1                     On 18 February 2005, Services Sydney Pty Limited (ACN 084 481 103) (Services Sydney) applied to the Australian Competition Tribunal (the Tribunal) under s 44K(2) of the Trade Practices Act 1974 (Cth) (the Act) for a review of the deemed decision by the designated Minister, the Hon Robert Carr, Premier of New South Wales (NSW) (the Minister) under s 44H(9) of the Act, not to declare certain services.  The services were described in Services Sydney’s application to the Tribunal as follows:

‘(a)      a service for the connection of new sewers to Sydney Water Corporation’s (“Sydney Water”) sewage reticulation network(s) at points of interconnection (“Interconnection Service”); and 

(b)       a service for the transportation of sewage provided by means of Sydney Water's sewage reticulation network(s), from a customer's boundary trap to points of interconnection (“Transportation Service”).’ 

2                     Declaration under Pt IIIA of the Act is one process through which third parties can gain access to what are often described as ‘essential facilities’ or natural monopolies, to which access is required in order to compete in a related market.  These particular terms do not, however, appear in the Act.  Rather, Pt IIIA of the Act provides for the declaration of a ‘service provided by means of a facility’ (s 44B of the Act) where the application meets certain criteria.  Hence, a service is distinguished from a facility, although the service may simply involve the use of a facility (Rail Access Corporation v NSW Minerals Council Ltd (1998) 87 FCR 517 at p524, (1998)ATPR 41-663 at 41,389).  Declaration is only possible where access is not already available through either an access undertaking that has been accepted by the Australian Competition and Consumer Commission (ACCC) under s 44ZZA of the Act, or through a state or territory access regime that has been found to be ‘effective’ under s 44N.  Once a service is declared, an access seeker has the right to negotiate terms and conditions of access with the service provider, and to have those terms and conditions arbitrated by the ACCC when a dispute is notified.

3                     In the first instance, it is for the National Competition Council (NCC) to recommend (s 44F of the Act), and the designated Minister to determine (s 44H of the Act), whether a service should be declared.  If the Minister fails to publish a declaration, or the reasons for not declaring the service, within 60 days of receiving a recommendation from the NCC, the Minister is taken to have decided not to declare the service (s 44H(9) of the Act).  The Minister’s decision is reviewable by the Tribunal (s 44K of the Act).

4                     Services Sydney originally applied to the NCC on the 3 March 2004 for a recommendation to declare the following services:

‘(1)      a service for the transmission of sewage via Sydney Water’s Sydney Sewage Reticulation Network from the Customer Collection Points to the Interconnection Points (Transmission Service); and

(2)       a service for connection of new trunk main sewers owned and operated by Services Sydney to the existing Sydney Sewage Reticulation Network at the Interconnection Points (Interconnection Service).’

5                     This specification of the services was narrow, designed to facilitate access by Services Sydney to transportation and interconnection services relating to particular interconnection points between the sewerage reticulation network operated by Sydney Water Corporation (Sydney Water) and Services Sydney’s trunk main sewers.  Declaration under the Act, however, is not concerned with providing access for any particular individual or business.  Once a service is declared, any party can seek access and have the terms and conditions of access arbitrated by the ACCC.  The NCC considered that the services specified in the application were too narrowly focused on Services Sydney’s particular business plan and should be described in more general terms. 

6                     The NCC further concluded that there are three relevant facilities, namely the Northern Suburbs Ocean Outfall Sewer (NSOOS), the Bondi Ocean Outfall Sewer (BOOS) and the South Western Suburbs Ocean Outfall Sewer (SWSOOS).  Since the NCC agreed that transportation and interconnection were separate services, which should be defined in relation to each of the three facilities, they recommended that a total of six services be declared.

7                     Accordingly, on 1 December 2004, the NCC recommended declaration of more broadly defined services for transportation to ‘points of interconnection’ on each of the three sewerage reticulation networks and for the ‘connection of new sewers’ to those sewerage reticulation networks as follows:

‘(a)      A service for the transportation of sewage provided by means of the North Head Reticulation Network, from a customer’s boundary trap to points of interconnection.

(b)       A service for the connection of new sewers to the North Head Reticulation Network at points of interconnection.

(c)        A service for the transportation of sewage provided by means of the Bondi Reticulation Network, from a customer’s boundary trap to points of interconnection.

(d)       A service for connection of new sewers to the Bondi Reticulation Network at points of interconnection.

(e)        A service for the transportation of sewage provided by means of the Malabar Reticulation Network, from a customer’s boundary trap to points of interconnection.

(f)        A service for connection of new sewers to the Malabar Reticulation Network at points of interconnection.’

8                     The Minister did not publish a declaration, or his reasons for not declaring the services, within 60 days of receiving the recommendation from the NCC, and was thus taken to have decided not to declare the services.  Accordingly, Services Sydney made the current application to the Tribunal.

9                     The Tribunal’s review is a re-consideration of the matter (s 44K(4) of the Act).  In other words, it is not an appeal and the Tribunal can consider new information and evidence that was not available to the NCC or the Minister.  For the purposes of the review, the Tribunal has the same powers as the designated Minister (s 44K(5) of the Act) and may affirm or set aside the Minister’s decision (s 44K(8) of the Act).

10                  Before the Tribunal can declare the services, it must be satisfied that all the criteria in s 44H(4) of the Act are satisfied:

‘(a)      that access (or increased access) to the service would promote competition in at least one market (whether or not in Australia), other than the market for the service;

(b)       that it would be uneconomical for anyone to develop another facility to provide the service;

(c)        that the facility is of national significance, having regard to:

(i)                 the size of the facility; or

(ii)               the importance of the facility to constitutional trade or commerce; or

(iii)             the importance of the facility to the national economy;

(d)       that access to the service can be provided without undue risk to human health or safety;

(e)        that access to the service is not already the subject of an effective access regime;

(f)        that access (or increased access) to the service would not be contrary to the public interest.’

The Tribunal must also consider whether it would be economical for anyone to develop another facility that could provide part of the service (s 44H(2) of the Act).

11                  As noted earlier, the Act provides for the declaration of services provided by means of facilities, rather than for the declaration of the facilities themselves.  As previously mentioned, it is the NCC’s view that in this case there are three relevant facilities, being each of the NSOOS, BOOS and SWSOOS sewerage reticulation systems, and six relevant transportation and interconnection services, as opposed to the one facility and two services for which Services Sydney originally requested declaration.  The NCC is also of the view that the services should be defined broadly as transportation and interconnection services, rather than services relating to specific points of interconnection with Services Sydney’s sewers. 

12                  Services Sydney’s application to the Tribunal adopted the NCC’s more generic definition of the services and defined the facility or facilities in the alternative as either a single Sydney reticulation network, a combination of the three major reticulation networks, or each major reticulation network separately.  Sydney Water argued that there were three separate facilities.

13                  The Act does not define a ‘facility’ for the purposes of Pt IIIA of the Act.  In Re Review of Freight Handling Services at Sydney International Airport (2000) ATPR 41‑754 (Re Sydney International Airport), the Tribunal said (at 40,771) that:

‘…a facility for the purposes of the Act is a physical asset (or set of assets) essential for service provision and which also exhibits the features of a natural monopoly.’

and (at 40,791) that:

‘A key issue is the minimum bundle of assets required to provide the relevant services subject to declaration.’

14                  Debate between the parties focused on the extent to which the three networks were interconnected, either physically or operationally.  Both parties agreed that the networks were not currently physically interconnected.  Services Sydney argued that while physically separate, the three networks are fully integrated and coordinated in terms of staffing, operation and maintenance, they provide common services and the licences for the three networks are virtually identical.  Sydney Water argued that each of the reticulation networks is separate and distinct, licensed and operated separately and with quite different characteristics. 

15                  Applying the Tribunal’s ‘minimum bundle of assets’ test to the current matter, the Tribunal agrees with the NCC’s view that there are three relevant facilities.  It is quite conceivable that a new entrant could offer sewage collection services only to customers connected to one of the three reticulation networks, accessing transportation and interconnection services along that network, from which the sewage would be conveyed to a sewage treatment plant for processing and disposal.  It would not be essential to access transportation and interconnection services provided by each of the reticulation networks in order to compete. 

16                  A ‘service provided by means of a facility’ is defined, non-exhaustively, by the Act (s 44B) to include the use of an infrastructure facility and the handling or transporting of things.  The Act specifically excludes the supply of goods or the use of intellectual property or a production process as relevant services for Pt IIIA. Clearly the services for which declaration is sought fit within the types of services to which Pt IIIA was designed to apply.

