO Land and Water Page i of 53

4 Acknowledgements The ideas contained in this report have resulted from over two years research and the opportunities to discuss with many of Australia s leading natural resource managers and researchers. In particular, I would like to acknowledge and thank my colleagues Mike Young and Jim McColl for their passion about water policy and water reform and their influence on the development of my ideas (especially on issues of water entitlement arrangement and water trading) at different stages of this research. This final report has also benefited from detailed comments and suggestions received from several reviewers. In this respect, I would like and in alphabetical order to thank: Kim Alvarez, Henning Bjornlund, Gerry Davies, John Howe, Tom Rooney, Louise Rose, Ian Wills and John Ward. CSIRO Land and Water Page ii of 53

5 Executive Summary Water entitlement and water allocation reform is now a key concern on the national and state policy agendas. As part of this process, administrators are searching for ways to remove unnecessary barriers to water trading and therefore reduce the transaction costs associated with trade. This report attempts to inform readers about the challenge of this task by revealing some of the complexity of current arrangements. If ways can be found to simplify these arrangements and to remove unnecessary barriers it may be possible to reduce the transaction costs associated with water entitlement and allocation trading. As a result, more efficient investment and more wealth generation can be expected and, if well designed, the result could also be a significant improvement in environmental outcomes. How many types of entitlements are there? In this report, a classification system is developed to identify the number of entitlement types in the Southern Connected River Murray System encompassing parts of New South Wales (NSW), Victoria (Vic) and South Australia (SA). A type of water entitlement is most easily identified by asking whether or not a trade involves only a change to the entitlement ownership. If other changes have to be made, for example, to the allocation pool that the water is drawn from, or the management zone or region where the water is held, then the trade involves conversion from one type of entitlement to another type of entitlement. When considering only the regulated surface water system, a total of 438 types of water entitlements can be identified: 132 types of regulated surface water entitlements in NSW; 191 types of regulated surface water entitlements in Vic; and 115 types of regulated surface water entitlements in SA. Many of these entitlement types are used for urban and country town water supplies, industrial and environmental purposes. Most of them are not yet tradeable. From an irrigation perspective, when consideration is given to supply reliability, entitlement tradability, allocation tradability, tenure, access priority and use restrictions associated with issues such as salinity, 183 types of irrigation entitlements can be identified. Table A provides an overview of the 39 categories of water entitlements in the Southern Connected River Murray System. Tradability matrices Across Australia, opportunities to permanently trade water entitlements and to temporarily trade water allocations are increasing. When an entitlement is traded between allocation pools or between management zones, the entitlement must be converted from one type to another. To simplify this process water brokers are constructing tradability matrices that show whether or not a trade of entitlement is allowed and, if so, what changes have to be made to the entitlement to complete that trade. A full tradability matrix for 183 types of irrigation entitlements in the Southern Connected River Murray System would contain 33,306 matrix elements. For a number of reasons (e.g., a lack of sufficient hydraulic connectivity, the flow constraint through the Barmah Choke, and policy restrictions on trade), many entitlements cannot be converted from one type to another. In reality, the tradability matrix for irrigation entitlements in the Southern Connected River Murray System allows around 3,700 possible trades. CSIRO Land and Water Page iii of 53

6 With so many trading possibilities, there is a risk that changes could create opportunities for arbitrage. Arbitrage occurs when an entitlement is traded in a manner that increases one person s share of the water at the expense of other entitlement holders. Simplification of the system could significantly reduce the arbitrage opportunities and transaction costs associated with water trading. Table A. Overview of existing 39 categories of water entitlements in the SCRMS System NSW Victoria SA Domestic & stock access licence Domestic & stock right Stock & domestic licensed allocation Entitlement Categories (39) Ground Unregulated surface water Regulated surface water (22) water (8) (9) Local water utility access licence Town water supply Metropolitan water licensed allocation High security access licence Supply by agreement Country town water licensed allocation Conveyance access licence Water right Industrial licensed allocation Environmental water access licence Diversion licence Recreational & environmental licensed allocation Indigenous cultural access licence Sales water * Irrigation licensed allocation General security access licence Wetlands licensed allocation Supplementary water access licence Water (holding) licensed allocation Domestic & stock access licence Direct pumping licence Local water utility access licence Winter fill licence Unregulated river access licence Farm dam licence Runoff harvesting access licence Indigenous cultural access licence Research access licence Local water utility access licence Groundwater licence Water (taking) licensed allocation Aquifer access licence Groundwater licence (irrigation) Water (holding) licensed allocation Supplementary water access licence Groundwater licence (non-irrigation) Note: * For the purpose of classification and as the Victorian Government White Paper has proposed to make sales water into a separate, legally recognised, and independently tradable entitlement. In this report all sales water is identified as a separate category of water entitlement. Opportunities to simplify the system The large number of water entitlements makes the trading processes administratively complicated and confusing. Conceptually, with more consistent definitions of water entitlements and simplified trading arrangements, transaction costs will be lower there will be fewer opportunities for arbitrage. One of the biggest challenges is to sequence any rationalisation process so that water entitlements reform occurs in a manner that does not destroy system functionality. Significant opportunities to improve irrigation entitlement arrangements include: Introducing standard terminology; Unbundling use restrictions and obligations, including those associated with salinity management, from entitlement and allocation arrangements; Standardising the tenure, trading restrictions and other similar arrangements; Converting existing entitlements into one or more standardised entitlements; and CSIRO Land and Water Page iv of 53

