REVIEW of WATER TRADING and WATER PRICING in the MURRAY-DARLING BASIN

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1 SmartRivers REVIEW of WATER TRADING and WATER PRICING in the MURRAY-DARLING BASIN June 2009 WRSIM Pty Ltd Water Resources Systems Investigations & Modelling

2 CONTENTS Page 1. INTRODUCTION Background Objective WATER ALLOCATIONS IN THE MURRAY-DARLING BASIN Water Allocations from Regulated Rivers High Security Water Allocations Lower Security Water Allocations Other Factors Farm Storage and Supplementary Water Preliminary Remarks MARKET PRICES Sources of Data Recent Trading Results Explanatory Comments DISCUSSION General Water Allocations Unsupplemented Water Concluding Remarks LIST OF TABLES Table 1: Market Prices for Permanent Water Trades in the Murray-Darling Basin 5 Table 2: Reliability of Supplemented/Regulated Water Diversions (Medium/General Security) 11 Table 3: Indicators of Relevance to Unsupplemented/Supplementary Water Access 12 APPENDIX A: Annual Diversions of Unsupplemented (Queensland) and Supplementary Water (NSW) 17

3 EXECUTIVE SUMMARY There is no market history of water trading in the Condamine-Balonne river basin that can provide a ready indicator of market value for water trades. In order to relate market history in other parts of the MDB to the value of water in the Condamine-Balonne, this review aims to provide an appreciation of why the unit value of traded water varies so much. The review considers permanent trades of water in all parts of the MDB. The best indicators for market value in the Lower Balonne are the other river basins in the far north of the MDB where water trading has commenced: namely, the Queensland Border Rivers, and the Gwydir River valley in northern NSW. Although there are greater similarities in water use and irrigation practice in this part of the MDB, different conditions of access to water make comparisons difficult. The table below sets out the average market trading values of supplemented and unsupplemented water, weighted by volume, in the Queensland Border Rivers and in the Gwydir River basin. More detail is provided in the report text. Market Average Values Weighted by Volume in 2008/09 River Basin Medium / General Security Water Unsupplemented / Supplementary Water Queensland Border Rivers $2,211 /ML $1,818 /ML Gwydir (share assignments) $2,212 per share $1,000 per share Sources: Water registries of Queensland DERM and NSW DWE In viewing these figures several cautionary notes are required. Trading of water in the Queensland Border Rivers only commenced in the 2008/09 water year, and the number of trades completed to date is quite limited particularly in relation to unsupplemented water. In NSW, any trade is in water shares. Although a trade in shares is colloquially referred to as a certain number of ML traded, the average annual diversion (AAD) possible with a Gwydir water share is significantly less than one megalitre. In Queensland, trading is in terms of ML specifically the nominal volume (NV) and the NV is equivalent to the AAD. Direct comparison in terms of ML is invalid unless proper account is made for this distinction. The AAD of supplemented (medium security) water in St George WSS is approximately 81% of the combined volume of water entitlements (~66 GL/a cf GL/a); and the percentage of years when the AAD or more can be supplied is ~75%. The AAD of general security water in the Gwydir is 38% of the combined volume of water entitlements (195.3 GL/a cf GL/a); and the percentage of years when the AAD or more can be supplied is ~44%. In the Queensland Border Rivers the AAD of medium security water is 36% of the combined volume of water entitlements (36.3 GL/a cf GL/a); however, Queensland trades are in terms of NVs. For unsupplemented water (termed supplementary water in NSW), the administrative systems for water accounting i.e. accounting for water in individual water user accounts are different in each river basin. The differences are explained in the report. In summary, the determination of NV, the determination of volumetric limit (VL), the annual volumes credited to each account, and the maximum limits on volumes that can be held in accounts are all more favourable to irrigators in the Lower Balonne than for irrigators in Review of Water Trading and Water Pricing in the Murray-Darling Basin i

4 the Queensland Border Rivers. In the Gwydir River basin an annual cap is imposed on diversions of supplementary water such that the cap of 178 GL is only 1.78 times the AAD of GL. For the Lower Balonne the AAD is 275 GL, the total of VLs is GL, and according to IQQM modelling the maximum annual diversion over a very long simulation period is ~900 GL. Private on-farm storage is an important factor in the effective use of this type of water. In Queensland river basins, including the Lower Balonne, the volume of tradeable entitlements is equivalent to the AAD (or NV). In NSW river basins, including the Gwydir, the volume of tradeable shares is equivalent to the cap on water diversions. In the Gwydir river basin, the AAD of supplementary water is only 56% of the volume of tradeable shares (AAD GL cf. 178 GL of water shares). These factors mean that direct comparisons cannot readily be made, and it is important to consider the conditions of access to water in any assessments of water trading value. Review of Water Trading and Water Pricing in the Murray-Darling Basin ii