17                  Sydney Water argued that the services for which Services Sydney are seeking declaration lack sufficient specificity, that the transportation service should be defined as a point to point service and the interconnection service should be defined in terms of specific points of interconnection.  The Tribunal does not accept this argument.  If a service is declared, access will potentially be available to anyone seeking it, not just Services Sydney.  The Tribunal agrees with the NCC that the definition of the services for the purpose of declaration needs to be sufficiently broad to be relevant to alternative entry plans.  The specific location of interconnection points is something that can be determined as part of the negotiation and arbitration of the terms and conditions of access.

18                  The Tribunal is of the opinion that there are three relevant facilities, being each of the NSOOS, BOOS and SWSOOS.  As interconnection services may be required independently of transportation services (for example, by sewer miners), the Tribunal is of opinion that there are six relevant services, and adopts the NCC’s definition of those services.

19                  Sydney Water submits that the Tribunal has no jurisdiction to make the declaration sought or, indeed, any declaration.  It is submitted that there is disconformity between the services identified by Services Sydney in its application to the NCC and those identified in the recommendation for declaration by the NCC to the Minister.  It is also submitted by Sydney Water that there is disconformity between the declaration now sought by Services Sydney and that recommended by the NCC.  Reliance is placed upon the decision of the High Court in Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597 (Bhardwaj).

20                  The Tribunal does not determine its own jurisdiction.  However, it is appropriate to give some consideration to the issue as, if the submission were clearly correct, it would not be right to continue.  In our opinion, the submission is not clearly correct and, indeed, is incorrect, for the reasons that follow.

21                  It is clear enough that the NCC is limited to dealing with the application made to it pursuant to s 44F(1) of the Act.  It is also clear enough that a recommendation to declare must be limited to the particular service identified in the application.  However, that does not require a literal or pedantic adherence to the nature of the application or to the particular description of the service when deciding whether the same application and the same service is being dealt with.  There is well-established authority to that effect in relation to planning approvals (see the discussion by Hope JA in Cambridge Credit Corporation Ltd v Parkes Developments Pty Ltd [1974] 2 NSWLR 590, particularly at 599, and the many later cases that have cited it). 

22                  Statutory provisions should be construed in context, bearing in mind the consequences of a literal construction, in order to give provisions the meaning that the legislature is taken to have intended them to have (Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 per McHugh, Gummow, Kirby and Hayne JJ at 384).  Purposive construction is required by s 15AA of the Acts Interpretation Act 1901 (Cth).  Incongruous or capricious results are to be avoided (Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297).

23                  In the present case the splitting of the facility (and so the services) into three does not affect the substance of the service to be declared in any respect material to this case.  It is the kind of precise and detailed formality that does not affect substantial compliance with the statutory regime (cf Stephen J in Scurr v Brisbane City Council (No 5) (1973) 133 CLR 242 at 256).  The added flexibility in relation to interconnection provided by the NCC recommendation does not change the essential nature of the application or the service.  A literal and pedantic construction of the provision would not accord with the wider purpose of Pt IIIA of the Act and would create anomalous and capricious results – as this case would illustrate if Sydney Water’s submission were to be accepted.

24                  The reference to Bhardwaj does not assist the debate.  That case deals with the consequences of a decision that is made in breach of an essential statutory condition.

25                  ‘Sewage’ is a combination of water-carried waste removed from residences, institutions and commercial and industrial establishments, together with such groundwater, surface water and stormwater as may be present, that is discharged into a sewerage reticulation network.  ‘Wastewater’ is a somewhat broader term, which includes discarded water of any origin, clean or contaminated, that is discharged into a sewerage or stormwater drainage system. 

26                  In Sydney today, sewage is generally, but not always, transported from customer premises via a sewerage reticulation network to a sewage treatment plant, where it is processed prior to being discharged into the environment (rivers and oceans) as ‘effluent’.  ‘Sewerage’ refers to the pipes and associated infrastructure through which the sewage is transported and ‘sewerage reticulation network’ refers to the network of pipes and fittings that collect sewage from customer properties and transport it to a sewage treatment plant or discharge point.  The transportation of sewage through sewerage reticulation networks is primarily by gravity, following natural catchment drainage lines, supplemented by pumping stations.

27                  Sewage may be processed in different ways and to various levels.  The level of treatment generally ranges from high rate primary (the lowest) to tertiary (the highest).  Some or all of the sewage may also be recycled as ‘biosolids’, used in agriculture, and recycled water, currently used for non-drinking purposes by households, agriculture and industry.

28                  Primary treatment involves the removal of solid particles from the sewage through screening, skimming and sedimentation.  High rate primary treatment involves higher loading rates and hence removes fewer materials.  Secondary treatment removes dissolved and suspended organic and inorganic solids through bacterial decomposition.  Tertiary treatment involves the removal of further inorganic compounds, and substances such as the plant nutrients nitrogen and phosphorous, and fine particles.  Tertiary processing may involve physical, biological and/or chemical processes.  Disinfection can be applied at any treatment level to inactivate disease-causing micro-organisms such as bacteria, viruses and parasites. 

29                  Disinfected secondary treated sewage can be used as recycled water for uses involving minimal human contact, such as pasture irrigation and coal washing and conveyance.  Disinfected tertiary treated sewage produces a high quality recycled water that is suitable for all types of non-potable use.  A further treatment stage, generally involving reverse osmosis, can be used to treat tertiary treated reclaimed water to a higher standard, known as potable water, suitable for blending with fresh water supplies that are further treated to produce drinking water.

36                  Until relatively recently, the function of sewage disposal was seen as a duty rather than a privilege.  It was traditionally a function of local government.  This is still the case for much of New South Wales.  It was the case in the city of Sydney from 1850 (Act 14 Victoria No 41).  In 1888 the function was effectively transferred to the Board of Water Supply and Sewage (Metropolitan Water and Sewerage Act of 1880; Metropolitan Water and Sewerage Amendment Act of 1888).  That body was succeeded by the Metropolitan Water Sewerage and Drainage Board in 1924 (Metropolitan Water Sewerage and Drainage Act 1924 (NSW)) and was reconstituted in 1987 as the Water Board (the Water Board Act 1987 (NSW)).  Local government and other statutory authorities operate sewerage systems elsewhere in New South Wales (eg Local Government Act 1993 (NSW), Pt 3 Div 2).

37                  The ownership and control of the developing infrastructure for the supply of sewerage services made academic any competition in relation to sewage collection, treatment and disposal.  The public authorities in the respective geographical areas performed all of those services.  By 1994 the landscape had begun to change.  The then NSW Government was ahead of its time in commercialising public services.  The State Owned Corporations Act 1989 (NSW)(SOC) introduced corporatisation.  The Water Board (Corporatisation) Act 1994 (NSW), now known as the Sydney Water Act 1994 (NSW), applied that concept to the Water Board. 

38                  The Water Board became a Company State Owned Corporation known as Sydney Water Corporation Limited.  That Act introduced the concept of an Operating Licence to provide (inter alia) sewerage services (Pt 5 of the Sydney Water Act).  The initial term of the licence was to be for a maximum of five years.  If the Operating Licence is cancelled, the Governor may vest the assets, rights and liabilities of the Corporation in the Crown or another person (s 210 of the Sydney Water Act).  The Sydney Water Corporation Licence Regulator was established to undertake an operational audit of compliance by the Sydney Water Corporation with the Operating Licence.  That Act also introduced the concept of customer contracts (Pt 6 Div 7 of the Sydney Water Act).

39                  Following problems with the quality of Sydney drinking water, substantial amendments were passed in 1998 transferring catchment management functions to the Sydney Catchment Authority (Sydney Water Catchment Management Act 1998 (NSW)).  The Water Legislation Amendment (Drinking Water and Corporate Structure) Act 1998 (NSW) changed the status of the Sydney Water Corporation Limited from a Company State Owned Corporation to a Statutory State Owned Corporation known as Sydney Water Corporation.  The Independent Pricing and Regulatory Tribunal and other Legislation Amendment Act 2000 (NSW) transferred the functions of regulating Sydney Water Corporation’s Operating Licence compliance and pricing determinations to the Independent Pricing and Regulatory Tribunal of NSW (IPART).  The Operating Licence and customer contract provisions continued. 