7 Rationalising zone boundaries so that they are constrained only by hydrological considerations. All the above opportunities could help reduce transaction costs and simplify river management. If pursued properly one could expect greater productivity and less conflict among communities. A case study To illustrate the potential of these opportunities, the report contains a case study of the Northern Victoria and NSW River Murray regulated surface water system. When the above opportunities are pursued, it becomes clear that: Previous 24 trading zones can be rationalised into 22 trading zones; and Previous 62 types of irrigation entitlements can be simplified into 10 types. Application to the entire system Different types of water entitlements can be ranked and then grouped together according to similar attributes (i.e., supply reliability, tradability, tenure, etc). One option is to modify the size of each pool so that entitlement reliability is similar. For example, in terms of supply reliability, different types of irrigation entitlements can be separated into three classes, i.e., Class I (high reliability %), Class II (medium reliability 61-90%) and Class III (low reliability 0-60%) (see Table B). Table B summarises the nature of opportunities available. As indicated in this report, one cannot escape hydraulic realities but there are many opportunities. If states can standardise across boundaries, the number of entitlement types could be reduced significantly. Table B. Three classes of irrigation entitlements in the SCRMS Entitlement Entitlement Category (total 9) Entitlement Type Class NSW Vic SA NSW Vic SA Total Class I (high reliability %) Class II (medium reliability 61-90%) Class III (low reliability 0-60%) High security General security Supplementary water Water right Diversion licence Diversion licence Stock & domestic Irrigation Water (holding) NA 10 5 NA 15 Sales water NA NA 30 Sub-total CSIRO Land and Water Page v of 53

8 Table of Contents Acknowledgements Executive Summary How many types of entitlements are there? Tradability matrices Opportunities to simplify the system A case study Application to the entire system Simplifying Complexity: A Framework for the Rationalisation of Water Entitlements in the Southern Connected River Murray System 1 1 Introduction Current water entitlements arrangements NWI challenges states to align existing water entitlement systems 1 2 Scope and Purpose of This Report 2 3 Overview of Water Licensing Arrangements Approaches to water allocation and supply reliability Water legislation Specifying entitlements Specifying allocations Other key attributes Overview of water entitlements in the SCRMS 6 4 Classification framework Elements of the framework Water entitlements in regulated surface water system Irrigation entitlements in regulated surface water system 11 5 Opportunities to Simplify Irrigation Entitlements Arrangements A case study of simplifying irrigation entitlements arrangements 18 6 Application of Simplification Opportunities to the SCRMS Introducing standard terminology Reducing water entitlement and trading arrangements complexity Unbundling 23 7 Standardisation opportunities Rationalising supply reliability and access priority Rationalising tenure Merging allocation pools Converting sales and supplementary water 26 8 Issues For Further Study Recognising allocation pool limits Assessing the impacts of water trading 27 CSIRO Land and Water Page vi of 53 ii iii iii iii iv v v

9 8.3 The dynamic relationships between water trading and supply reliability Balancing the private and public interests 27 9 Concluding Remarks 29 References 30 Appendix 1. A brief comparison of water use in three States Appendix 2. Major legal framework in three States Appendix 3. Seasonal water allocations in three States Appendix 4. Ranking 112 types of irrigation entitlements by supply reliability, tradability, tenure and access priority...35 Appendix 5. Grouping 9 categories and 112 types of irrigation entitlements into 14 groups Appendix 6. Fourteen groups of irrigation entitlements in the SCRMS CSIRO Land and Water Page vii of 53

10 List of Figures, Tables and Maps Figure 1. Water act and water licensing in three states... 4 Figure 2. Existing 22 categories and 438 types of regulated surface water entitlements in the SCRMS... 8 Figure 3. A schematic diagram of Murrumbidgee, Murray and Goulburn irrigation systems Table 1. Existing 39 categories of water entitlements in the Southern Connected River Murray System... 7 Table 2. A classification framework to assist in identifying the number of types of water entitlements in the SCRMS... 9 Table 3. Existing 22 categories of entitlements 1 in regulated surface water system Table 4. A summary of state approaches to regulated surface water allocation Table 5. Major 9 categories and types of irrigation entitlements in regulated surface water of the SCRMS Table 6. Tradability matrix for irrigation entitlements in regulated Northern Vic and NSW River Murray surface water Table 7. A simplified irrigation entitlements and trading zones arrangement for regulated Northern Vic and NSW River Murray surface water Table 8. A comparison of terminologies used in three states Table 9. Three classes of irrigation entitlements in the SCRMS Table 10. Classification of 14 irrigation entitlement groups in the SCRMS into three classes Map 1. Southern Connected River Murray System and 10 main irrigation regions... 3 Map 2. Water trading/salinity impact zones in Northern Vic and NSW River Murray regulated surface water system CSIRO Land and Water Page viii of 53

11 Simplifying Complexity: A Framework for the Rationalisation of Water Entitlements in the Southern Connected River Murray System The best explanation is as simple as possible, but no simpler. Albert Einstein 1 Introduction 1.1 Current water entitlements arrangements Australian water administrators are being called upon to develop a nationally compatible water entitlement register coupled with trading arrangements that minimise transaction costs. By 2007, institutional and regulatory arrangements are required to be in place to facilitate intra and interstate trade, and manage differences in entitlement reliability, supply losses, supply source constraints, trading between systems, and cap requirements and to develop arrangements to facilitate effective and efficient water trading on the markets (COAG 2004a). While at the highest level water entitlement arrangements seem similar, when one delves into the detail a large variety of arrangements prevail across the Murray-Darling Basin (MDB). Among states and even within a state, supply reliability varies, tenure periods are inconsistent, and the degree of protection given to registered interests and restrictions on trade vary considerably. The terms used also vary with one another. For example, in South Australia a water entitlement is called an allocation, while in Victoria and NSW an allocation is the amount of water received annually by an entitlement holder. In Victoria entitlements are called water rights or diversion licences while in NSW they are called water access licences. 1.2 NWI challenges states to align existing water entitlement systems At a COAG meeting on 25th June 2004, the Commonwealth, the ACT, Queensland, NSW, Victoria, SA and the Northern Territory agreed to adopt a National Water Initiative (NWI). 1 According to the NWI, a consistent and compatible water entitlements system will be developed to: facilitate the operation of efficient water markets and the opportunities for trading, within and between States and Territories, where water systems are physically shared or hydrologic connections and water supply considerations will permit water trading; minimise transaction costs on water trades (e.g., through good information flows in the market and compatible entitlement, registry, regulatory and other arrangements across jurisdictions); and enable the appropriate mix of water products to develop based on access entitlements which can be traded either in whole, or in part, and either temporarily or permanently, or through lease arrangements or other trading options that may evolve over time. As a result, the water access entitlements and planning framework will: 1 Strictly speaking, the NWI consists of two agreements. One covers water allocation and management in all States and Territories, the other addresses over-allocation and environmental objectives in the Murray-Darling Basin (COAG 2004a,b). CSIRO Land and Water Page 1 of 53