5 1. INTRODUCTION 1.1 Background Through the Department of the Environment, Water, Heritage and the Arts (DEWHA), the Commonwealth Government announced on 8 September 2008 its intention to purchase water entitlements (water buybacks) in the Murray-Darling Basin (MDB), with two purchasing rounds for the northern MDB and the southern MDB open to applicants wishing to sell their water entitlements. The current purchasing round for the northern MDB remains open until 30 June For the purposes of the buyback scheme, the northern MDB includes all irrigators upstream of Menindee Lakes on the Darling River. Under the Government s Restoring the Balance in the MDB Program, funding of up to $3.1 billion is available over 10 years to purchase water entitlements to protect or restore environmental assets such as wetlands or streams in the MDB a. $350 million is currently allocated to purchase water entitlements in Queensland. According to a presentation by Commonwealth Government officials b, the principle criteria for making water purchases are that: (1) there must be an identifiable need for environmental water; (2) it must be feasible for delivery of purchased water to the environmental target(s); and (3) price. In the Condamine-Balonne river basin, and particularly in the Lower Balonne section of the basin, there are clear environmental needs that may be identified. These include, but are not limited to: the RAMSAR-listed Narran Lakes, the distributary streams and floodplains of the Lower Balonne c, and the upper reaches of the Darling River. Delivery from any water purchased in the Lower Balonne to supplement water supply to these environmental targets is quite feasible. 1.2 Objective The third criterion is price. The Government must seek value for money in its purchases, but on the other hand irrigators will be keen to obtain a fair market price. To date, no water trades have occurred in the Condamine-Balonne river basin due to delays in proclamation of the Condamine-Balonne Resource Operation Plan (ROP). There is therefore no market history of water trading in this river basin that would provide a ready indicator of market value. The objective of this report is to review water trading and market prices for irrigation water in the Murray-Darling Basin to provide guidance for irrigators in the tender application process. The review entails a comparison of recent water sales on a $/ML basis. The unit value of water ($/ML) varies considerably throughout the MDB, however, and in order to relate market history in other parts of the MDB to the value of water in the Condamine- Balonne, it is important to gain an appreciation of why the unit value of traded water varies so much. 2. WATER ALLOCATIONS IN THE MURRAY-DARLING BASIN There are many different types of water entitlement in the MDB. This means that comparisons are not straightforward. Following the water reform program that commenced in the Review of Water Trading and Water Pricing in the Murray-Darling Basin 1

6 early 1990s and greater exercise of Commonwealth powers in response to recent water shortages and drought, there has been a trend towards more consistency across State jurisdictions; however historically States have developed separate administrative procedures and provide different products for irrigation water. 2.1 Water Allocations from Regulated Rivers In regulated river systems in Queensland, for example, there are usually high security water allocations and medium security water allocations. While high security generally means an annual reliability of supply near 100% (typically 98% or better), the reliability of medium security water varies significantly between river systems in Queensland, depending on the degree of regulation afforded by government-operated dams and on the regional hydrology. The nominal volumes (NVs) determined in the Water Resource Plan (WRP) and ROP for each river basin are an attempt to standardise products and facilitate comparison, with the NV generally meaning the long-term average of the volume of water that can be diverted and used. But a NV of 250 ML, say, has different inherent value depending on whether the NV can be supplied in nearly 100% of years (as in a high security water allocation) or in only 40% of years (which in Queensland would be a medium security water allocation). Medium security water allocations will often provide no water at all in some percentage of years, and that precludes irrigation of certain cultivars (e.g. horticulture) High Security Water Allocations High security water allocations are available in all States of the MDB, and there is reasonable consistency in the reliability of these allocations across the MDB. The availability of high security water allocations differs considerably, availability generally increasing north to south, or upstream to downstream. In the Queensland MDB the number of high security water allocations is low, and these are generally restricted for water supply to towns or key industries. On the lower Murray (or the Murray River Prescribed Water Course [PWC]) in South Australia, most water allocations are high security enabling production of citrus and other high value irrigation enterprises that require high reliability of water supply Lower Security Water Allocations Terminology also varies markedly. Water allocations on regulated streams with annual reliability much less than 100% are termed medium security in Queensland, general security in NSW, and low security in Victoria. These terms are comparable, although as noted above the annual reliability can vary from river to river, and can even vary upstream to downstream along a river. This report will try to convey the reliabilities attached to these nonhigh security water allocations in the many tributary river basins of the MDB, and relate these to unit price Other Factors The unit value of irrigation water depends on factors other than reliability. To a large extent, it depends on what the water can be used to grow, which depends largely on climate and soils. In South Australia, for example, much of the available irrigation water is used to cultivate citrus and vines. In Victoria, irrigation water is sometimes used to irrigate pasture for dairy production. In southern NSW where soils allow, irrigation of rice is common. In northern NSW and southern Queensland, irrigation water is most often used for cotton growing. Moreover, as any manager of rural land knows, the value of produce depends on current market conditions that are influenced by a complicated set of Review of Water Trading and Water Pricing in the Murray-Darling Basin 2