40                  The collection, treatment and disposal of sewage is one half of the ‘water cycle’.  The other half is the supply of drinking water through a second reticulation system to households and businesses.  Sydney Water is currently a vertically integrated monopoly supplier of both water and sewage services in Sydney, the Blue Mountains and the Illawarra.  It collects and disposes of more than 1.2 billion litres of sewage from around 1.6 million residential, non-residential and trade waste customers.  It has 28 sewerage reticulation networks and 31 sewage treatment plants. 

41                  Other vertical and horizontal structures are possible, however, and are observed both historically and currently in other parts of Australia and the rest of the world.  The supply of water and sewage services in Melbourne was restructured during the 1990s to separate out the supply of bulk water and the processing of sewage by Melbourne Water from the local reticulation of water supply and sewage collection by a number of local monopolies, who are subject to ‘yardstick competition’ by the regulator.  In England and Wales, the supply of drinking water is being opened up to third party competition, through a process of licensing and access to the incumbent reticulation systems.

42                  Sydney Water does not, however, conduct all its activities in house.  Section 91 of the Sydney Water Act relevantly provides:

‘91       Contracting out

(1)               The Corporation may enter into a contract or other arrangement with any person for the provision, construction, operation, management or maintenance of systems or services that are the subject of an operating licence or for the carrying out of any of its other activities.’

Sydney Water currently contracts out some elements of the supply chain, such as meter reading, maintenance and vehicle fleet management.  It also uses various ‘build own operate’ or ‘design, build and operate’ arrangements with the private sector to obtain some water filtration and sewage treatment services, including the Veolia Water sewerage reticulation and treatment project at Gerringong/Gerroa.  Sydney Water estimates that private sector competitive tenders currently account for 35 per cent of its total operating expenditure and 90 per cent of its capital expenditure.

43                  The three major sewerage reticulation networks in Sydney are the NSOOS, which is connected to the North Head sewage treatment plant; the BOOS, which is connected to the Bondi sewage treatment plant; and the SWSOOS, which is connected to the Malabar sewage treatment plant.  Sewage is treated to high rate primary levels at these sewage treatment plants.  The sewer line is owned by the property owner up to and including the junction with Sydney Water’s sewer. 

44                  Sydney Water also supplies recycled water to a number of domestic and commercial customers.  For example, the Rouse Hill Recycled Water Area Project involves the reticulated supply of recycled water for non-drinking purposes to more than 15,000 households in the area via a ‘third pipe’ reticulation system.  Similar systems are being considered for other areas.  Sydney Water is currently commissioning a plant to supply recycled water to Blue Scope Steel, which will use nearly 70 to 80 per cent of sewage coming into the Wollongong sewage treatment plant.  Recycled water is also being used as ‘process water’ for cooling purposes in the operation of the North Head sewage treatment plant, and there are plans to develop a similar scheme for Malabar.  Recycled water is also supplied for agricultural use and for watering various golf courses in Sydney.

45                  ‘Sewer mining’ is a term used to describe the extraction of sewage from trunk sewers and its treatment by physical, chemical and/or biological processes to produce reclaimed water suitable for specific end uses.  Sewer mining generally involves the connection of a pipe owned by the sewer miner to the trunk sewer to extract and transport the sewage to the sewer miner’s treatment plant.  After processing, sludge, grit and screenings may be returned to the trunk sewer by another pipe, while the recycled water is transported to end users by a pipe or network of pipes.  Sydney Water has established a process for dealing with enquiries from potential sewer miners.  However, only the Sydney Olympic Park Authority (SOPA) is currently engaged in the mining of Sydney Water’s sewers.  SOPA extracts sewage from the Sydney Olympic Park area and pumps it through its own pipes to its treatment and water reclamation facilities.  The reclaimed water is then supplied to the venues and facilities of Sydney Olympic Park and the residents of Newington via a ‘third pipe’ system owned by SOPA.  SOPA charges residents of Newington for the recycled water, the price of which is set at 15c/KL less than the price of drinking water supplied by Sydney Water.  Sydney Water continues to supply drinking water and sewage collection services and collects the recycled water fees on behalf of SOPA.  SOPA has no contractual relationship with the occupiers of premises from which sewage is collected in relation to that service and receives no revenue from that source.

46                  The two distinguishing characteristics of the sewage collection, processing and disposal industry discussed above, namely health and environmental externalities and monopoly supply, underpin the extensive regulatory regime within which Sydney Water operates.

47                  The principal functions of Sydney Water are to provide, construct, operate, manage or maintain systems or services for storing or supplying water, providing sewerage services, providing stormwater services or disposing of waste water (s 12 of the Sydney Water Act), to the extent that it is so enabled by its Operating Licence. 

48                  Section 21 of the Sydney Water Act provides that the principal objectives of Sydney Water are to be a successful business, operating at least as efficiently as any comparable business, maximising the net worth of the State’s investment in it and exhibiting a sense of social responsibility; to protect the environment; and to protect public health by supplying safe drinking water.  Section 22 of the Sydney Water Act further provides that Sydney Water also has certain special objectives of reducing risk to human health and preventing degradation of the environment.

49                  Sydney Water is required, by cl 11.3.1 of its Operating Licence, to comply with competitive neutrality policies and guidelines adopted by NSW and is also subject to Pt IV of the Act:

‘11.3        Competitive neutrality

11.3.1      Subject to the Act, the SOC Act and any applicable law, Sydney Water must comply, and must ensure that its Subsidiaries comply, with the competitive neutrality policies and guidelines adopted by New South Wales  under clause 3 of the Competition Principles Agreement.

11.3.2      This Part is in addition to any obligations of Sydney Water under the Trade Practices Act 1974 and the Competition Code of NSW and other States and Territories as applicable.’

Section 46 of the Act is noted as an example.

50                  The Operating Licence is one of the principal means by which Sydney Water’s operations are regulated.  The terms and conditions of the Operating Licence are determined by the Governor, but must include those matters set out in s 14 of the Sydney Water Act, which includes a requirement to supply commercially viable sewerage systems and services in its area of operations, the specification of service standards and the compilation of environmental impact indicators.  The current Operating Licence was issued on 1 July 2005 for a period of five years and includes explicit permission for Sydney Water to supply recycled water as well as those services listed in s 12 of the Sydney Water Act (cl 14).

51                  Clauses 10.1–10.4 of the Operating Licence are as follows:

‘10.1        What the Licence authorises and regulates

10.1.1      This Licence is granted to enable and require Sydney Water to provide, construct, operate, manage and maintain efficient, co-ordinated and commercially viable systems for providing the Services throughout the Area of Operations.

10.1.2      Sydney Water must ensure that its systems and Services comply with the quality and performance standards required in this Licence or required to be developed under this Licence.

10.2         Powers not limited

                This Licence does not restrict or affect Sydney Water’s power to carry out any functions imposed under any applicable law.

10.3         Area of Operations

                The Area of Operations may be varied only as permitted under the Act.

10.4         Connection of Services

10.4.1      Subject to Sydney Water continuing to be in compliance with any applicable law, Sydney Water must ensure that its Services are available for connection on request to any Property situated in the Area of Operations.

10.4.2      Connection to the Services is subject to any conditions Sydney Water may lawfully determine to ensure the safe, reliable and financially viable supply of Services to Properties in the Area of Operations in accordance with this Licence.  Satisfactory compliance with the conditions of connection is an essential requirement for gaining Sydney Water’s approval for connection of the land to a water main or sewer main under section 56(2) of the Act.’

Sydney Water’s ‘services’ are defined by cl 14.1 of the Operating Licence as the following services of Sydney Water permitted by the Operating Licence and any applicable law:

(a)               storing and supplying water;

(b)               providing sewerage services;

(c)               providing stormwater drainage services;

(d)               disposing of waste water; and

(e)               recycled water.

52                  Sydney Water is obliged to connect any property within its area of operations to its sewerage reticulation network on request.  Sydney Water’s area of operations can only be varied by the Governor (s 10(2) of the Sydney Water Act) if the Minister is satisfied that similar services will be provided by another public entity specified in s 10(3) of the Sydney Water Act. 

53                  Clause 10.5 of the Operating Licence provides that:

‘This licence does not prohibit another person from providing services in the Area of Operations that are the same as or similar to the Services, if the person is lawfully entitled to do so.’

54                  Division 7 of Pt 6 of the Sydney Water Act deals with customer contracts and is of some importance.  The provisions include:

‘54      Publication of terms and conditions of customer contracts

(1)       The terms and conditions of customer contracts are to be set out in the operating licence or licences that relate to the provision of water supply or sewerage services by the Corporation.

(2)       (Repealed)

(3)       The terms and conditions must include particulars of the contract charges or of the manner in which the contract charges are to be calculated or determined in relation to the provision of water supply or sewerage services to customers by the Corporation.

