WATER ENTITLEMENT MANAGEMENT ADDRESSING CHALLENGES AND EXPLORING OPPORTUNITIES IN REGIONAL COMMUNITIES

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1 WATER ENTITLEMENT MANAGEMENT ADDRESSING CHALLENGES AND EXPLORING OPPORTUNITIES IN REGIONAL COMMUNITIES Louise Barth 1, Ryan Gormly 2, Chris Olszak 3 Aither, Melbourne, VIC, Australia ABSTRACT Strategic water entitlement management is of utmost importance to all entitlement holders, including regional New South Wales (NSW) councils that are responsible for securing their own water supplies. These communities face challenges due to climate change, and growth and variability in water demand. However, water markets are developing across the state and are helping communities meet their water requirements in a cost-effective manner and balance variability. This paper will document our assessment of councils current entitlement portfolios and management practices to address challenges and explore opportunities for improved water entitlement management. It is based on recent project experience with a number of councils in the Central and Far Western regions of NSW. INTRODUCTION Local councils in regional NSW are responsible for securing water supply, including in the market for water entitlements (permanent rights) and allocations (annual quantities of water assigned to each entitlement). Securing town water supply is critical to ensuring economic growth and community wellbeing. Regional councils face challenges in ensuring supply security due to climatic variability and growth and variability in the demand for water. Water restrictions and carting during times of reduced water availability have significant economic and social impacts on councils and the community more broadly. Therefore, councils must balance the need to secure sufficient water supplies with the additional costs incurred by holding surplus volumes of water entitlements. There are strategies available for councils to mitigate against risk and uncertainty through improved portfolio management and taking advantage of cost-effective water market opportunities. Water trading can provide an efficient means for regional councils to secure supply in the short and long term, however markets can be complex and difficult to navigate. Drawing on recent and ongoing project experience with 10 councils in regional NSW, this paper will outline some of the key challenges and opportunities for improved water entitlement management in regional communities. METHODS Review of water entitlements and systems Regional councils in NSW are reliant on a mix of surface (regulated and unregulated) and groundwater entitlements to secure their water supplies. While these water entitlements are all governed by the Water Management Act 2000 and statutory water sharing plans, they have different licence conditions and constraints, reliability characteristics, and also attract fees for access and usage. The assessment of councils water entitlement portfolios commenced with a review of the water entitlements and relevant surface and groundwater systems. This task was undertaken initially to understand the regulatory features of each system and the reliability and tradability of the different entitlement types. The review included an analysis of entitlement and allocation markets and the extent to which local water utilities may be able to participate in those markets to meet water requirements in a costeffective manner and balance variability in demand. Assessment of current portfolio management practices A stocktake of current entitlements and an assessment of current portfolio management practices such as use, non-use, carryover and trade was undertaken. This assessment enabled a decision to be made regarding whether councils are optimising the use of their existing water entitlements. Potential improvements could then be identified. Supply and demand assessment A simple assessment of supply and demand based on historical data was then performed to determine the portfolio s ability to meet demand in all years. This assessment included the use of strategic

2 modelling to undertake a risk assessment of the long term supply and demand balance, in order to identify risks and opportunities. The strategic modelling generates long term supply and demand forecasts under different future rainfall and population growth scenarios to estimate the volume of allocations that may be required under different conditions. This enables councils to then decide on a desired level of supply security to be met through entitlements as opposed to relying on the allocation market or demand-side measures. From there, strategies can be developed to manage identified risks and take advantage of opportunities to optimise the use of existing entitlements and minimise licence fees and the cost of procuring additional water if required. Summary of challenges and opportunities The final part of this study involved identifying and assessing the different options available to councils to strategically manage their water entitlement portfolios in order to address current and future challenges and realise the market opportunities available to meet water demand in a cost-effective manner. These typically consist of short term options which councils can implement immediately to improve the management of their existing portfolio as well as longer term options which may assist in securing supply to communities at least cost in the long term. RESULTS AND DISCUSSION Review of water entitlements and systems The surface and groundwater systems in NSW are governed by Water Sharing Plans (WSPs) which set out rules for protecting the environment, extractions, managing landholders water accounts and water trading in the plan area. Most surface water systems have a variety of different licence types, with varying levels of reliability and conditions attached to each. Local water utility licences are the highest priority category followed by high security licences. General security licences are the lowest priority category and are subject to allocations based on available water. Supplementary licences are issued to all general security licence holders and are only available for use during periods of high natural river flows and may be accessed for limited designated days. In the Macquarie and Cudgegong Regulated Rivers water source, which a number of councils in the study held entitlements in, General Security entitlements form the vast majority of water rights (see Table 1). General security entitlement holders in the Macquarie system are permitted to carry over up to 100 per cent of their entitlement volume at the each of each season for use in future years. Carryover is not permitted for any other licence types. Water availability varies depending on climatic conditions with percentage allocations set through available water determinations made at the start of each water year and if required during the course of the year. In the Macquarie surface water system, high priority entitlements have been fully allocated over the past ten years. However, allocations to general security entitlements have varied from 0 to 10 per cent allocation during the drought years to 100 per cent allocation in due to high water availability. The market for surface water allocations has developed significantly in the last few years as licence holders have sought to sell unused allocations following the end of the drought. Accordingly, the average price received for the sale of allocations has declined since its peak at the height of the drought. There is also a market for general security entitlements, although trade has declined since due to increased water availability. The market for high security and supplementary entitlements is currently limited, although relatively high prices are received for high security entitlements due to their good reliability (see Table 2). In terms of groundwater, local water utility entitlements are the highest priority category, with aquifer licences also available within most systems. Groundwater entitlements held by the councils included in the study have been fully allocated over the past decade, while trading of groundwater allocations and entitlements has been limited to date. Assessment of current entitlement portfolios and management practices Following the assessment of current entitlement portfolios, it was identified that some council entitlement records were incorrect or incomplete. Some councils also experienced issues with their entitlements which constrained their ability to extract the full licensed volume. These discrepancies limit the potential for each council to optimise their entitlement portfolio and may also result in councils paying licence fees for entitlements that have not been utilised. Further, the assessment found that council records of annual allocations and usage could be improved. In some cases, this was the result of unmetered entitlements or inaccurate metering. A lack of accurate and well maintained allocation and usage records presents challenges in monitoring the balance between water supply and demand for each council and identifying potential shortfalls or surpluses in allocations.