7 determinants so the value of water will vary from one year to another, and from one season to another. Analysis of seasonal MDB water prices in the NSW Riverina by MIL d has demonstrated a peak in unit value for irrigation water in September and November, preceding the summer growing season, declining to a low in January or February with prices relatively depressed until the following spring. The unit value of irrigation water may also be expected to be influenced by prevailing climatic conditions. Some irrigators may be prepared to pay more for water when there are widespread water shortages, and when water available for trading may be scarce; on the other hand, those who are facing hardships during tough times may be prepared to sell for less. 2.2 Farm Storage and Supplementary Water Use of private on-farm storage (OFS) increases the unit value of non-high security water inasmuch as water does not have to be delivered at a particular time, but can be stored for later use. Seasonal fluctuations of price within the year are greatly reduced where adequate OFS is available. Use of OFS to store water diversions is prolific in many parts of the northern MDB, but is quite restricted in the southern MDB. Most OFS in the southern MDB is comprised of gully dams used to capture local runoff, but in the northern MDB larger storages are often constructed that have little or no local catchment and therefore capture relatively little local runoff. The primary purpose is most often to store water diverted/ pumped from flows in regulated or unregulated streams, and diversions to OFS are commonly referred to as water harvesting. Some of the water diverted to OFS may be medium/general security water on regulated streams, and some will be unsupplemented (Qld) or supplementary (NSW) water: i.e. river flows deriving from unregulated parts of the river basin or unregulated spills from dams. In practice, rules prescribe that unsupplemented/supplementary water may be diverted up to an annual limit 1 under certain conditions of flow principally when flows exceed a preset threshold. On unregulated streams this is the only type of diversion possible. Entitlements to divert unsupplemented/supplementary water constitute another class of water allocation. Catchment response and water resource operations modelling undertaken during water resource management planning for each designated river basin in the MDB has estimated the NV 2 and its reliability for this class of water allocation. Both the NV and its reliability can vary substantially within a river basin, depending on location in the stream network. In general, the reliability attached to a NV of one of these water allocations will be lower than the reliability attached to a NV of the same volume for a medium/general security water allocation, because the latter derive from a regulated water source. For unsupplemented/ supplementary water allocations, the probability of years with zero diversion is higher. These are factors influencing the unit value of this type of water. On regulated streams in Queensland, unsupplemented water entitlements are wholly independent of medium security water allocations. An irrigator may hold either one or other of these entitlements, or both. On regulated streams in NSW, deriving from the historically separate administrative procedures, supplementary water allocations have been attached to 1 2 In Queensland, every licence for diversion of unsupplemented water has a specified volumetric limit (VL). In NSW, there is an annual cap on total diversion of supplementary water, and each licence specifies a share of that cap as the annual limit. NV is a term used only in Queensland. For other States the average annual diversion (AAD) is an equivalent quantity. Review of Water Trading and Water Pricing in the Murray-Darling Basin 3

8 general security water allocations. Having entitlement to a certain volume of general security water determines the volume of supplementary water to which the irrigator is entitled. This mandatory link between general security water entitlement and supplementary water entitlement on regulated streams in NSW also affects the unit value of each, tending to a greater differential between the unit values of each type of water. In the Border Rivers, these two distinct management procedures operate side by side on opposite banks of the same river. 2.3 Preliminary Remarks The summary above provides some context for consideration of the unit value of irrigation water in the MDB and its variation. It allows some preliminary appreciation that comparisons are not simple or straightforward. The report will now proceed to compare recent market prices achieved in water trading in the MDB, and then review details of different river systems that help explain some of the observed price variation. That will provide a richer context for consideration of the value of irrigation water in the Condamine-Balonne river basin where water is yet to be traded, and with particular reference to the Lower Balonne. 3. MARKET PRICES 3.1 Sources of Data Each State with management responsibility of part of the MDB water resources now maintains a water register. Public access to information from the water registers is available on websites listed at the end of this report. Unfortunately, the public reporting of information from the websites is not consistent between States. For example, information on the volume and price of every water trade is provided by the NSW water register (Water Made Available Register: WMA register); in Victoria the relevant website provides only summaries of water trading (i.e. number of trades, total volume traded, weighted average price, price range). The frequency of updating information on the water registers also varies from State to State. Water prices reported in water registers rely on the good faith of traders, and is not mandatory. Some trades occur between related parties and prices may not reflect market value. For these reasons the accuracy of price data may be limited. 3.2 Recent Trading Results Table 1 summarises market prices in river basins of the MDB over the two water years and 2008/09. Prices shown are for permanent trades only. In the table the number of trades and volumes traded include all permanent trades. Average prices reported are weighted by the volumes of trades so that the possibility of trades of small volumes at higher unit prices unduly distorting reported averages is avoided. Median prices are also reported where adequate data is available. Medians are values that are exceeded in 50% of trades. Where there are substantial volumes traded at either very high or very low prices, the median can be a better guide to market value. Because most registers include numerous trades where either prices were not advised and are recorded as zero, or the water was traded with no exchange of money (e.g. between related parties), zero-value trades were excluded from the calculation of average and median values, and Review of Water Trading and Water Pricing in the Murray-Darling Basin 4