(4), (5)(Repealed)

55       Owner of land taken to have entered into customer contract

(1)       An owner of land that is connected to a water main or sewer main owned by the Corporation is taken to have entered into a customer contract with the Corporation, on the terms and conditions set out in the relevant operating licence or licences as varied from time to time in accordance with section 59, for the provision of water supply or sewerage services, or either of them, to the land.

(2)       In addition, a customer contract may also include terms and conditions relating to the imposition and payment of charges imposed under section 64 or 65. If a customer contract makes provision for such matters, a person by whom one or more of the charges are payable is taken to have entered into a customer contract with the Corporation on those terms and conditions.

(3)       A customer contract is not unjust, unconscionable, harsh or oppressive for the purposes of any law.

(4)       This section has effect subject to section 56.

…

57       Division not to apply to certain contracts

(1)       This Division does not apply to the extent that the terms and conditions of a contract or other arrangement for the provision of water supply or sewerage or stormwater drainage systems, or any of them, have been specifically agreed to by the Corporation and a person who is taken to have entered into a customer contract under section 55.

…

59       Variation of customer contracts

(1)       The terms and conditions of a customer contract may, subject to the approval of the Governor, be varied by the Corporation by a notice setting out or summarising the variation and published in a daily newspaper circulating in the area of operations. The notice must be published at least 6 months before the variation becomes effective or within a shorter period approved by the Minister.

…

(4)       Subsections (1)–(3) do not apply to the variation of the terms and conditions of a customer contract to the extent that the variation relates to alteration of the level of fees or charges and the alteration is in accordance with a determination of the Independent Pricing and Regulatory Tribunal.’

55                  Accordingly, once connected to Sydney Water’s sewerage reticulation network, a deemed contract comes into existence between the customer and Sydney Water, on terms and conditions set out in the Operating Licence.  Variation of the terms and conditions, other than fees and charges, is subject to the Governor’s approval.  The deemed customer contract is dealt with in cl 5 of the Operating Licence as follows (so far as presently relevant):

‘5.1.      Customer Contract

5.1.1     The Customer Contract applies for the purpose of section 54 of the Act and may only be varied in accordance with section 59 of the Act.

5.1.2     Subject to section 56 of the Act, the Customer Contract automatically applies to persons specified in section 55(1) of the Act.

5.1.3     The Customer Contract sets out the rights and obligations of Customers and Sydney Water in relation to the Services provided through systems required under this Licence.  These rights and obligations are in addition to the rights and obligations conferred by the Act and any other law.

…

5.1.10   As provided by and subject to section 57 of the Act, Sydney Water may enter into other contracts or arrangements for the supply of Services.  The terms of any such contract or arrangement are such as may be negotiated between Sydney Water and any such person.’

56                  The standard form customer contract is set out in Schedule 6 to the Operating Licence and includes the following clauses:

‘2.2     Who is covered by this contract?

            You are our customer and you are covered by this contract if you are the owner of property within our area of operations that is connected to a water main or sewer main owned by us, except where that connection has not been authorised or approved by us.

            You are also our customer and covered by this contract (except parts 3, 6, 10 and clauses 8.1, 8.2 and 8.3) if:

·               you are the owner of property that is within a declared stormwater drainage area; or

·               you are liable to pay us an availability charge and we have not exempted you from that charge or waived payment of that charge.

2.3       Other agreements with us

            If you have a separate agreement with us (for example a trade waste agreement), this contract will apply so far as it is not inconsistent with that agreement.

            We may enter a separate agreement with you for the provision of different levels of service where possible.  Before entering a separate agreement with you, we will provide you with an estimate of the costs to supply you with the service requested and advise you if the service that we have agreed to provide is below the standards set out in this contract.

…

3.2       Sewerage services

3.2.1    Supply of sewerage service

            If your property is connected to our sewer system, we will supply you with sewerage services to meet a customer’s reasonable needs for the discharge of domestic sewage except:

·               where we are entitled to discontinue supply under clause 6; or

·               in the case of planned interruptions and unplanned interruptions, under clauses 3.4.2 and 3.4.3; or

·               in the case of events beyond our reasonable control.

…

3.2.4    Trade waste

You may discharge trade wastewater into our sewer system only if you have obtained our written permission and entered into an agreement with us.

We will give you our written permission and enter into an agreement with you only if we are able to accept, transport and process trade wastewater that you discharge in full compliance with applicable safety and environmental laws, the Operating Licence and the Act.

You can contact us to obtain further information on the guidelines and standards for a trade waste permission.

…

4.1       Responsibility to pay the account

            You must pay us the amount of your account by the date specified, unless you have been overcharged or undercharged – see clauses 4.5 and 4.6.

…

6.6      Disconnection by a customer

You may disconnect your property from our sewer system or our water system provided that:

·               you have complied with all applicable health, environmental and local council regulatory requirements;

·               you have given us information we may reasonably require;

·               you have given us 10 days written notice; and

·               the disconnection is undertaken by a licensed plumber or drainer and conducted in accordance with plumbing, drainage or other regulations or standards that may apply.

On disconnecting your property, we may continue to charge you a service availability charge.  You may apply to us to be exempted from this charge.

…

14.1     Termination of this contract

This contract will terminate between us and you if you cease to be covered by this contract as described in clause 2.2.

The termination of this contract does not affect any rights or obligations of you or us that accrue prior to termination.

14.2     Variation of this contract

We may also vary this contract as permitted by the Act.’

57                  Division 8 of Pt 6 of the Sydney Water Act deals with fees and charges.  The key provisions for present purposes are:

‘60       Fees and charges generally

(1)       The Corporation may impose:

(a)       fees and charges for or in connection with any service or thing supplied or provided by the Corporation in the exercise of its functions under this Act, and

(b)       without affecting the generality of paragraph (a)—availability charges and stormwater drainage area charges.

…

(3)       The Corporation may impose any such fees and charges by customer contracts or by any other means. A fee or charge that is imposed by a customer contract cannot be altered except in accordance with the customer contract or an operating licence.

…

(5)       An operating licence may regulate the imposition of any fees and charges, and in particular may provide for any or all of the following:

(a)       specified fees and charges must not be imposed or must cease being imposed,

(b)       specified fees and charges must be imposed,

(c)        specified fees and charges may be imposed by customer contracts only.

…

64        Availability charges

(1)       The Corporation may and, if so required by an operating licence must, require the owner of land that is not connected to a water main or sewer main owned by the Corporation and available for connection to pay an availability charge.

…

(5)       Without limiting the generality of section 60 (5), the Corporation must cease imposing availability charges if an operating licence so requires.’

58                  Sydney Water’s fees and charges are subject to regulation by IPART.  Clause 8 of the Operating Licence provides as follows:

‘Sydney Water must set the level of fees, charges and other amounts payable for its Services subject to the terms of this Licence, the Act and the maximum prices and methodologies for Sydney Water’s Services determined from time to time by IPART under the IPART Act.’

IPART currently sets maximum prices for domestic and trade waste sewage services, as well as for recycled water supplied at Rouse Hill.  A new pricing determination has recently been issued and commenced on 1 October 2005.  Residential households pay a flat annual fee for sewage collection, while trade waste customers pay management and volumetric charges which reflect the amount and content of trade waste discharged into the sewer.  The maximum availability charge for sewerage services has been set at zero.  The previous pricing determination also set maximum prices for sewer mining at zero, with sewer miners required to pay the capital costs of interconnection.  However, there are no maximum prices for sewer mining under the new determination.  IPART has said that a negative price may be appropriate where costs are avoided as a consequence of sewer mining.  It will review sewer mining charges as part of its forthcoming review of recycled water prices.

59                  While the prices determined by IPART are expressed as maximum prices, s 18(2) of the Independent Pricing and Regulatory Tribunal Act 1992 (NSW) (the IPART Act) provides:

‘The approval of the Treasurer must be obtained if another Minister, an official or an agency fixes (or takes action to fix) the price below the maximum price determined by the Tribunal or calculated in accordance with the determination of the Tribunal.’

60                  Certain performance and service standards relating to sewerage services are laid down in the Operating Licence.  IPART undertakes an annual audit of Sydney Water’s compliance with the Operating Licence.  Under the Operating Licence, Sydney Water also has various annual reporting obligations to IPART, covering matters such as compliance with the sewage overflow standard, its performance against service quality and system performance and environmental indicators, progress in meeting the Environmental Plan and in meeting water re-use targets.  It is also required to report to IPART at least once during the term of the Operating Licence on its asset management system, which IPART is required to audit. 