3 The study also found that a number of regional councils do not actively manage the use of their different entitlements where there is the potential to do so. For example, supplementary licences appear to rarely be utilised when such water is available for extraction. A number of councils hold a range of entitlements within different water sources and with varied levels of reliability. There is the opportunity for these councils to maximise the efficiency of use by following a draw down strategy which directs surplus water to the most flexible entitlement type, providing councils with the greatest opportunity to realise value from carryover and allocation sales at the end of each water year. Supply and demand assessment Water usage is highly variable and influenced by factors such as population, rainfall, temperature and changes in government policy. During the middle of the previous decade, the demand for water allocations increased across all councils due to the prolonged drought sequence. Following the end of the drought in , extractions declined as rainfall recovered. The assessment of historical supply and demand found that most councils have had sufficient entitlements to meet demand in most seasons. Figure 1 provides an illustrative example of historical water supply and use for one council with an excess supply of entitlements. As shown, the council has extracted only a small proportion of its total entitlement over the past decade. However, some councils did experience shortfalls in supply or recorded limited volumes of excess allocations during the drought conditions of the mid- 2000s (see Figure 2). As shown in Figure 2, one council recorded a shortfall in supply as demand increased in the mid-2000s. In terms of future requirements, the strategic modelling of future water demand based on historical usage data indicates that the ability of councils to meet future demand for water allocations is influenced by the rate of population growth and rainfall patterns. Climate is arguably the biggest determinant of water supply and is also a significant driver of the demand for allocations. In many cases, the study found that councils have relatively reliable portfolios of entitlements and decreasing populations resulting in a natural increase in supply security over time. However, some larger councils are expected to experience reasonable population growth over the next twenty years. Therefore, current entitlements are unlikely to be sufficient to meet additional demands in these councils, particularly in the case of prolonged drought. Figure 3 presents a range of different demand projections to illustrate how the balance of supply and demand for one Macquarie council is affected by different rainfall assumptions. As shown, under average rainfall conditions, there would be ample supply to meet projected demand over the forecast period. However, if extremely low rainfall at the 1 st percentile is recorded, the council would need to purchase entitlements or allocations within the next five years. From here, the council can select a desired level of supply security from entitlements, which is equivalent to the extent to which the council wishes to meet demand for water in all years through entitlements as opposed to relying on the allocation market for additional water. The scenario in Figure 3 indicates that if the security standard based on median rainfall is selected, the council should have sufficient existing supplies to meet demand in 50 per cent of years. However, if a standard based on 5 th percentile or 1 st percentile rainfall is adopted, the council would need to begin purchasing entitlements within the next five years. Clearly, this assessment shows that the level of desired supply security to be provided by entitlements greatly influences the volume and timing of entitlement purchases by councils. Summary of challenges and opportunities The main challenge faced by local water utilities is the need to ensure supply security whilst also maintaining the affordability of water services to residents and businesses. As noted in this assessment, uncertainty regarding future rainfall and population trends makes it difficult for local water utilities to assess future water needs and manage risk. However, there are opportunities available to councils to improve the management of their portfolios both in the short term and over the longer term. In the short term, there is an opportunity for councils to firstly improve the administrative management of their water entitlements. By monitoring allocations to and extractions against entitlements throughout the season, councils will be able to identify opportunities to trade unused allocations as they arise, and ensure that their use remains within licence limits. In order to ensure councils have accurate usage information, meters should be implemented for all extraction points and existing meters tested for accuracy. Councils should also keep a record of any licence fees and charges paid to relevant water authorities and compare the usage charges with their internal usage records to ensure they are being charged correctly. There is also a need for councils to resolve any licence issues associated with their entitlement portfolio.