9 Table 1: Market Prices for Permanent Water Trades in the Murray-Darling Basin River Year Type Number Volume Unit Value ($/ML) Notes (ML) Low High Weighted Average Median BORDER RIVERS medium security $ 2,193 $ 2,500 $ 2,211 $ 2,200 Source: Qld DERM 2008/09 - Qld unsupplemented $ 1,795 $ 1,852 $ 1,818 No trading in GWYDIR 2008/09 Source: NSW DWE licences high security 1 50 $ 3,800 general security $ 337 $ 2,500 $ 1,531 $ 2,127 In NSW, licences or share assignments supplementary $ 250 $ 1,624 $ 842 $ 853 may be traded. share assignments high security 0 Under a share assignment, a share of the general security $ 2,211 $ 2,212 $ 2,212 $ 2,211 available water in the basin is sold and supplementary $ 1,000 $ 1,000 $ 1,000 $ 1,000 transferred between existing licences. licences general security $ 520 $ 2,500 $ 1,665 $ 2,063 supplementary $ 467 $ 1,000 $ 789 $ 708 share assignments general security $ 2,191 $ 2,212 $ 2,198 supplementary 0 NAMOI 2008/09 licences general security $ 265 $ 31,000 $ 535 $ 1,622 supplementary $ 6 $ 114 $ 108 n.a. only two values reported share assignments general security 1 40 $ 1,825 supplementary value not reported licences general security value not reported supplementary values not reported share assignments general security 1 43 $ 2,050 supplementary 0 MACQUARIE 2008/09 licences general security $ 587 $ 1,350 $ 1,228 $ 1,230 supplementary $ 50 $ 211 $ 171 $ 180 share assignments general security $ 1,200 $ 1,260 $ 1,235 $ 1,250 supplementary $ 180 values not reported licences general security $ 1,000 $ 1,358 $ 1,247 $ 1,250 supplementary 2 35 $ 64 $ 201 $ 152 n.a. share assignments general security $ 1,195 $ 1,250 $ 1,232 $ 1,250 supplementary values not reported LOWER DARLING 2008/09 licences high security $ 1,000 $ 2,499 $ 2,279 $ 1,700 supplementary $ 136 share assignments high security $ 2,250 $ 2,300 $ 2,298 supplementary 0 Review of Water Trading and Water Pricing in the Murray-Darling Basin 5

10 River Year Type Number Volume (ML) Unit Value ($/ML) Low High Weighted Average licences high security 2 26 $ 1,100 $ 1,500 $ 1,362 n.a. general security 1 15 $ 1,000 n.a. no share assignments traded in LACHLAN 2008/09 licences high security $ 1,400 $ 2,200 $ 1,906 $ 2,000 general security $ 66 $ 3,000 $ 589 $ 600 share assignments high security 0 general security $ 525 $ 700 $ 658 $ 700 licences high security $ 1,350 $ 1,400 $ 1,386 $ 1,400 general security $ 500 $ 3,175 $ 637 $ 625 share assignments high security 0 general security $ 535 $ 650 $ 562 n.a. only two values reported MURRUMBIDGEE 2008/09 licences high security $ 3,200 $ 3,600 $ 3,564 general security $ 887 $ 1,300 $ 1,053 $ 1,000 supplementary $ 250 $ 491 $ 318 n.a. only two values reported share assignments high security $ 3,100 n.a. only one value reported general security $ 900 $ 1,320 $ 1,268 $ 1,200 supplementary 0 licences high security 1 50 $ 3,200 general security $ 833 $ 1,200 $ 867 $ 900 share assignments high security 3 68 $ 1,288 $ 2,800 $ 2,331 n.a. only two values reported general security $ 756 $ 1,140 $ 897 $ 900 MURRAY - NSW 2008/09 Source: MIL Water Exchange general security $ 530 $ 2,100 $ 1,097 $ 1,050 general security $ 525 $ 1,123 $ 857 $ 743 OVENS 2008/09 Source: Victorian DSE high security $ 1,500 $ 13,500 $ 3,600 Data accessible in Victorian register high security $ 770 $ 1,700 $ 1,202 does not facilitate determination of BROKEN 2008/09 median values. high security $ 310 $ 2,000 $ 1,401 low security $ 100 $ 2,000 $ 1,102 high security $ 900 $ 2,000 $ 1,698 low security $ 100 $ 2,000 $ 839 GOULBURN 2008/09 high security $ 1,900 $ 7,000 $ 2,110 low security $ 100 $ 2,400 $ 185 Median Notes Review of Water Trading and Water Pricing in the Murray-Darling Basin 6

11 River Year Type Number Volume Unit Value ($/ML) (ML) Low High Weighted Average high security $ 1,400 $ 3,000 $ 1,748 low security $ 100 $ 2,000 $ 147 CAMPASPE 2008/09 LODDON 2008/09 BOORT I.A. 2008/09 MURRAY u/s Barmah MIDDLE MURRAY LOWER MURRAY (SA) 2008/ / /09 high security $ 2,000 $ 54,857 $ 2,297 low security $ 50 high security $ 15 $ 2,500 $ 1,252 low security $ 4 $ 100 $ 35 Median high security $ 2,000 only one value reported low security no values reported high security $ 1,750 only one value reported low security no values reported high security $ 1,250 $ 2,550 $ 2,369 low security $ 100 $ 250 $ 224 high security $ 1,050 $ 2,600 $ 2,091 low security $ 200 $ 260 $ 220 high security $ 1,800 $ 80,585 $ 2,090 low security $ 100 $ 333 $ 200 anomalous data for 4/09 omitted high security $ 1,600 $ 2,500 $ 1,720 low security $ 30 $ 1,900 $ 128 Notes high security $ 2,000 $ 3,198 $ 2,235 anomalous item in 3/09 omitted low security $ 100 $ 1,000 $ 160 high security $ 1,245 $ 3,333 $ 1,959 low security $ 100 $ 3,752 $ 145 Source: SA DWLBC high security $ 1,190 $ 28,000 $ 12,178 Trading a taking in SA is equivalent to a (holding) $ 1,750 $ 24,750 $ 9,268 $ 5,940 share assignment in NSW (see above). (taking) $ 1,190 $ 28,000 $ 16,978 $ 8,160 Trading a holding is trading a licence. Review of Water Trading and Water Pricing in the Murray-Darling Basin 7