61                  Section 35 of the Sydney Water Act requires Sydney Water to enter into Memoranda of Understanding with each of the Water Administration Ministerial Corporation, the Department of Health and the Environment Protection Authority to form the basis for co-operative relationships with those regulatory agencies.

62                  Sydney Water is also subject to additional environmental regulation under the Protection of the Environment Operations Act 1997 (NSW) (the POEA Act) and the Environmental Planning and Assessment Act 1979 (NSW) (the EPA Act).  Each of its sewerage reticulation networks and sewage treatment plants are licensed under the POEA Act, and these licences contain numerous conditions relating, for example, to sewage overflows and pollution incidents, breaches of which may involve criminal liability.

63                  The potential for recycling sewage as reclaimed water is particularly significant in Sydney, which is suffering from a long term water supply and demand imbalance.  The NSW Government’s Metropolitan Water Plan 2004 stated that consumption had been exceeding the safe yield from water storages for the preceding three years and the gap would increase over the next 25 years without action.  This is said to reflect a reduced supply of water available from Sydney’s major dam, as a consequence of global warming and prolonged drought, compared to projected population growth and the recognised need to increase environmental flows in the Hawkesbury-Nepean and other rivers to restore their health.

64                  There have been a number of policy responses by Sydney Water and the NSW Government to the water shortage facing Sydney.  On the supply side it is planned to divert water from the Shoalhaven and there is a proposal to build a desalination plant.  On the demand side, various regulatory restrictions and initiatives have been introduced, including water use restrictions; the Building Sustainability Index (BASIX) scheme, which requires all new houses and apartments in Sydney to reduce their mains water consumption by 40 per cent through installation of water efficient fixtures and rainwater tanks or connection to a recycled water supply; the payment of subsidies for installation of water efficient fixtures and rainwater tanks; and establishment of the Water Savings Fund.

65                  Historically, domestic water prices have been set below the long run marginal cost of supply and were not originally related to usage.  Hence the pricing mechanism did not bring supply and demand for water into balance.  Usage charges have been introduced and the most recent IPART price determination has substantially increased the proportion of charges made up of usage charges as compared to the fixed charge.  Usage charges are now two tiered, increasing from $1.20/KL to $1.48/KL beyond usage of 400 KL per year for individually metered households.  These prices reflect the long run marginal cost (LRMC) of bulk water supply, which has been estimated by IPART’s consultants to be in the range of $1.20/KL to $1.50/KL, and are designed to encourage water conservation and deter the use of drinking water for discretionary purposes such as watering gardens.

66                  Higher marginal prices for drinking water will make the use of recycled water for non-drinking purposes more attractive.  The geographic area over which it is economic to supply recycled water is currently limited to a relatively small radius around a sewage treatment plant, but if the price increases to some degree with the increased price of drinking water, supply over greater distances will become more viable.

67                  Services Sydney was established by Mr van der Merwe and Mr Feitelson in 1998 as an alternative approach to the Sydney Water Sewer Overflows Licensing Project (SOLP) studies in the 1990s and Sydney Water’s Water Plan 21, published in October 1997, for the provision of water and wastewater services until 2020.  Water Plan 21 included major investment to upgrade sewage treatment and to reduce sewage overflows through major maintenance work.  Services Sydney’s alternative plan involved investment in major new infrastructure to bypass old sewers and sewage treatment plants, intercepting and diverting sewage to a new high level sewage treatment and water reclamation plant. 

68                  Initially, Services Sydney entered into negotiations with Sydney Water to progress their plan under some sort of contractual arrangement.  The two parties entered into Heads of Agreement in October 1999 to undertake two jointly funded pre-feasibility studies in relation to the proposal.  These pre-feasibility studies reported favourably on the proposal, but Sydney Water subsequently terminated the Heads of Agreement.  Services Sydney continued to develop their proposal independently and made further submissions to the NSW Government.  By 2002 the proposal was termed Sustaining the City, but still involved the supply of sewage treatment and water reclamation services to Sydney Water.  There was no proposal at this time to compete with Sydney Water for retail customers.  At the end of 2003, the NSW Government notified Services Sydney that it would not be committing further resources to a consideration of Services Sydney’s proposal. 

69                  Failing to win the support of either Sydney Water or the NSW Government, Services Sydney decided to add sewage collection services to its proposal, with the intention of competing with Sydney Water for customers.  This was the genesis of the application to the NCC and now to the Tribunal.

70                  Services Sydney’s current proposal involves two stages. Both stages involve the construction of an interconnection tunnel which would connect with each of Sydney Water’s three major reticulation networks and Services Sydney’s sewage treatment plant.  Sydney Water would transport the sewage from Services Sydney’s customers to interconnection points, where it would be transferred into Services Sydney’s pipe and transported to the sewage treatment works.  Under the first stage, sewage would be treated to a secondary level and then disposed of.  Various options for disposal were canvassed, including the possible use of Sydney Water’s existing infrastructure or the construction of new infrastructure.

71                  The second stage would involve treating sewage to a tertiary level and producing recycled water.  The reclaimed water could be used for agricultural, industrial and domestic purposes and/or returned to rivers for environmental flows.  Evidence before the Tribunal particularly focussed on the latter and the barriers to achieving such a plan, particularly the need to obtain title over land for tunnelling, regulatory and licensing requirements and the various parties with whom Services Sydney would need to reach agreement. 

72                  Services Sydney also stated that it would be possible to further upgrade its plant to treat water to a potable standard, using reverse osmosis and ultraviolet techniques.  This is not part of the current proposal, however, in recognition of consumer resistance to the use of recycled water for drinking.

73                  Services Sydney stated a preference for implementing both stages of its proposal from commencement, but recognised that this will depend on their funding and ability to obtain relevant licences and approvals.  It intends to charge comparable prices to Sydney Water and to compete for customers on the basis of having ‘green’ technology.

74                  As previously noted, the Tribunal’s review of the Minister’s decision is a re-hearing of the matter.  Accordingly, the Tribunal was presented with fresh evidence and materials, as well as having available the NCC’s recommendation and report to the Minister and submissions made to the NCC.  The Tribunal is an administrative body, not bound by the rules of evidence.  It can receive such material from such sources and in such manner as it sees fit. 

75                  At the initial directions hearing, counsel for the Premier of NSW, the designated Minister in relation to this application, indicated that he wished to intervene in the matter.  He wished to explain his reasons for failing to make a decision; to make submissions regarding the regulatory changes and costs that would be required to facilitate access; to raise what were described as ‘whole of government issues’ relating to the industry; and to put before the Tribunal the IPART report, which the Premier had requested, reviewing the water and wastewater industries in NSW (see below), and if possible the NSW Government’s response to it.  Sydney Water supported the application to intervene.  Sydney Water also requested that the matter not be heard prior to receipt of the IPART report.  The Tribunal declined to delay the hearing to await receipt of the report, but as it turned out the directions resulted in the hearing coinciding with the expected date of the final report.  In the event, the draft IPART report (Investigation into Water and Wastewater Service Provision in the Greater Sydney Region (the IPART Draft Report)) was received immediately prior to the hearing.

76                  The Premier’s application to intervene was declined on 6 April 2005.  The Minister has a place in the statutory framework as the deemed decision maker but is not made a necessary party to the review by the statute.  Sydney Water was the natural contradictor and played an active part in the proceedings.  The presence of a natural contradictor relieved the need for the decision maker to play that role.  The IPART report could be, and was, conveyed to the Tribunal without requiring the intervention of the Premier in the proceedings.  To the extent that matters relevant to the NSW Government existed, but were not adequately covered by the parties to the review, the Tribunal could have been expected to seek assistance from the Premier.  Further, there was no barrier to the Premier offering information to the Tribunal and applying for leave to appear on a limited basis as events unfolded, or indeed to him making a further application to intervene, if justified by new circumstances.

77                  The IPART draft report was released on Friday 2 September 2005 and the hearing commenced on Monday 5 September 2005.  As discussed below, the draft report made some recommendations regarding a proposed access regime to water and wastewater infrastructure.  Receipt of the draft report caused Sydney Water to reconsider the grounds on which it would object to Services Sydney’s application for declaration.  After considering the draft report, Sydney Water supported the introduction of a state based access regime as proposed by IPART and accordingly narrowed the grounds for its objection. 