12 enhance the security and commercial certainty of water access entitlements by clearly specifying the statutory nature of those entitlements; be compatible across jurisdictions (in the case of water access entitlements) to improve investment certainty, be competitively neutral and to minimise transaction costs on water trades (where relevant); and reflect regional differences in the variability of water supply and the state of knowledge underpinning regional allocation decisions. The NWI has recognised the importance of establishing a nationally compatible system of water access entitlements to manage surface and groundwater resources for rural and urban use that optimises economic, social and environmental outcomes. It has set out a vision and proposed that water entitlement arrangements should be consistent and compatible. However, more research is needed to articulate the issues on compatible water entitlements arrangements. 2 Scope and Purpose of This Report Given the requirements of the NWI, this report focuses on water entitlement arrangements in the Southern Connected River Murray System (SCRMS) as indicated in Map 1. This region comprises a set of linked river systems and associated groundwater systems in southern NSW, northern Vic and eastern SA. 2 The SCRMS is essentially a winter rainfall system, where water systems are either physically shared and/or hydraulically connected. It does not include the Mallee River system in Victoria and the Lachlan River system in NSW as significant volumes of water from these systems rarely flow into the River Murray. The purpose of this report is to develop a framework for the classification of existing entitlements by essentially grouping them according to similarity and compatibility. The underpinning hypothesis for this work is that in a policy environment where trading is encouraged, variation in the way entitlements are defined increases transaction costs. The corollary of this hypothesis is that the more consistent entitlement definitions and the more simplified trading arrangements can be, the lower transaction costs and less arbitrage opportunities will be. As a result, the efficient and effective water markets will be achieved and if appropriate environmental arrangements are in place, the greater benefits of water use will be realised. 2 It consists of the River Murray, Lower Murray, Angas Bremer, and five pipeline systems (i.e., Morgan to Whyalla, Swan Reach to York Peninsula, Mannum to Adelaide, Murray Bridge to Onkaparinga and Tailem Bend to Keith) in South Australia; the Darling River and its Ana Branch below the Menindee Lakes, the River Murray itself, the Murrumbidgee system in NSW; and seven Victorian tributaries (i.e., Upper Murray, Kiewa, Ovens, Broken, Goulburn, Campaspe and Loddon) except those in the Mallee (Young and McColl, 2003). CSIRO Land and Water Page 2 of 53

13 Map 1. Southern Connected River Murray System and 10 main irrigation regions Source: Meyer et al., Overview of Water Licensing Arrangements 3.1 Approaches to water allocation and supply reliability Irrigation development and water licensing arrangements in Australia have been largely developed on a regional basis and with little expectation that there could be advantages in having a highly standardised approach. There is much variability. In most, if not all, cases, many attributes of water entitlements are only partially specified. As a result, it is not surprising that detail underpinning licence arrangements is inordinately complex Water legislation Figure 1 provides a high level summary of the mechanisms used to allocate and manage water in three jurisdictions of the SCRMS. Essentially, the Water Acts issue licences to people to access and use water, and require the construction of necessary works to do this. CSIRO Land and Water Page 3 of 53

14 Figure 1. Water act and water licensing in three states Basic landholder rights Water Management Act 2000 (NSW) Statutory rights Water sharing plans Access licences Environmental water Works & use approvals 1 DIPNR 2 Irrigation corporations (bulk licences) Private irrigation districts Private drainage districts Statutory rights Harvest rainwater Water Act 1989 (Vic) Bulk entitlements Primary entitlements (water rights, take & use licences) 1 DSE 2 Works approvals Rural water authorities Landholder unlimited water use Unlicensed statutory right (non-prescribed water) Water Resources Act 1997 (SA) Water allocation plans Environmental water Provision Licensed right (prescribed water) Construct permits (well, dam, wall) DWLBC 2 Water licences (extraction limits & use conditions) 1 Private irrigation districts (trust, bulk licences) Government owned irrigation districts (water licence) Notes: 1. Access licences are separated from works and water use approvals that provide a permit to extract and use water. An access licence does not give the right to use that water for any particular purpose (this will require a water use approval ), or to build any of the works that may be physically required to extract the water (this will require a water supply work approval ). 2. Department of Infrastructure, Planning and Natural Resources. Notes: 1. Right to access/take and right to use water are not separated. In the case of the Melbourne and Metropolitan Board of Works, under the Melbourne and Metropolitan Board of Works Act Department of Sustainability and Environment. Notes: 1. In general, right to access/take and right to use water are not separated. However, the SA Water Holding Licence enables licence holders to own water but not use it. 2. Department of Water, Land and Biodiversity Conservation. CSIRO Land and Water Page 4 of 53