12 the ranges of pricing. These results are based upon only non-zero value sales. In some cases, and in particular from SA, some excessively high unit values were excluded from calculations of weighted average and median values. 3.3 Explanatory Comments Queensland In the Queensland MDB, the history of water trading is very short indeed. The Resource Operation Plan (ROP) for the Condamine-Balonne river basin remains as a draft, and so trading has not yet commenced. In the Border Rivers (Queensland) trading commenced only in the 2008/09 water year. The weighted average price for traded medium security water exceeds $2,200. There have only been three trades of unsupplemented water completed to date, for which unit prices were reported in only two cases; however the unit prices in these two trades were similar, with a weighted average value of $1,818/ML. New South Wales In NSW, most irrigators have entitlements to general security water, although there are some high security entitlements used for irrigation in some of the MDB river valleys. The reliability of the general security entitlements (or water shares) varies depending on hydrology and degree of upstream flow regulation. Two types of water trade featured in NSW are (a) trades of water licences, and (b) trades of share assignments. In trades of water licences, the seller must terminate their right to divert water for their use. There is a termination fee imposed on this transaction by the operating authorities, and depending on the contract for the trade this fee may be borne by one or the other party e. If the purchaser agrees to compensate the seller for the termination fee it would normally depress the unit price of the trade, or the price per water share. There is no termination fee involved in trades of share assignments. In this type of trade, a number of water shares (i.e. shares of available water ) are deducted from the account of the seller and added to the account of the buyer. In NSW, both buyer and seller would normally be and would remain license holders however a new category of non-water-user has been introduced in Victoria f that affects interstate trade from NSW (other States are expected to follow this lead) where the buyer need not be a license holder. From Table 1, there is a range of prices for high security water traded in the NSW MDB, varying from under $2,000/ML to in excess of $3,000/ML during 2008/09 to date. Market prices for general security water vary from valley to valley, from less than $1,000/ML in the Namoi and Lachlan valleys, and with the highest unit prices in the Gwydir River valley where over $2,200/ML has been the weighted average for share assignments during 2008/09. Supplementary water in NSW terminology, equivalent to unsupplemented water in Queensland, is also a common source of water for NSW irrigators and is more important in northern NSW. As noted above, historically only holders of general security licences were entitled to divert supplementary water from regulated streams in NSW. However, this nexus has now been broken to permit the free trade of water allocations under the water reform agenda. To date, a significant number of trades of rights to supplementary water have occurred only in the Gwydir and Macquarie River valleys. Market values (weighted averages) vary from $171 for license sales in the Macquarie valley to $1,000 for share assignments in the Gwydir valley. Water trading has not yet commenced in the NSW Border Rivers where the Water Sharing Plan remains in draft g. Review of Water Trading and Water Pricing in the Murray-Darling Basin 8

13 Victoria In Victoria, most irrigation districts are supplied from highly-regulated sources. There are very large storages on the Goulburn River (Eildon) and Upper Murray/Mitta Mitta (Dartmouth, Hume), and a main distribution channel network conveys water from these sources to most of the irrigation districts in northern Victoria and integrates water from other river systems en route. The high level of regulation has led to a water management and administration system that is different to other State jurisdictions. Operation and administration of irrigation areas is undertaken by regional (not State) water authorities, of which Goulburn-Murray Water and Lower Murray Water are the two largest. The majority of water supplied for irrigation is high security water (formerly water rights, now high reliability water shares or HRWS), and high security water from the Goulburn-Murray system has an estimated 97% annual probability of delivering 100% allocations during each water year although recent experience during severe drought has been a departure from the norm h. 100% allocations are declared when there is sufficient water in storage to meet current season s requirements. After that, no further increase in allocations is made until storage volumes rise enough to reserve adequate water for the following irrigation season too. Once this reserve is met, any excess in storage may be allocated as low reliability water shares (LRWS, formerly referred to as sales water ). From Table 1, current trading values of HRWS in Victoria are well above $2000/ML. Trading values of LRWS are much lower, typically in the range $160/ML to $220/ML (outliers exist for the relatively small Broken and Campaspe River valleys). These LRWS values may be temporarily depressed by the drought, as there would be little expectation of any water being available through these licences in the near future. They will remain of little practical use until storage levels in the very large reservoirs recover. There are more abiding reasons for low valuation of LRWS water in Victoria, however. The rules determining delivery of water under these shares (see above) mean that water only becomes available after all other water requirements, plus a substantial reserve, are satisfied. This is less likely to be early in the irrigation season when demand and trading prices are highest. Water is not made available from unregulated storm runoff as under unsupplemented water licences in Queensland, and there is relatively little OFS in Victoria that could store diverted water for later use. South Australia In South Australia, all irrigation water drawn from the Murray River PWC (Prescribed Water Course) is high-security water. There are two types of permanent trades, referred to as taking and holding water allocations. A water (taking) allocation entitles the licensee to take and use the volume of water nominated on the license. A water (holding) allocation entitles the licensee to request the Minister to convert the nominated volume to a water (taking) allocation i, and is something akin to a sleeper licence in Queensland. Data in the SA water register, or NRMIS (Natural Resources Management Information System) indicates a differential in the value of trades for taking and holding water allocations with a premium paid for the former which are already active. The data in the NRMIS are not reliable, unfortunately. The database displays a broad spread of prices with some astronomical prices for certain trades, and the pricing data entered had changed from one week to the next. However GHD Hassall quote monthly volume-weighted average prices from $2,371/ML to $2,386/ML based on information provided to them by DWLBC j for the first half of 2008/09 (i.e July to December 2008). Advice from a DWLBC enquiry line was that current market values for permanent trades in SA are between $2,300/ML and $2,400/ML (pers.comm., 11 May Review of Water Trading and Water Pricing in the Murray-Darling Basin 9