78                  The criteria in contention between the parties were already limited to s 44H(4)(a) and (f) of the Act (criterion (a) and criterion (f)), namely whether competition would be promoted in another market and whether declaration would be contrary to the public interest.  Sydney Water now argued that the Tribunal should find that it is more likely than not that a state based access regime along the lines recommended by IPART would be introduced in NSW.  This changed the nature and extent of Sydney Water’s grounds for objecting to the application for declaration.  The nature of the dispute under (a) was narrowed, with Sydney Water accepting the market definitions proposed by Services Sydney for the purposes of this application, but arguing that the boundaries of those markets were unclear.  Their arguments under criterion (a) now focused on whether competition would be promoted in those markets.  The dispute under (f) also changed, with Sydney Water no longer arguing that the costs of providing access would exceed the potential benefits, but arguing that the provision of access would require various other regulatory reforms and that a state based access regime, which would deal with these issues in an integrated package, would be preferable to declaration under Pt IIIA of the Act.

79                  As an initial threshold issue, Sydney Water contended that the Tribunal did not have jurisdiction to hear the matter because of the changing definition of the services for which declaration is sought.  We have already dealt with this contention.

80                  Prior to the hearing in this matter, the Tribunal received a submission from the Public Interest Advocacy Centre (PIAC).  PIAC describes itself as an independent and non-profit legal and policy centre.  PIAC undertakes work on access to essential services through its Utility Consumers’ Advocacy Program, funded by the NSW Department of Energy, Utilities and Sustainability.  The submission was limited to commenting on the potential impact on consumers of a declaration of the services under the public interest criterion (see below).  The Tribunal has taken PIAC’s submission into account.

81                  The Tribunal heard evidence from six witnesses.  Mr van der Merwe, a Director of Services Sydney, gave evidence in relation to the history of Services Sydney, its current plans, infrastructure requirements and costs, and the investigations and negotiations undertaken to date.  Mr Freeman, General Manager of the Asset Management Division of Sydney Water, provided evidence in relation to Sydney Water’s sewerage reticulation network, sewage treatment and disposal, its involvement in the supply of recycled water and the various regulations under which Sydney Water operates.  He also gave evidence regarding practical issues associated with interconnection.  Dr Hansen, General Manager of the Sustainability Division of Sydney Water, gave evidence regarding Sydney Water’s sewer mining policy and its arrangements with SOPA for sewer mining and the supply of recycled water.  Mr Law, an expert engineering consultant called by Services Sydney, provided evidence in relation to the technical viability of stage one of Services Sydney’s proposals, technical aspects of sewage treatment generally and whether there is a basis for determining the sewage volume and pollution load contribution of particular users of Sydney Water’s reticulation network.

82                  Both sides called economic experts, who had previously filed reports.  Services Sydney called Mrs Smith and Sydney Water called Dr Williams.  Following the narrowing grounds of dispute between the parties, parts of the filed reports were not read.  Both witnesses were cross examined sequentially in the first instance.  Following this, the Tribunal members asked a number of questions of both witnesses together.  The evidence focused on whether declaration would promote competition in the agreed markets, and economic issues relating to the public interest.  The Tribunal was assisted by this evidence.

83                  IPART’s Final Report was released after the conclusion of the hearing, on 29 November 2005.  The Tribunal wrote to all the parties asking if they wished to make supplementary submissions arising out of the Final Report.  Submissions were received from the NCC, Services Sydney and Sydney Water and the solicitors for the Premier of NSW provided a statement.

84                  The Tribunal would like to acknowledge the assistance of the parties in the co-operative and expeditious manner in which the hearing was conducted and to the witnesses for their assistance.

85                  On 2 September 2005, IPART published the IPART Draft Report.  The Final Report was anticipated to be available by 31 October 2005 but was in fact published on 29 November 2005.  The Report followed a NSW Government request that IPART:

‘… investigate and provide advice on possible pricing principles and alternative arrangements, including possible private sector involvement, for the delivery of water and wastewater services in the greater Sydney metropolitan area, with a view to making recommendations for providing these services in the most efficient, effective and sustainable way.’

86                  While there are some differences between the draft and final reports, the overall direction of the two reports is not fundamentally different.  IPART expressed general support for increasing competition in Sydney’s water and wastewater industry, with a focus on promoting dynamic efficiency, including through the introduction of access-based competition:

‘The fundamental need in Sydney’s water industry at present is innovation and the provision of new supply sources.  To this end, the Tribunal has sought competitive reforms where the potential benefits are likely to be in the form of dynamic efficiency gains …, including increased innovation and more efficient use of water resources.’

87                  The Report examined three areas of potential reform: competitive sourcing; access; and structural reform.  The Report placed particular emphasis on the first two.  It did not recommend that Sydney Water be vertically or horizontally separated at this time, but recommended that work continue to examine the potential costs and benefits of structural reform. 

88                  In relation to competitive sourcing, IPART recommended a move to ‘outcomes-based procurement’.  In the Final Report, IPART looked specifically at the practice of sewer mining, which it was considered would likely feature prominently among competitive sourcing proposals and recycled water projects in general.  IPART recommended that the NSW Government establish a regulatory framework for sewer mining, in order to ensure its efficient uptake.  IPART will also be reviewing sewer mining charges as part of its forthcoming review of recycled water pricing.

89                  Of particular relevance to the current matter, the Report supported the introduction of access-based competition:

‘The Tribunal believes that access-based competition has the potential to improve the efficiency and effectiveness of service provision in Sydney’s water and wastewater industry.  In general, where it is feasible, competition can provide stronger incentives for efficiency and innovation than regulation.’

90                  IPART recommended the introduction of a state based access regime to govern access to Sydney Water’s water and sewerage reticulation systems.  It recommended a cautious ‘adaptive management’ approach to access and competition until the demand for access becomes clearer.  The proposed access regime would follow a negotiate/arbitrate model and would be available for infrastructure which meets relevant criteria, with IPART suggesting the application of criteria contained in Pt IIIA of the Act.  The Draft IPART Report had proposed that initially only large customers be exposed to competition.  The Final Report reconsidered this issue and recommended that access be available to compete for all customers, but that all of the costs associated with a new entrant should be covered by that entrant’s business proposal and not spread across Sydney Water’s asset base, to be recovered from Sydney Water’s existing customer base or be the subject of a price determination by IPART.  It was recommended that appropriate regulatory obligations be placed on both incumbents and new entrants through a licensing or authorisation regime.  IPART further recommended the use of the efficient component pricing rule (ECPR), under which the incremental costs of providing access would be added to and Sydney Water’s avoidable costs would be deducted from retail prices, to determine access prices. 

91                  The advantages of a state based access regime were said to be that it would allow for an integrated approach to regulatory reform and Government policy in the industry and the use of a single regulator for retail and access prices as well as service standards.  State based regulation was also considered to be appropriate in the absence of a national market for urban water and wastewater services.  The use of ECPR pricing would allow ‘postage stamp’ pricing to be maintained, under which residents are charged the same for sewage services regardless of their location.  It can also be implemented in the absence of information about the unbundled costs of Sydney Water’s services.  A major problem identified with ECPR based access pricing is that it may do nothing to erode monopoly profits.  However, IPART considered this issue to be of less concern in the water and waste water industry because final prices, from which ECPR access prices are calculated, are regulated and IPART recommended that this regulation continue.

92                  The NSW Government indicated at the time of release of the Final Report that it would be accepting all of its recommendations, including the introduction of a state based access regime to water and wastewater services.  The statement later provided to the Tribunal spelled this out in detail.  That statement is set out in full because of the importance that it assumes:

‘1.       As announced by the Premier's press release and in the NSW Parliament on 29 November 2005, the NSW Government has approved development of a State-­based access regime for services provided by means of significant water and waste­-water infrastructure, consistent with the recommendations of the Independent Pricing and Regulatory Tribunal ("IPART") in its Final Report Investigation into Water and Waste-Water Service Provision in the Greater Sydney Region (November 2005) (the "Final Report").

2.         All 22 of the recommendations in IPART's Final Report were endorsed by the NSW Government.

3.         Consistent with those recommendations, and as foreshadowed in the Premier's press release of 29 November 2005, the NSW Government is now committed to introducing a State-based access regime with, among other things, the following characteristics:

a.         The regime will cover water and waste-water infrastructure which exhibits natural monopoly characteristics such as transportation services and interconnection. Coverage will not be limited to large customers but will cover both business and residential customers.

b.         The regime will be drafted so as to enable the future inclusion of water and waste-water infrastructure beyond the greater Sydney metropolitan area, where it meets the relevant natural monopoly criteria.

c.         The regime will be based on a negotiate-arbitrate model, with access via commercial negotiations given primacy.

d.         The regime will be drafted with a view to ensuring that it will be an "effective access regime" in accordance with section 44G(3) of the Trade Practices Act 1974 (Cth) and the Competition Principles Agreement.

e.         As such, the regime will be drafted to address the concerns, such as the need for enforcement provisions and accounting separation, and the other matters raised by the National Competition Council in its review of the IPART Report.

f.         The regime will be administered by IPART, which will also retain responsibility for retail pricing regulation.