15 3.1.2 Specifying entitlements At the most general level, entitlements are used to define access to pools of water. A variety of legislative, formal planning processes and administrative procedures are used to determine how much water per allocation unit is available to entitlement holders. By identifying the number of entitlement units issued and the degree of access priority assigned to each pool, it is possible to assess the reliability of each pool. Some plans go as far as to specify reliability in terms of the number of years in a 100 that entitlement holders should expect to receive their full allocation. Typically, a sub-set of the pools has close to 100% reliability (e.g., stock & domestic, town water supply). In the past, stock and domestic users, for example, have been free to take and use as much water as they can for stock and domestic purposes. However, limits are now placed on the structures that may be built to aid the collection and extraction of water for these stock and domestic purposes. Often the policy mechanisms used to manage different uses are also quite different. Urban water users, for example, can be subject to water use restrictions that are not applied to rural water users. Entitlements are, in effect, a formal assignment of a share of water available in a defined pool. By convention, the entitlement units are defined in megalitres. Allocations are then made on a pro-rata basis in proportion to the number of megalitres specified in an entitlement. In recognition of the share nature of entitlements, NSW is in the process of converting all volumebased entitlements into unit shares. 3.2 Specifying allocations As with entitlements, each State has a different approach to the periodic assignment of allocations (see Appendix 3 for more details). All are influenced by conditions set out in the Murray-Darling Basin Agreement, statements about pool priority in State legislation, and rules set out in water and/or catchment plans. Typically, quite different arrangements apply for groundwater and river systems and also to the management of urban and rural uses. In times of severe shortage, legislation typically allows allocation commitments made in water sharing/allocation plans to be varied. The actual reliability of a pool is defined in water use management plans and interstate agreements that set out the rules for allocating water to a pool. In NSW, for example, where the probability of entitlement holders receiving their full allocation is greater than 95% the entitlement is often described as a high security pool. All South Australian entitlements fall into this category, as do most of Victoria s water rights and diversion licences. One of the most striking differences is the arrangement that allows general security entitlement holders in the NSW Murray and Murrumbidgee systems, to carry forward unused allocation. However, they are only allowed to do this up to their maximum entitlement volume. 3.3 Other key attributes A large number of other conditions also apply to water entitlements. From a transaction cost perspective, critical attributes include: entitlement tenure; the degree of tradability of entitlements and of allocations; use conditions associated with the extraction and application of water to land; and expectations about obligations to contribute to the costs of infrastructure construction, operation and maintenance. Trading arrangements are of critical importance to this report. As a result of the National Water Initiative, recent policy announcements are perhaps best described as in a state of flux. CSIRO Land and Water Page 5 of 53

16 Major arrangements under consideration include: the widespread use of water entitlement exchange rates (the rate of conversion that calculated and agreed to be applied to water traded from one trading zone and/or jurisdiction to another); water entitlement tagging for water trades (an accounting approach that allows a traded water entitlement to retain its original characteristics when traded to a new jurisdiction and/or trading zone, rather than being converted into a form issued in the new jurisdiction and/or trading zone); a system of trading zones to simplify administration; and trading rules to address resource management and infrastructure delivery considerations. Another consideration is the nature of registries used to record entitlement details and interests in them. 3.4 Overview of water entitlements in the SCRMS When all water entitlements are considered according to the way they are defined in legislation, 39 categories of water entitlements can be identified in the SCRMS that are available for irrigation and other purposes. Excluding the ACT and as set out in Table 1, there are: 22 categories of regulated surface water entitlements; 9 categories of unregulated surface water entitlements; and 8 categories of groundwater entitlements. This, however, is only a high level summary of water entitlement categories. If only considering regulated surface water system and, when supplies reliability, tradability, tenure, access priority and, also, use restrictions and conditions are taken into account, the number of water entitlement types expands to 438 (see Figure 2). Entitlement trading is normally described as a permanent trade and allocation trading as temporary trade. 3 When one accounts for the fact that entitlements and allocations can be traded separately, this suggests that if both entitlements and allocations were made fully tradeable, potentially there could be as many as 876 water products on the market at any time. 3 The reason for these names appears to be the fact that in the early stages of implementation, when water trading was in its infancy, allocation trades were implemented by temporarily transferring a water licence to someone else, allowing them to use the allocation attached to it and then returning the licence back to the original licence holder. CSIRO Land and Water Page 6 of 53

17 Table 1. Existing 39 categories of water entitlements in the Southern Connected River Murray System System NSW Victoria SA a Domestic & stock access licence b Domestic & stock right b Stock & domestic licensed allocation b Entitlement Categories (39) Ground Unregulated surface water Regulated surface water (22) water (8) (9) Local water utility access licence Town water supply Metropolitan water licensed allocation c High security access licence Supply by agreement Country town water licensed allocation Conveyance access licence Water right Industrial licensed allocation Environmental water access licence Diversion licence Recreational & environmental licensed allocation Indigenous cultural access licence Sales water d Irrigation licensed allocation General security access licence Wetlands licensed allocation Supplementary water access licence Water (holding) licensed allocation Domestic & stock access licence Direct pumping licence Local water utility access licence Winter fill licence Unregulated river access licence Farm dam licence Runoff harvesting access licence Indigenous cultural access licence Research access licence Local water utility access licence Groundwater licence Water (taking) licensed allocation Aquifer access licence Groundwater licence (irrigation) Water (holding) licensed allocation Supplementary water access licence Groundwater licence (non-irrigation) Notes: a. In SA all entitlements are issued as a water licence with a defined purpose. A water licence must be endorsed with a water allocation and a clear distinction is made between water taking allocations and water holding allocations. Water holding allocations are tradable but cannot be used until they are converted to water taking allocations. Recognised water taking purposes include: stock & domestic, Metropolitan water supplies, country town water supplies, industrial, recreational & environmental, irrigation and wetlands. b. In NSW and Victoria, rights to domestic and stock water allow access in most cases without the need of a licence. In SA, the exception applies to riparian users situated directly on the watercourse who can take limited amounts of water (i.e., 500KL) for stock and domestic use without a licence. c. Under Schedule F of the Murray-Darling Basin Agreement, diversion of water for South Australia s Metropolitan Adelaide and associated country areas must not exceed a total of 650 GL over any period of 5 years. d. For the convenience to the research, and as the Victorian Government White Paper has proposed to unbundle Sales water into a separate, legally recognised, and independently tradable entitlement. In this report, Sales water is identified as a separate category of water entitlement. Under current arrangements, opportunities to apply for Sales water are attached to Water rights and Diversion licences and can be traded only with the entitlement. Water right and Diversion licence holders in the Sunraysia cannot apply for access to Sales water. CSIRO Land and Water Page 7 of 53