14 2009). These are trading prices similar to those in Victoria, which is unsurprising given that interstate water trading is well established in this part of the MDB. 4. DISCUSSION 4.1 General Few firm conclusions can be drawn from the review. However, for the purpose of the review, implications for pricing of water entitlements in the Lower Balonne are considered. The review demonstrates that there are substantial differences in the water products delivered across the breadth of the MDB. For example, water extracted from the Murray River in SA is virtually all high security water, and sustains permanent horticulture; and in Victoria most water delivered is high security, and the value of low reliability water allocations is comparatively very low. In general, there is a gradation from downstream to upstream, or from south to north, with water available for irrigation in the northern MDB typically of lower reliability. The terms used in Queensland (medium security) and NSW (general security) are appropriate, inasmuch as they convey that the reliability of supply is not as good as high security water, but better than the low reliability water in Victoria. However, the reliability varies considerably within this intermediate range. To make valid comparisons, a definition of reliability is required. For the purposes of this review, reliability will be defined as the percentage of years in which the volume of water available for diversion is equal to or better than the long-term average annual diversion (AAD). A reliability of 100% would mean that the same volume of water is dependably supplied every year. A low reliability of, say 20%, would mean that the long-term average volume can only be diverted in 20% of years: in 80% of years less water would be available, and in 20% of years more water would be available for diversion. Lower reliability implies either that a highly variable area of seasonal crops may be planted each year, or that private storages with large capacity are required to mitigate this limitation. A comparison of long-term average annual diversions estimated from a standard method of estimation is available from the reports produced for the Australian Government by the Sustainable Yields Project undertaken by the CSIRO. This series of reports was recently produced on available water, one report for each of the contributing river basins of the MDB. Another report for NSW regulated rivers of the MDB has just been released by NSW DWE (Ribbons, 2009). Because of the substantial differences between water products across the entire MDB as noted above, this comparison is restricted to the river basins of the most northern part of the MDB where water products are similar: namely, the Condamine-Balonne, Border Rivers and Gwydir river basins. In the Border Rivers the comparison focuses on the Queensland water products. As noted above the NSW Water Sharing Plan for the Border Rivers remains in draft and so no water trading has yet commenced there. 4.2 Water Allocations Supplemented or regulated water supply in these basins includes small quantities of high security water, principally for town water supplies. In Table 2, a summary of medium security (Queensland) and general security (Gwydir) water is provided. The licensed volumes of entitlements are reported in the CSIRO reports (CSIRO 2007, 2008). Long-term Review of Water Trading and Water Pricing in the Murray-Darling Basin 10

15 average diversion volumes estimated in the same reports are based on IQQM simulation of current development over more than 100 years. The percentage of years in which diversions equalled or exceeded the long-term annual average were inferred from graphical presentations in the reports and because of this are indicative rather than precise. Table 2: Reliability of Supplemented/Regulated Water Diversions (Medium/General Security) a. Licensed Volume of Entitlements (GL) k b. Long-term average annual diversion (GL/a) Reliability (% of years AAD is exceeded) Ratio b/a Condamine- Balonne l 0.81 St George WSS (est.) ~ 75% m 0.81 Chinchilla WSS (est.) ~ 70% n 0.81 U. Condamine WSS (est.) ~ 55% o 0.82 Border Rivers p 0.36 Coolmunda WSS 16 (est.) ~ 75% q Border Rivers WSS 20 (est.) ~ 40% r Gwydir (from Copeton Dam) s ~ 44% t 0.38 The comparison shows that the reliability of general security water in the Gwydir river valley and of medium security water in the Border Rivers Water Supply Scheme (WSS) are similar, both in the band between 40% and 45% reliability. Reliability of medium security water supplied from Coolmunda Dam in the Border Rivers (Macintyre Brook) and from Beardmore Dam on the Balonne (St George WSS) is higher, around 75%. In theory, higher reliability should be reflected in the trading value of the water. Another key factor is that in Queensland, a trade of water refers to the NV of the water traded. In NSW, trades of share assignments (or of complete licences) are shares of the water available in the river basin, i.e. a share of the total volume of entitlements. To illustrate the implications of this distinction, consider the following examples. If 100 ML of water is traded in the St George WSS (Water Supply Scheme), the AAD of the water traded is nominally 100 ML. In the Gwydir River Valley, if 100 shares are traded, that is 100 of a total of shares of general security water in the river basin. The 100 shares may permit an irrigator to divert 100 ML in a very good year when water availability is very high (or even up to 125 ML because of a 25% carry-over provision), but the AAD associated with the 100 shares would typically be only 38 ML Unsupplemented Water Access to unsupplemented or supplementary water is permitted in these river basins when river flows allow, and are subject to certain provisions. In Queensland, one way to compare water products in different locations is to compare the ratio of the volumetric limit (VL) to GL from Table 2, column a., Gwydir 100 ML x0.38 from Table 2, ratio b/a, Gwydir Review of Water Trading and Water Pricing in the Murray-Darling Basin 11