4 Councils can optimise their existing portfolios by actively managing the use of their different entitlements in accordance with the reliability, tradability and conditions associated with each licence. As noted previously, councils should endeavour to extract allocations in such a manner as to maximise the efficiency of use. This can be achieved by maintaining allocations against those entitlements that offer greatest flexibility in trade and carryover (i.e. using those entitlements last). General security allocations in many systems can be carried over for use in future years so these entitlements should generally be used last. Councils with excess allocations may have the opportunity to trade a proportion of their remaining allocations in the temporary (allocation) market, which results in improved financial outcomes. In some cases, the trade of excess allocations could potentially generate hundreds of thousands of dollars in revenue per year where active allocation markets exist. Conversely, some councils may consider purchasing additional allocations to improve supply security, particularly during unexpected drought events. Allocations to general security and high security entitlements can be traded immediately. While it is legally possible for allocations to LWU entitlements to also be traded, councils must first have ministerially approved demand management and drought management plans in place as stipulated under Regulation 17(5) of the NSW Access licence dealing principles order Further guidance from the New South Wales Office of Water on how to meet these conditions would be useful for councils as there is presently some uncertainty regarding this issue. Based on consideration of the reliability and characteristics of the entitlement portfolio and the assessment of historical supply and demand, councils can determine whether the current entitlement portfolio is appropriate for their town water needs. Some councils may be required to purchase additional entitlements based on the chosen security standard. Figure 3 illustrates that the volume of entitlement that the representative council should hold and the timing of additional entitlement purchase vary considerably if a different water security standard is adopted. There are a range of different entitlement types and other options available to councils to ensure their supply security over the longer term. Groundwater licences have high reliability and generally good water quality. The purchase of these licences may be a key opportunity for some councils, particularly those currently relying on limited surface water allocations. While the market for groundwater entitlements is currently relatively thin in many systems, markets are continuing to develop in the region. High security entitlements are available in some systems and form an obvious approach to meeting demand in dry years for councils within these systems due to their very high reliability. However, these entitlements are relatively expensive due to their good reliability. Councils choosing to purchase high security entitlements to ensure supply security in very dry years may benefit from also selling volumes of allocations in average to wet years (when the water is not needed) in order to secure a return on the entitlement. General security entitlements are considerably less expensive than high security entitlements and are generally the most commonly traded form of entitlement in regional NSW. However, these entitlements may not provide sufficient allocations when needed during times of drought due to their lower reliability. Where carryover is permitted, this issue could be overcome by carrying over unused allocation on general security licences in average to wet years for use in drier periods. Finally, there is an opportunity for councils to engage in water policy and planning processes which may affect the characteristics of the entitlements held. Reviews of Water Sharing Plans and other processes may affect the reliability and tradability of entitlements and therefore it is important for councils to understand the impacts of potential changes and be able to influence the outcomes. CONCLUSION This paper has illustrated the challenges facing regional NSW councils in meeting town water supply due to rainfall and climatic variability and changing patterns of demand. An assessment of the water entitlement portfolios held by a number of regional NSW councils has found that many councils are not fully aware of the characteristics of their different entitlements and are therefore not optimising the use of their existing entitlements. By understanding the current portfolio and monitoring allocations and usage over time, councils can optimise their existing entitlements and estimate their future water requirements to secure supply in a cost-effective manner. Ulimately, water entitlements should be managed like other valuable assets with a more strategic approach to entitlement management enabling councils to identify and address challenges and take advantage of emerging opportunities.

5 REFERENCES Aither (2013) Water Entitlement Portfolio Management: Phase 1 Needs Assessment. A report prepared for the Dubbo City Council, October. Aither (2014) Water Licence Advisory Services: Strategic Needs Assessment. Report prepared for the Lower Macquarie Water Utilities Alliance, October.

6 Table 1: Macquarie surface water entitlements Entitlement Entitlement Entitlement Allocation Carryover % allocation type on issue trade trade Local Water 22,681 ML per Utility annum Yes No Potentially (a) No High 19,419 unit Security shares Yes Yes Yes No General 632,428 unit Security shares Yes Yes Yes Yes Supplement 50,000 unit ary shares No Yes No No a) Allocations can only be traded if the entitlement holder has approved demand management and drought management plans in place. Table 2: Average prices for Macquarie surface water entitlements Year High security ($/ML) General security ($/ML) Supplementary ($/ML) ,000 1, ,793 1, ,971 1, ,683 1, ,719 1,031 - Figure 1: Historical assessment of supply and demand for Council A

7 Figure 2: Historical assessment of supply and demand for Council B Figure 3: Long term assessment of supply and demand under different rainfall scenarios