18 Figure 2. Existing 22 categories and 438 types of regulated surface water entitlements in the SCRMS Category NSW regulated Type VIC regulated SA regulated 4 Classification framework Many different classification frameworks have been used in an attempt to classify water entitlements. As summarised in Table 2, the classification framework chosen in this report was designed with a view to identifying similarities that would enable simplification and help identify opportunities for rationalisation. Theoretical as well as political considerations are taken into account. In particular, jurisdictional boundaries are respected. Initially, we sought to find a hierarchical way to classify water entitlements but as we progressed, it became clear that what is really needed is a framework that enables exploration of the types of water entitlements from different perspectives. The framework is therefore designed to enable the identification of any type of entitlement. Two water entitlements as being of the same type if a transfer involves only the clearance of any registered interests and a change to the name of the entitlement holder. If other entitlement specifications also need to be changed, then the transfer involves conversion of a water entitlement from one type to another. 4.1 Elements of the framework Using this definition, water entitlements are first grouped according to the nature of the supply system whether or not the prime source is a regulated surface water system, an unregulated surface water system, a confined groundwater aquifer or an unconfined groundwater aquifer. Each of these supply systems is then further defined by their physical location, hydrological boundaries and associated infrastructure. Physical constraints on water flow, like the Barmah Choke, are also recognised. CSIRO Land and Water Page 8 of 53

19 The next is the management zone, which is defined by a combination of political, administrative, and physical considerations. The next element in the classification framework is the allocation pool category. Across the SCRMS, reliability is usually defined twice. First, by identifying the purpose of use usually associated with the statements about access priority given to pools of water, and then, the actual reliability of the expected allocations. The last grouping collects a large variety of licence conditions and/or restrictions. Different types of water entitlements are further characterised by these complementary attributes, which include restrictions on the application of water to land, limits on the location where water may be used, restrictions on trade within and outside an area, the period over which any allocation is valid for, obligations to infrastructure suppliers, and so forth. Table 2. A classification framework to assist in identifying the number of types of water entitlements in the SCRMS Classification Framework Elements Supply system Management zone Criteria Dominant source of water (i.e., regulated or unregulated surface water, confined or unconfined groundwater aquifer) Defined by a combination of political, administrative, and physical considerations (State and hydrological boundaries are always respected. Zones are often defined by irrigation district boundaries) Allocation pool category Defined by a combination of use purpose and statements about access priority and/or the reliability of the expected allocations Licence conditions/ restrictions Restrictions on use and trade, infrastructure obligations, and tenure, etc. 4.2 Water entitlements in regulated surface water system Although most, if not all, of the above systems are interconnected, much of the policy attention is being given to the management of regulated surface water system where options for water trading and supply management are greater. The allocation pools in the regulated surface water system are also the Murray Darling Basin Commission most intimately involved. When specific details associated with the nature of each allocation pool, restrictions, conditions, etc. are taken into account, 22 categories of water entitlements can be identified in the regulated surface water system in the SCRMS (see Table 3). A number of attributes are important in specifying a water entitlement. In particular, Supply reliability is defined in terms of the number of years in 100 when entitlement holders can, on the basis of past climatic conditions and allocation decisions, expect to receive their maximum entitlement volume; Entitlement and allocation tradability is defined in terms of whether or not they are tradable among States (***), within the State (**), only within the region (*) or un-tradable (0); Tenure is defined in terms of whether or not the licence term is either perpetual ( ) or ongoing ( *), or has a specific term. Where a term exists, the licence is normally issued for a number of years; and CSIRO Land and Water Page 9 of 53

20 Access priority refers to the priority assigned to the pool of water from the system within which it is taken. As a general rule there is a close correlation between access priority and supply reliability. Table 3 summarises the characteristics of these 22 entitlements categories in terms of supply reliability and tenure arrangements. Reliability estimates, for entitlement categories with reliability less than 90%, are indicative and variable as a result of the change of farm dam development, more groundwater is used, return flows decrease, land use change affects run off and climate change occurs. Table 3. Existing 22 categories of entitlements 1 in regulated surface water system Attributes State Water System Entitlement Category (total 22) Supply reliability (%) Tenure (year) NSW (8) Vic (6) SA (8) Murray River Lower Darling River Murrumbidgee River Goulburn-Murray Water Murray River River Murray Prescribed Watercourse Domestic & stock 100 Local water utility High security >97 Conveyance 50 b Environmental water 100 * General security 70 a Supplementary water 50 b 2 Domestic & stock 100 Local water utility High security >97 Environmental water 100 * General security 70 a Supplementary water 50 b 2 Domestic & stock 100 Local water utility High security >95 Conveyance 50 b Indigenous cultural 100 * General security 70 a Supplementary water 50 b 2 Domestic & stock right 100 Town water supply 100 * Supply by agreement 100 * Water right 96 * Diversion licence 96/70 a 15 Sales water Domestic & stock right 100 Town water supply 100 * Supply by agreement 100 * Water right 96 * Diversion licence 96 5 Sales water Stock & domestic 100 Country town water 100 Industrial 100 Recreational & environmental >97 CSIRO Land and Water Page 10 of 53

21 Lower Murray Prescribed Watercourse Angas Bremer Prescribed Well Area 4 Irrigation >97 Wetlands > Water (holding) >97 Stock & domestic 100 Metropolitan water Country town water 100 Industrial 100 Recreational & environmental >97 Irrigation >97 Water (holding) >97 Stock & domestic 100 Country town water 100 Industrial 100 Recreational & environmental >97 Irrigation >97 Wetlands > Water (holding) >97 Notes: 1. In the regulated surface water system, there are 438 types of water entitlements for different purposes. Due to the limitation of available information on entitlement attributes, only 53 types of water entitlements are listed. 2. For the convenience to the research, and as the Victorian Government White Paper has proposed to unbundle Sales water into a separate, legally recognised, and independently tradable entitlement, in this report Sales water is identified as a separate category of water entitlement. Under current arrangements, opportunities to apply for Sales water are attached to Water rights and Diversion licences and can be traded only with the entitlement. 3. Water can be traded into the 650GL allocation over 5 years for metropolitan Adelaide and associated country areas, but cannot be traded out. 4. There is a close connection between groundwater and River Murray water in SA Angas Bremer Prescribed Well Area and they are jointly managed. a. 70 is indicative of the average supply reliability of NSW General security entitlements and for some Victorian Diversion licences. b. 50 is indicative of the supply reliability of NSW Conveyance and Supplementary water entitlements. 4.3 Irrigation entitlements in regulated surface water system Table 4 provides an overview of the differences among states in irrigation entitlement arrangements and seasonal allocation policies in regulated surface water area of the SCRMS. More detailed information is available in Appendix 1 and Appendix 2. CSIRO Land and Water Page 11 of 53