16 the nominal volume (NV). This terminology is not used in NSW. The nominal volume is a measure of the long-term average annual diversion (AAD) possible, estimated by modelling of past climatic and hydrological history under current levels of development. The VL is the maximum diversion possible in any one year, a limit identified in the ROP. Along the main stream of the Border Rivers (the Dumaresq-Macintyre-Barwon, or Dumaresq Water Management Area), the nominal volume is prescribed as equivalent to 8.8 days of pumping based on licensed pump capacities. The volumetric limit is set at 250% of the NV, so the ratio of VL/NV is 2.5. In practice, under the system of annual accounting specified under the Border Rivers ROP the percentage of years when it would be possible to divert the VL is very small. The annual credit added to each account is equal to the NV, and the accumulated credit in accounts is limited to the VL. These are limits imposed not by the hydrology but by the water management authority. In the Lower Balonne, limits are imposed more by the hydrology and the volume of on-farm storage (OFS). Nominal volumes were determined consistent with current water use. Volumetric limits were determined by the volume of OFS. The ratios of VL/NV vary, but are typically much higher than 2.5. Under the system of annual accounting used in the Lower Balonne, each account receives an annual credit equal to the VL. Moreover, for most irrigators with multi-year accounting, there is also a maximum volumetric account, or maximum accumulated credit, defined as twice the amount of the VL. This has the effect of allowing annual diversions up to double the capacity of on-farm storage should river flows permit. In comparison with the Border Rivers, the determination of NV, the determination of VL, the annual credit under the system of annual accounting, and the maximum accumulated credit permissible in each account are all more generous in the Lower Balonne. This should be reflected in the trading value of the water entitlements. In the Gwydir, the long-term average of the supplementary water diversions is GL/a and there is an annual cap of 178 GL u. These quantities approximate the NV and the VL as defined in Queensland. The ratio of these two quantities is only This is 29% lower than VL/NV in the Border Rivers, and much lower than is typical in the Lower Balonne. Table 3 presents comparison of indicators relevant to the use of unsupplemented or supplementary water in the three river basins. Low reliability of annual supply can be offset with greater volume of private OFS. In the Lower Balonne, the reliabilities shown are lower than in the Border Rivers and Gwydir, however the ratio of OFS to average annual diversion (AAD) is higher than in the Border Rivers v. In the Gwydir river basin, because of the historical nexus between regulated water allocations (general security water) and off-allocation diversions (supplementary water) referred to above in sections 2.2 and 3.3, all irrigators had both types of water access and in practice gained most of their water from regulated water allocations. OFS in the Gwydir river basin may be used for storage of both types of water, with some of the capacity being used for storage of regulated or general security water. In the Queensland Border Rivers the situation is mixed, however there are many irrigators there whose OFS stores both types of water. In the Lower Balonne, on the other hand, virtually all water stored in OFS is unsupplemented water, so the effective ratio of private storage volume to NV or AAD of unsupplemented water is much higher than in the other two river basins. That is very effective in compensating for the lower reliability of access. More complete graphical Review of Water Trading and Water Pricing in the Murray-Darling Basin 12

17 data on annual diversions of unsupplemented or supplementary water in the three river basins is presented in Appendix A. Table 3: Indicators of Relevance to Unsupplemented/Supplementary Water Access Indicator Lower Balonne Border Rivers 1 Gwydir Tradeable Licensed Volume of Entitlements (GL) NV Nominal Volume (GL) n.a. 2 AAD average annual diversion (GL) AAD / Licensed volume of entitlements VL Volumetric Limit (GL) VL / AAD Average Private storage, or OFS (GL) ~ , % of years when diversions equal or exceed tradeable licensed volume of entitlements OFS / AAD , ~ 22% % 10 11, 12 18% Reliability (% of years when diversions equal or exceed AAD ) ~ 22% % 10 ~ 40% 11 NOTES: 1. Border Rivers WMA plus Callandoon Creek WMA. (Excludes Weir River and Macintyre Brook tributaries) 2. NV is a term not used in NSW. NV approximates the AAD. Slight discrepancies occur due to modelling 3. Source: CSIRO (2007, 2008). 4. Varies from irrigator to irrigator in the Lwr Balonne. System of annual accounting also permits accumulated credit 2xVL.. Maximum annual diversion by modelling is ~900 GL (CSIRO, 2008; also see Appendix A). 5. For the Gwydir, AAD divided by the annual cap. Maximum annual diversion (or cap) is 178 GL. See also Appendix A. 6. Estimate based on draft ROP sum of VLs. 7. These data are for all Queensland Border Rivers WMAs, including Weir River and Macintyre Brook tributaries. 8. Unlike the Lower Balonne, most OFS in the Border Rivers and Gwydir perform dual functions of storage of both medium/general security regulated water and unsupplemented/supplementary water. 9. Approximated from graphical data presented in CSIRO (2007, 2008). See also Appendix A. 10. Advice from Queensland DERM, 15June09: Average Volume Probability for Border Rivers WMA. 11. Approximated from graphical data presented in Ribbons (2009) w. See also Appendix A. 12. For the Gwydir, the sum of water shares or tradeable volume of entitlements is defined equal to the cap, so diversions may equal, but never exceed, the tradeable volume of entitlements. These data imply that irrigators dependent on unsupplemented or supplementary water in the Gwydir and Border Rivers do not enjoy the same level of flexibility in their access to and use of that water as their counterparts in the Lower Balonne. Lower market prices for supplementary water in the Gwydir river basin compared to market prices for unsupplemented water in the Border Rivers in part reflects the administrative constraints historically attached to supplementary water in NSW, where any entitlement to supplementary water has been contingent upon prior entitlement to regulated (general security) water. 4.3 Concluding Remarks It may be inferred from the discussion above that irrigators in the Balonne river valley downstream of Beardmore Dam who are dependent on either medium security water or unsupplemented water derive some relative benefit because of different conditions of Review of Water Trading and Water Pricing in the Murray-Darling Basin 13