4.         It is expected that a draft of the regime will be prepared by mid-2006. The NSW Government intends and expects to finalise and implement the regime toward the end of 2006.

5.         To facilitate this timing, responsibility for coordinating the implementation of the IPART recommendations has been allocated to the Metropolitan Water Directorate within The Cabinet Office. The Premier has recently relocated the Directorate to his administration in recognition of the importance of progressing reforms of the water and waste-water industries in Sydney. An inter-agency Working Group chaired by The Cabinet Office has been established to oversee the drafting of the regime and to recommend complementary regulatory reforms by mid-2006. Appropriate resources have been allocated to these tasks in central government and in relevant agencies. This timing is further facilitated by the comprehensive consultation and investigations undertaken by IPART to produce their Final Report.

6.         The State-based access regime will have significantly greater breadth than the services which were the subject of the National Competition Council's ("NCC") Final Recommendation of 2004. The NSW Government intends and expects that the regime will cover all of the services that were the subject of the NCC's Final Recommendation, and considerably more.

7.         Given the NSW Government's commitment to the development of an effective water and waste-water access regime, it is not in the public interest for this regime to be duplicated at the Commonwealth level. Duplication between regimes would waste government resources and be contrary to the intent of the Trade Practices Act.

8.         The NSW Government intends and expects that the State-based access regime will be developed so as to constitute an effective access regime in accordance with section 44G(3) of the Trade Practices Actand the Competition Principles Agreement. To ensure that that happens, the NSW Government will consult with the NCC before finalising and implementing the regime.

9.         At the same time as the NSW Government develops the State-based access regime, it will, in accordance with IPART's Recommendation 17, undertake a review of the current legal and regulatory framework and will modify that framework as necessary to:

"ensure appropriate regulatory obligations are placed on incumbents and new entrants through a licensing regime or authorisation regime to protect customers and the public interest in relation to ensuring security of supply, ensuring water quality and protection of public health, managing environmental impacts, developing, maintaining and extending water and sewerage services, addressing potential effects on customer contracts, and allocating responsibility for managing emergencies and national security matters" (Recommendation 17).

10.       The NSW Government will also undertake a legislative review to identify and, where warranted, remove any impediments to water and waste-water competition (Recommendation 9).

11.       Consistent with the recommendations in IPART's Final Report, the first guiding principle for the development of the access regime and the cognate legislative and regulatory framework will be that "no service provider or activity should have an adverse impact on public health, safety or the environment" (IPART Final Report, p. 86).

12.       Water and waste-water services are essential services which are vital both to health, and to economic, environmental and social well-being. The Premier believes that any access regime applying to water and/or waste-water services can only be in the public interest if it is implemented in a manner which gives primacy to public health, safety, environmental and other broader public interest concerns.

13.       Providing access to the water and waste-water services provided by Sydney Water's infrastructure will create new markets in upstream and downstream activities where there currently are no competitive markets. It is imperative therefore, that any access regime be developed concurrently with, and so as to be concordant with, the development of an appropriate legislative and regulatory framework for these new markets, to ensure protection of the broader public interest. The development of this framework is a matter which, constitutionally, is within the province of the State.’

108               Market definition involves a process of identifying the buyers and sellers who constrain the pricing and output decisions of the firm.  Section 4E of the Act provides that the term market ‘when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.’  As the Tribunal said in Re Queensland Co-operative Milling Association Ltd (the QCMA case) (1976) 8 ALR 481 (at 517); (1976) ATPR 40-012 (at 17,247):

‘A market is the area of close competition between firms or, putting the matter a little differently, the field of rivalry between them.   …  Within the bounds of a market there is substitution – substitution between one product and another, and between one source of supply and another, in response to changing prices …  So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive.’

109               While product and geographic substitution will often be the focus of argument in Pt IV matters, this is less often so in Pt IIIA matters.  The focus here tends to be not on the dimensions of the market, as defined by substitution, but on the existence of separate markets from the market for the service.  In other words, at which functional levels in the supply chain do markets occur? 

110               Consistent with the QCMA case, a market exists where there are actual or potential transactions for goods or services.  Actual transactions can be observed, but how do we determine whether there are potential transactions, which is generally the issue that arises for consideration under Pt IIIA, at least as regards the market(s) for the service(s)?   This question arose first under s 46 in the High Court decision Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co. Ltd (the Star Picket Fence Post case) (1989) 167 CLR 177, which concerned a refusal to supply on reasonable terms a product known as ‘Y-bar’, which was needed to make star pickets for rural fencing.  The question arose as to whether there could be a market for or including Y-bar, when there was no actual trade in the product.  The High Court found that there was.  Deane J said (at 196) that:

‘… a market can exist if there be the potential for close competition even though none in fact exists.  A market will continue to exist even though dealings in it be temporarily dormant or suspended.  Indeed, for the purposes of the Act, a market may exist for particular existing goods at a particular level if there exists a demand for (and a potential for competition between traders in) such goods at that level, notwithstanding that there is no supplier of, nor trade in, those goods at a given time – because, for example, one party is unwilling to enter any transaction at the price or on the conditions set by the other.’ 

111               In discussing this case, in Market Definition Issues on Australian and New Zealand Trade Practices Litigation, (1990) 18 ABLR 86 at 122, Professor M Brunt asked the question:

‘A market is the network of actual and potential transactions between buyers and sellers of goods or services which are, or could be, close substitutes.  Under what circumstances, we may ask, would the potential for transactions not exist?  Answer: when there are such efficiencies of vertical integration, as between Y-bar and star pickets, that market co-ordination between buyers and sellers is superseded by in-house co-ordination.  There would, in such a case, be no functional split to create transactions between stages of production.’

112               The Tribunal agrees with this approach.

113               In their original submissions and in the filed statements of the economic experts, there was a dispute between the parties as to whether it was appropriate to define a functionally distinct market or market(s) for the services for which declaration is sought.  While the parties agreed that the critical issue was the relative costs of market transactions as compared to the costs of internal coordination within a vertically integrated firm, they disagreed as to the relevant test. 

114               The parties abandoned this area of debate following release of the IPART Draft Report, when Sydney Water acknowledged that a separate market for the services could be created by way of access and hence accepted, for the purposes of this application, the separate markets propounded by Services Sydney.  Nevertheless, the Tribunal must be satisfied of the existence of separate markets.  However, in the circumstances, there is no occasion for a comprehensive consideration of the issue.  Our reasoning can be relatively brief.

115               The purpose of establishing an access regime under Pt IIIA of the Act is to open up ‘bottlenecks’ to competition and thereby unlock the potential benefits which competition may bring in dependent markets including, in particular, the benefits associated with economic efficiency.  The approach adopted to the identification of separate markets should be consistent with this purpose.

116               One approach to assessing efficiencies of vertical integration is to posit that where the transactions costs of market coordination between vertical stages of supply exceed those of administrative coordination within the firm, there will be no separate market for the service(s).  However, a literal interpretation of that test could prevent the very benefits of competition in dependent markets, which Pt IIIA is designed to achieve, from being realised.  It is not difficult to imagine a situation where the coordination costs within a vertically integrated firm are less than the costs of market transactions for a particular service; but where there exists a more cost efficient potential entrant to an upstream or downstream dependent stage of the supply chain, who can more than offset the additional transactions costs with their superior efficiency.  Entry of such a firm would be pro-competitive and economically efficient, yet a narrow view of the test would have the consequence that no market for the service would be defined and hence there would possibly be no declaration and no entry.  The community would be denied the very kind of benefits arising from competition which were envisaged by the report of the Independent Committee of Inquiry into Competition Policy in Australia on National Competition Policy (the Hilmer Report) and which underpin the access regime principles in Pt IIIA. 