22 Table 4. A summary of state approaches to regulated surface water allocation State NSW Vic Nature of water entitlement High security access licence General security access licence Supplementary water access licence Water right Diversion licence Sales water attached to Water right b Allocation policy Allocations are specified as a maximum volume and this allocation is expected to be available in all but the worst droughts. Unused allocations are surrendered at the end of the season. The entitlement includes permission to use water at a specific location. NSW is in the process of converting all licences into separate access licences as shares and moving all use and work conditions into separate water use approval and water supply work approval. User s annual allocation varies according to the amount of water available in the general security allocation pool, after allowing to higher priority pools including commitments to water utilities, the environment, stock and domestic users, high security access licence holders, etc. Carry-over and overdraw provision rules apply to general security entitlements only. NSW is in the process of converting all licences into separate access licences as shares and moving all use and work conditions into separate water use approval and water supply work approval. Available to general security access licence holders only when flows are surplus to in-stream requirements. A water right is a high reliability entitlement, held by individuals within irrigation districts. Allocations are specified as a maximum volume and this allocation is expected to be available in all but the worst droughts. Some, but not all, water right holders have access to sales water. Unused allocations are surrendered at the end of the season. Following NSW, Victoria has announced an intention to unbundle the entitlement dimension of a water right from use conditions and manage them separately from allocations. A diversion licence is issued for a specified annual volume and (usually) a maximum diversion rate. Unused allocations are surrendered at the end of the season. Following NSW, Victoria has announced an intention to unbundle the entitlement dimension of a diversion licence from use conditions and manage them separately from allocations. When seasonal conditions and dam supplies allow, sales water allocations may be purchased by an irrigator in addition to those available under a water right. Sales water is not available to water right holders in the western part of Victoria. Unused allocations are surrendered at the end of the season. Reliability a 95% (Murrumbidgee) 97% (Murray & Lower Darling) 70% on average Opportunistic 96-99% 96-99% 68% c (Murray) 43% c (Goulburn) CSIRO Land and Water Page 12 of 53

23 Sales water attached to Diversion licence b Sales water attached to a water right is more reliable than that attached to diversion licences. All other allocation policy dimensions are the same as above. 48% d (Murray) 30% d (Goulburn) SA Water (taking) licence Allocations are specified as a maximum volume and this allocation is expected to be available in all but the worst droughts. Unused allocations are surrendered at the end of the season. Taking allocations include permission to use water at a specific location. Almost 100% e Water (holding) licence Allocations do not vary from year to year and are expected to be available in all but the worst droughts. Holding allocations must be transferred to a taking licence before they can be used. Almost 100% e Notes: a. Data were deriver from Ballard (2003). b. Under current arrangement in Vic, sales water is not a formal entitlement. It is attached to water right or diversion licence and cannot be traded separately. For the convenience to the research, and as the Victorian Government White Paper has proposed to make sales water into a separate, legally recognised, and independently tradable entitlement, in this report sales water is identified as a separate category of water entitlement. c. The reliability of sales water entitlement is approximate and reflects the probability of reaching full sales allocation. d. The reliability of sales water entitlement is approximate and reflects the probability of reaching full sales allocation. e. In 2003/4 and 2004/5, holders of SA water licences in the SCRMS have not received their full allocation. This is the first time happened in history. Table 1 and Table 3 show that among 22 categories of regulated surface water entitlements, 13 categories (i.e., Domestic & stock, Local water utility, Conveyance, Environmental water, Indigenous cultural, Domestic & stock right, Town water supply, Supply by agreement, Metropolitan water, Country town water, Industrial, Recreational & environmental and Wetlands) are set for specific purposes and normally they are not allowed to trade. The remaining 9 categories are assigned to irrigation and river management purposes and tradable (i.e., High security, General security, Supplementary water, Water right, Diversion licence, Sales water, Stock & domestic, 4 Irrigation and Water (holding)). Table 5 summarises these 9 categories and 183 types of irrigation entitlements (which are, to varying degrees, tradeable) that are identified in the regulated surface water area of the SCRMS. 4 The exception applies to SA Stock & domestic licensed allocations. They are separated from land title and can be traded independently. CSIRO Land and Water Page 13 of 53

24 Table 5. Major 9 categories and types of irrigation entitlements in regulated surface water of the SCRMS Entitlement Type Code River Valley Management Zone Zone Code Sub-Zone Entitlement Category Attributes Supply reliability (%) Entitlement tradability (permanent) Allocation tradability (temporary) T1 High security >97 E** A*** 1 4 IDs: Berriquin, Denimein, Wakool, T2 Murray Irrigation Ltd. 10B Deniboota General security 70 a E** A*** 2 T3 Supplementary water 50 b 0 A* 2 3 NSW Murray T4 Western Murray Irrigation Ltd. 3 IAs: Buronga, Coomealla, Curlwaa High security >97 E** A*** 1 T5 West Corurgan Irrigation Trust General security 70 a E** A*** 2 T6 Supplementary water 50 b 0 A* 2 3 T7 High security >97 E*** A*** 1 NSW Lower Menindee Lake to Wentworth T8 Darling Weir General security 70 a E** A*** 2 T9 Supplementary water 50 b 0 A* 2 3 T10 High security >95 E** A*** 1 2 IAs: Mirrool, Yanco, 3 IDs: Tabbita, T11 Murrumbidgee Irrigation Area Benerembah, Wah Wah General security 70 a E** A*** 2 T12 Supplementary water 50 b 0 A* 2 3 T13 High security >95 E** A*** 1 T14 Coleambally Irrigation Area General security 70 a E** A*** 2 T15 NSW Supplementary water 50 b 0 A* 2 3 T16 Murrumbidgee High security >95 E** A*** 1 T17 Burrinjunk to Murray General security 70 a E** A*** 2 T18 Tenure (year) Access priority 2 Supplementary water 50 b 0 A* 2 3 T19 High security >95 E** A*** 1 T20 Yanco/Billabong Creek System General security 70 a E** A*** 2 T21 Supplementary water 50 b 0 A* 2 3 T22 NSW River Murray High security >97 E** A*** 1 T23 Channel Hume to Barmah Choke 10A General security 70 a E** A*** 2 T24 Supplementary water 50 b 0 A* 2 3 T25 High security >97 E** A*** 1 T26 Barmah Choke to Nyah General security 70 a E** A*** 2 T27 Supplementary water 50 b 0 A* 2 3 Total Entitlement Type NSW 53 CSIRO Land and Water Page 14 of 53