18 access that are more favourable than those for users of similar types of water in the Border Rivers or Gwydir river basins. This is a review of water resources aspects of water trading in the MDB, and it is not appropriate to make recommendations about pricing levels here. The information and comparisons presented in this report will assist irrigators to evaluate some of the factors that influence the value of the water to which they have entitlements. Review of Water Trading and Water Pricing in the Murray-Darling Basin 14

19 REFERENCES CSIRO (2007). Water Availability in the Border Rivers. A report to the Australian Government from the CSIRO Murray-Darling Basin Sustainable Yields Project. November 2007, CSIRO, Australia. 144pp. CSIRO (2007). Water Availability in the Gwydir. A report to the Australian Government from the CSIRO Murray-Darling Basin Sustainable Yields Project. December 2007, CSIRO, Australia. 134pp. CSIRO (2008). Water Availability in the Condamine-Balonne. A report to the Australian Government from the CSIRO Murray-Darling Basin Sustainable Yields Project. June 2008, CSIRO, Australia. 169pp. CSIRO (2008). Water Availability in the Murray-Darling Basin. A report to the Australian Government from the CSIRO Murray-Darling Basin Sustainable Yields Project. October 2008, CSIRO, Australia. 67pp. NSW Government (2002). Water Sharing Plan for the Gwydir Regulated River Source. NSW legislation. NRW (2007). Condamine and Balonne Draft Resource Operations Plan. Report by Queensland Department of Natural Resources & Water (subsequently renamed Department of Environment & Resource Management). April pp. NRW (2008). Border Rivers Resource Operations Plan. Report by Queensland Department of Natural Resources & Water (subsequently renamed Department of Environment & Resource Management). March pp. Ribbons, C (2009). Water Availability in New South Wales Murray-Darling Basin Regulated Rivers. NSW Department of Water & Energy, Sydney. April pp. WEBSITES: abare.gov.au/publications_html/landwater/landwater_09/landwater_09.html Australian Bureau of Agricultural & Resource Economics, Land & Water publications abs.gov.au/ausstats/abs@.nsf/mf/ Australian Bureau of Statistics, Water Use on Australian Farms, 2006/07 dwe.nsw.gov.au/water/index.shtml Management information NSW Department of Water & Energy, Water e-nrims.dwlbc.sa.gov.au/wtr/ SA Department of Water, Land & Biodiversity Conservation, Natural Resources Information Management System, water trading data environment.gov.au/water/mdb/entitlement-purchasing/index.html Australian Department of the Environment, Water, Heritage and the Arts, Water for the Future Program, public releases on water buybacks mdbc.gov.au/nrm/water_issues/water_trade trading information Murray Darling Basin Commission, water Review of Water Trading and Water Pricing in the Murray-Darling Basin 15

20 murrayirrigation.com.au/watexch/ Murray Irrigation Limited, Water Exchange nrw.qld.gov.au/water/trading/market_info.html Queensland Department of Natural Resources & Water (rebadged as Department of Environment & Resource Management), water trading summaries nwc.gov.au/www/html/251-water-trading.asp National Water Commission, water trading information and dictionary of terms waterregister.vic.gov.au/ Victorian Department of Sustainability and Environment, Office of Water, water trading summaries wma.naturalresources.nsw.gov.au/wma/ Water Made Available Registers NSW Department of Water & Energy, ENDNOTES: a b c d e northern Basin water entitlement purchase, Restoring the Balance in the Murray-Darling Basin Program: Water for the Future. Restoring the Balance. DEWHA Powerpoint presentation, February 2009: Water Availability in the Condamine-Balonne (CSIRO, 2008), pp Murray Irrigation Limited, Water Exchange Annual History Data, Water Exchange monthly sales season: f g h i Water Victoria, Murray Dairy website This site reports the following water allocations as percentages of the water right : Year Murray Goulburn 1991/92 200% 200% 1992/93 200% 200% 1993/94 200% 200% 1994/95 200% 200% 1995/96 200% 200% 1996/97 130% 120% 1997/98 200% 100% 1998/99 200% 100% 1999/00 130% 100% 2000/01 200% 100% 2001/02 200% 100% 2002/03 129% 57% 2003/04 100% 100% 2004/05 100% 100% 2005/06 144% 100% 2006/07 95% 29% 43% 57% 100% designates 100% of HRWS (high reliability water shares); anything in excess of 100% would be LRWS (low reliability water shares) under water trading arrangements introduced in July Australian Government National Water Commission (NWC) definition of water terms, dictionary.nwc.gov.au/water_dictionary/item.cfm?id=767&xref=1 Review of Water Trading and Water Pricing in the Murray-Darling Basin 16