117               A broader approach, which asks whether the complementarities of vertical integration are such as to dictate vertical integration, would not preclude declaration and competition in these circumstances.  This approach was generally adopted in the NCC’s Final Report and is consistent with that adopted by the Tribunal in Re Sydney International Airport (at 40,772):

‘Though in the past usually vertically integrated, track services and the running of passenger or freight trains can be, and increasingly are, provided separately.  As such, they operate in functionally distinct markets, even though there is perfect complementarity between them.  To put it another way, these complementarities do not appear to give rise to economies of joint production that dictate the services must be performed within the same economic entity.’ 

118               An alternative, more precise, test could involve looking at some combination of both transactions costs and service delivery costs.  If there was a demand for the service at a price which covered these combined costs, then a market could be said to exist. 

119               In practical terms, the application of all of these tests in advance of declaration is difficult because it will not be possible to know with any accuracy, at that time, the extent of potential transactions costs and service delivery costs, in a situation where actual transactions have never taken place because of the existence of a vertically integrated monopoly.

120               In the present case the Tribunal is not satisfied that the costs associated with market transactions (with or without taking into account service delivery costs) are such, or conversely the efficiencies of vertical integration are such, that the existence of separate markets is precluded.  There is no difficulty in accepting the existence of a market or markets for the services of transportation and interconnection. 

121               Services Sydney put forward three dependent markets:

(1)        a sewage collection market;

(2)        a sewage treatment market; and

(3)        a recycled water market.

122               While Sydney Water accepted the existence of these markets for purposes of the application, they complained that ‘the activities which are said to take place in the Dependent Markets are unclear.  Services Sydney’s approach to these markets has changed over time and uncertainty remains.’  The Tribunal considers that the reason for this uncertainty lies in the erroneous approach to defining markets in terms of ‘activities’ rather than in terms of an area of close substitution between goods or services.  As discussed above, a market exists where there are actual or potential transactions for goods or services.  The confusion arises because in delineating the functional level of a market we are required to consider vertical efficiencies and transactions costs between vertically related activities.  In this sense it may be said that market ‘breaks’ in the vertical supply chain, where actual or potential transactions occur, are determined by the minimum set of activities which an efficient firm would undertake.  The activities themselves, however, do not define the market or the scope for substitution.  Within a market it is both possible and commonly observed that firms with very different vertical structures compete by providing substitute products.  In other words, we observe a range of vertical firm structures beyond the minimum set of activities which determine the existence of a market at any particular functional stage.  Thus, for example, in telecommunications markets we commonly observe resellers competing with vertically integrated incumbents and partially integrated players who combine unbundled inputs.

123               The issue is well illustrated in relation to the sewage collection market.  The Tribunal has no difficulty with the concept of a market for sewage collection services.  Transactions in this market already take place between virtually every household and business in Sydney and the monopoly supplier of those services, Sydney Water.  It is a vertically integrated supplier, but that circumstance does not define the market.  There was debate as to whether this market was a pure resellers market or whether it incorporated other elements in the supply chain.  There is scope for resellers to compete in such a market, as well as partially integrated players who may combine elements of self supply with purchased inputs from other industry players, including Sydney Water.  All these firms would be supplying ‘sewage collection services’ to households and businesses and there is no reason to suppose their services would not be close substitutes and hence in the same market. 

124               The relevant geographic market did not receive much attention.  Supply side substitution and complementarities seem to be of most relevance here, since consumers need sewage to be collected from their premises.  As discussed earlier in these reasons, each reticulation network is a separate facility, which tends to limit the potential for supply side substitution and suggests the relevant geographic market will be similarly defined.  However, for purposes of the current matter, whether the geographic market is relevantly defined separately for each network or on some broader basis is of no consequence.

125               There are also existing transactions in the sewage treatment market.  Any supplier of sewage collection services, who is not a pure reseller, will need to obtain sewage treatment services in order to dispose of the sewage collected, assuming that environmental restrictions will not allow them to simply tip untreated sewage into rivers and oceans in the future.  While Sydney Water has traditionally undertaken sewage treatment services itself, increasingly it looks to make efficiency gains by contracting out these services to the private sector.  More generally, the economic literature suggests that contracting out of sewage treatment is an obvious place for the introduction of market transactions and competition in the sewage industry.  The Gerringong/Gerroa sewage treatment plant and reticulation network is operated by Veolia Water under a design-build-operate contract with Sydney Water.  Similarly, SOPA contracts out the operation of its sewage treatment and water reclamation services.

126               SOPA and other sewer miners are also actual or potential suppliers in this market.  Sydney Water indicated its support for paying SOPA a positive price for the sewage treatment services it effectively provides to Sydney Water by charging SOPA a negative price for sewer mining, but that this has not been possible to date because the price for sewer mining was fixed at zero by IPART.  Under the new IPART price determination, there is no maximum price for sewage mining and the IPART Final Report indicates that a negative price may be appropriate. 

127               Finally, we turn to the recycled water market.  This is defined by Services Sydney as a ‘market for the provision and acquisition of water (both recycled and potable) for the range of uses for which recycled water is considered appropriate’.  Again the Tribunal has no problem accepting the existence of a market for recycled water.  According to the Metropolitan Water Plan 2004, recycled water use in Sydney has increased from 6.2 billion litres per year to 14 billion litres per year.  As noted earlier, Sydney Water already supplies recycled water to households in local areas which have been fitted with a ‘third pipe’ for reticulation, as does SOPA.  Sydney Water also supplies recycled water to recreational, agricultural and industrial users.  Mr Freeman said that Sydney Water is always looking for commercial opportunities to supply recycled water. 

128               It is generally accepted, and research suggests, that the Australian public is not yet ready to accept recycled water for drinking purposes, and current regulations do not permit it.  Potable water is widely used for non drinking purposes, hence substitution possibilities appear to be asymmetrical.  However, where recycled water is available, how close a substitute potable water is for it will depend on the relative price and consumer responsiveness to those relative prices.  This, in turn, will depend on the user’s location.  The only regulated prices for recycled water are those at Rouse Hill, where usage charges are less than a quarter of the charge for drinking water.  For SOPA’s customers, price differentials appear to be smaller.  Industrial, agricultural and other large users, such as golf courses, are subject to individual agreements.  Sydney Water submitted that it is currently only economic to supply recycled water within a small radius of a relevant sewage treatment plant.

129               Other major potential customers for recycled water would be bulk water suppliers, such as the Sydney Catchment Authority.  If treated to a sufficiently high level, recycled water could be returned to the potable water supply and/or used for environmental flows in rivers.  Indeed this is a component of phase two of Services Sydney’s business plan. 

209               The Tribunal is satisfied that the application meets all the criteria for declaration.  There is no occasion to exercise any residual discretion not to declare (Re Sydney International Airport at 40,796).

210               Services Sydney requested that the services be declared for a period of fifty years. This period would be consistent with the NCC’s recommendation.  That recommendation was based on the substantial nature and long life of the assets which a new entrant, other than a pure reseller, would need to invest in.  Such assets could include sewage treatment and water reclamation plants and connecting sewers.  It was argued that a period of fifty years was required to provide the necessary business certainty to secure investment in new entry. 

211               Sydney Water contends, firstly, that 50 years is a purely arbitrary period apparently chosen to ensure that Services Sydney makes profits and, secondly, that any declaration should be for a very limited period of time in view of the forthcoming introduction of an effective State based access regime. 

212               The likelihood of the facilities by means of which the services are provided being duplicated within 50 years and a competitive service becoming available are extremely remote.  While technical change in sewage treatment and water reclamation processes is likely, the need for access to transportation and interconnection services to carry sewage from customers’ premises to the competing treatment plants is likely to remain.  Investors in new treatment and reclamation plants, which are expected to provide many of the dynamic gains from competition, will require the certainty of long term access arrangements before committing funds to the planning and implementation of such projects.

213               There is the possibility of an effective State based regime emerging over the next few years.  Given the State based nature of the facilities it is possible that that could be an appropriate outcome, to be preferred to federal regulation.  If there were a limited period of declaration, sufficient to enable assessment of any State based regime, it is arguable that application could be made for a further declaration pursuant to Div 2 of Pt IIIA at the expiration of the period of declaration. 

214               The better view is that, if an effective access regime were established by the NSW Government, steps would be taken to revoke the declaration.  That being so, a lengthy period of declaration is appropriate.  Access needs to be certain for a sufficient period to enable capital to be invested by new entrants.  The facilities are unlikely to be either duplicated or superseded by new technology in the foreseeable future.  If that did occur, or if for any other reason the conditions for declaration no longer exist, then revocation of the declaration would be available (s 44J(2)).  In our opinion, a declaration for 50 years from today’s date is appropriate.

Associate:

Dated:              21 December 2005