25 T28 High security >97 E*** A*** 1 About 900 individual irrigators in Sunraysia T29 Nyah to SA Border district (NSW and Vic together) General security 70 a E** A*** 2 T30 Supplementary water 50 b 0 A* 2 3 T31 Water right 96 E** A*** * 1 T32 Great Goulburn 1A Diversion licence 96 E** A*** 15 1 T33 Sales water 3 40 c 0 A** 1 3 T34 Water right 96 E** A*** * 1 T35 Boort 1B Diversion licence 96 E** A*** 15 1 T36 Sales water 40 c 0 A** 1 3 T37 Water right 96 E** A*** * 1 T38 Pyramid-Boort 1C Diversion licence 96 E** A*** 15 1 T39 Vic Goulburn Sales water 40 c 0 A** 1 3 T40 Water right 96 E** A*** * 1 T41 Rochester 1D Diversion licence 96 E** A*** 15 1 T42 Sales water 40 c 0 A** 1 3 T43 Water right 96 E** A*** * 1 T44 Central Goulburn 1E Diversion licence 96 E** A*** 15 1 T45 Sales water 40 c 0 A** 1 3 T46 Lower Goulburn 3 Diversion licence 96 E** A*** 15 1 T47 Sales water 40 c T48 Nillahcootie to Casey's Weir 2A Diversion licence 70 a E** A*** 15 2 T49 Vic Broken Sales water 40 c T50 Casey's Weir to Goulburn River 2B Diversion licence 70 a E** A*** 15 2 T51 Sales water 40 c T52 Water right 96 E** A*** * 1 T53 Campaspe 4A Diversion licence 96 E** A*** 15 1 T54 Vic Campaspe Sales water 40 c 0 A** 1 3 T55 Water right 96 E** A*** * 1 T56 Campaspe Irrigation District 4C Diversion licence 96 E** A*** 15 1 T57 Sales water 40 c 0 A** 1 3 T58 Vic Loddon Loddon 5A Diversion licence 96 E** A*** 15 1 T59 Sales water 40 c T60 Vic Bullarook Diversion licence 70 a E** A*** 15 2 Bullarook 5B T61 Creek Sales water 40 c T62 Vic Murray Hume to Barmah Choke 6 Water right 96 E** A*** * 1 VIC 89 CSIRO Land and Water Page 15 of 53

26 T63 Diversion licence 96 E** A*** 15 1 T64 Sales water 60 d 0 A** 1 3 T65 Water right 96 E** A*** * 1 T66 Murray Valley Irrigation District Diversion licence 96 E** A*** 15 1 T67 Sales water 60 d 0 A** 1 3 T68 Water right 96 E** A*** * 1 T69 Barmah Choke to Nyah 7 Diversion licence 96 E** A*** 15 1 T70 Sales water 60 d 0 A** 1 3 T71 Water right 96 E** A*** * IA: Torrumbarry, 3 IDs: Tresco, Worrinen, T72 Torrumbarry 7A Nyah Diversion licence 96 E** A*** 15 1 T73 Sales water 60 d 0 A** 1 3 T74 Nyah to SA Border (HIZ) 8H 2 IDs (salinity): Merbein, Red Cliffs Water right 96 E** A*** * 1 T75 Diversion licence 96 E*** A*** 5 1 T76 First Mildura Irrigation Trust Water right 96 E** A*** * 1 T77 (HIZ) Diversion licence 96 E*** A*** 5 1 T78 Water right 96 E** A*** * 1 T79 Nyah to SA Border (LIZ1) 8L1 2 IDs (salinity): Merbein, Red Cliffs Diversion licence 96 E*** A*** 5 1 T80 Sales water 60 d 0 A** e 1 3 T81 Water right 96 E** A*** * 1 T82 Nyah to SA Border (LIZ2) 8L2 1 ID (salinity): Robinvale Diversion licence 96 E*** A*** 5 1 T83 Sales water 60 d 0 A** e 1 3 T84 Water right 96 E** A*** * 1 T85 Nyah to SA Border (LIZ3) 8L3 Diversion licence 96 E*** A*** 5 1 T86 Sales water 60 d 0 A** e 1 3 T87 Water right 96 E** A*** * 1 2 IDs (salinity): Red Cliffs, Nangiloc T88 Nyah to SA Border (LIZ4) 8L4 Colignan Diversion licence 96 E*** A*** 5 1 T89 Sales water 60 d 0 A** e 1 3 T90 Vic Ovens Ovens 9A Diversion licence 70 a E** A*** 15 2 T91 Vic King King 9B Diversion licence 70 a E** A*** 15 2 T92 SA River Murray 9IDs: Berri, Cadell, Chaffey, Cobdogla, Irrigation >97 E** A*** 1 Central Irrigation Trust T93 Prescribed Kingston, Loxton, Moorook, Mypolonga, Water (holding) >97 E** A*** 1 T94 Watercourse W ik i Renmark Irrigation Trust Irrigation >97 E** A*** 1 T95 Water (holding) >97 E** A*** 1 T96 Sunlands and Golden Heights And other small irrigation trusts (e.g., Pyap, Irrigation >97 E** A*** 1 T97 Irrigation Trusts Lyrup) Water (holding) >97 E** A*** 1 SA 41 CSIRO Land and Water Page 16 of 53

27 T98 Stock &domestic 100 E*** A*** 1 Over 450 individual irrigators in Riverland T99 Individual operation licences district Irrigation >97 E*** A*** 1 T100 Water (holding) >97 E*** A*** 1 T101 Stock &domestic 100 E*** A*** 1 Lower Murray Swamps T102 (highlands) Irrigation >97 E*** A*** 1 T103 SA Lower Murray Water (holding) >97 E*** A*** 1 T104 Prescribed Lower Murray Swamps Irrigation >97 E** A*** 1 T105 Watercourse (private) Water (holding) >97 E** A*** 1 T106 Lower Murray Swamps Irrigation >97 E** A*** 1 T107 (government) Water (holding) >97 E** A*** 1 T108 SA Angas Bremer Stock &domestic 100 E*** A*** 1 T109 Prescribed Well Angas Bremer Irrigation >97 E*** A*** 1 T110 Area Water (holding) >97 E*** A*** 1 T111 Barossa Barossa (connected via 3 Zones: 1 (Barossa Valley Floor), 2 (Jocob Irrigation >97 E*** A*** 1 T112 Prescribed Water pipeline) & Tanunda Creeks), 3 (Flaxman Valley) Water (holding) >97 E*** A*** Notes: Shading indicates currently in the Pilot Interstate Water Trading Project areas. 1. In the regulated surface water area of the SCRMS, there are 9 categories and 183 types of water entitlements for irrigation purpose. Due to the limitation of available information on entitlement attributes, only 112 types of water entitlements are listed. 2. Various entitlements are given access priority according to the allocation pool category they belong to (i.e., 1, 2 and 3). In NSW, for example, high security entitlements have prior access to water than general security entitlements, and general security entitlements have prior access to water than supplementary water entitlements. 3. For the convenience to the research, and as the Victorian Government White Paper has proposed to unbundle Sales water into a separate, legally recognised, and independently tradable entitlement, in this report Sales water is identified as a separate category of water entitlement. Sales water is the volume allocation above Water right and Diversion licences. Under current arrangements, opportunities to apply for Sales water are attached to entitlement of Water right or Diversion licence and can be traded only with the entitlement. 4. Zone 7A co-exists with Zone 7, this zone will only operate when net trade out of this zone reaches 2% of Water right. At all other times trades may be conducted with Zone 7. a. 70 is indicative of the average supply reliability of NSW General security entitlements and some Victorian Diversion licences. b. 50 is indicative of the supply reliability of NSW Supplementary water entitlements. c. 40 is indicative of the supply reliability of Vic Sales water in Goulburn system. d. 60 is indicative of the supply reliability of Vic Sales water in Murray system e. Water allocations can only be purchased from Goulburn-Murray trading zone. CSIRO Land and Water Page 17 of 53

28 5 Opportunities to Simplify Irrigation Entitlements Arrangements There are considerable opportunities to reduce the complexity of the current irrigation entitlements arrangements among Sates and some opportunities are already underway. Significant opportunities include: Introducing standard terminology; Reducing water entitlement and trading arrangements complexity; Unbundling use restrictions and obligations, including those associated with salinity management, from entitlement and allocation arrangements; Standardising the tenure, trading restrictions and other similar arrangements; Converting existing entitlements into one or more standardised entitlements; and Rationalising zone boundaries so that they are constrained only by hydrological considerations. As these issues are complicated a case study is used first to illustrate the nature of these opportunities and the challenges presented. In the process of drawing attention to these opportunities, an important caveat needs to be made. The purpose of writing this report is to search for opportunities and present them in a manner that makes the nature of the opportunities transparent. As a result, no consideration is given to the political difficulty associated with bringing about such a reform or the most appropriate way to deal with the many equity and procedural fairness issues that existing licence holders and other members of the community may raise. 5.1 A case study of simplifying irrigation entitlements arrangements As opportunities for simplification require simultaneous consideration of many issues it is useful to begin with a case study. The area chosen to illustrate the extent of opportunities is the Northern Victoria and NSW River Murray regulated surface water system (see Map 2). As can be sensed from the map, arrangements are complex in this area. For example, irrigators in zone 1A can buy water from zone 8H but because of salinity impacts they cannot sell water to zone 8H. Similarly, trade is possible within those zones above the Barmah Choke (e.g., 9A, 9B, 10A and 10B) but not to zones that are below the Barmah Choke. To add to the complexity, some locational exchange rates can be asymmetrical. For example, an irrigator in zone 10B, who buys 1 ML water from an irrigator in zone 10A, will only receive 0.85 ML water, but if he/she were to sell 1 ML to zone 10A, then the recipient would receive 1 ML water. Within the case study area there are 24 zones and 62 types of irrigation entitlements. Table 6 presents the resultant tradability matrix, which on close examination presents a number of opportunities for simplification. In particular, when all entitlements with the same attributes are grouped together 10 entitlement groups can be identified; when entitlements with the same location exchange rates and trade rules are grouped together it becomes apparent that a number of trading zones can be merged. As summarised in Table 7, it becomes apparent that once use conditions are unbundled from entitlement arrangements, trading zones 1A and 1B could be merged as zone 1. In the same vein, entitlements in zones 2A and 2B have the same locational exchange rates and are equally tradeable. Therefore, trading zones 2A and 2B could be merged as zone 2. When all these changes are put together, the result is a situation where the previous 24 trading zones and 62 types of irrigation entitlements are simplified into 22 trading zones and 10 types of irrigation entitlements. CSIRO Land and Water Page 18 of 53

29 Map 2. Water trading/salinity impact zones in Northern Vic and NSW River Murray regulated surface water system Source: Cartography by the Customized Mapping Unit, Land Information Group, Land Victoria, DNRE, CSIRO Land and Water Page 19 of 53