Submission Independent Pricing and Regulatory Tribunal’s End of Term Review of the Operating Licences of Sydney Water Corporation and the Sydney Catchment Authority

November 2003

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Table of Contents

1. INTRODUCTION ................................................................................ 3

2. SCA responses to questions raised by IPART in its issues paper ........ 7

3. SUPPORTING INFORMATION..........................................................13

3.1 The Regulatory Framework .................................................................................13

3.2 Ensuring safe drinking water................................................................................17

3.3 System Performance Standards and Measures..................................................18

3.4 Customer Service Standards and Consumer Rights ..........................................19

3.5 Catchment Management......................................................................................21 3.6 Protection of the Environment..............................................................................27

3.7 Administration of the Operating Licence..............................................................28

3.8 Other Issues .........................................................................................................29

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1. INTRODUCTION

The Independent Pricing and Regulatory Tribunal’s (IPART’s) end of term review of the Operating Licence for Sydney Water Corporation and the Sydney Catchment Authority provides a timely opportunity to reflect upon the experiences gained over the past four years, since the SCA was established, and prepare a path for the future. As IPART’s review Issues paper (October 2003) discusses the critical matters, the Sydney Catchment Authority’s (SCA’s) submission does not restate these but concentrates on three areas: section 1: This introduction gives a broad overview of the major matters that the SCA

wishes to bring to IPART’s attention section 2: The SCA answers the specific questions in the issues paper section 3: Where the SCA considers this will add value, some additional information is

provided relating to SCA answers in Section 2. The SCA would be pleased to provide IPART with any additional information or advice on these or other matters that may arise during the course of its review.

1.1 Overview of SCA’s submission

Generally, the Operating Licence has provided a robust basis for regulating the SCA’s performance and ensuring it meets its accountabilities. The issues raised in this submission address five areas that would improve the focus and effectiveness of the licence: 1. complexity of the SCA’s regulatory environment 2. clarity of the Operating Licence’s role vis a vis the role of other regulatory

instruments/frameworks. 3. impacts of changed institutional arrangements within Government 4. removal or revision of dated or ambiguous licence conditions 5. streamlined licence review.

1.1.1 Regulatory complexity

The NSW Government established the SCA as the major mechanism for implementing the outcomes of Peter McClellan QC’s Sydney Water Inquiry (December 1998). At the time, the principal concern was rightly to ensure the quality of Sydney’s drinking water. This was given expression in three statutory instruments: • Sydney Water Catchment Management (SWCM) Act 1998, which establishes the SCA

and defines its functions and obligations in ensuring catchment health and water quality • SCA Operating Licence, established under the SWCM Act, with IPART as the regulator • Water Management Licence, issued under the Water Act 1912, with the Department of

Infrastructure, Planning and Infrastructure (DIPNR) as the regulator. In addition, the SCA is required to met NSW Health requirements and guidelines. While the obligations placed on the SCA under these instruments have met the individual purposes, they also had the unintended result of creating: • undue regulatory complexity • overlap in monitoring and reporting requirements • achievement of the same outcomes. The SCA considers that it is possible and desirable to remove the duplication without risking either a high level of performance by the SCA or desired water quality and health outcomes. Three mechanisms provide the means to achieve this outcome. First, IPART’s current review

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provides the opportunity to revise the SCA’s operating licence. Secondly, the Minister for the Environment’s statutory five-year review of the SWCM Act, which commences in December 2003, provides the opportunity to bring forward proposals that may result in amendments to the Act. Thirdly, the SCA holds ongoing discussions with DIPNR on this matter in relation to its water management licence. (The MoU requirements under sections 35-36 of the SWCM Act also provide the avenue for discussion on health related matters.)

1.1.2 Clarity of the Operating Licence’s purpose

The SCA’s Operating Licence reflects its origins in the Sydney Water’s Operating Licence, when Sydney Water had responsibility for bulk drinking water supply. An operating licence for a state owned corporation (Sydney Water) has a wider regulatory role than would need to apply to a government trading enterprise under Ministerial direction (SCA). In the latter circumstance, an operating licence is well suited to regulating the operational aspects of the SCA’s delivery of bulk water to its customers: water quality, operating standards, customer protection and risk management. The Operating Licence need not duplicate the responsibilities of other agencies in regulating the SCA, particularly the Department of Environment and Conservation (DEC), NSW Health and DIPNR. As specialists in environmental management and health, these agencies are best placed to have regulatory responsibilities in these areas. Under the current Operating Licence, IPART has taken the view that this extends to auditing the SCA functions as an environmental regulator under the Sydney Water Catchment Management (Environment Protection) Regulation 2000. The SCA is unaware of similar arrangements applying to other regulators. The SCA’s accountabilities for this function would be better met through the usual requirements placed on regulating agencies, in particular, the SCA’s annual report. In addition, the effectiveness of the SCA’s programs (including its regulatory actions), as well as those of other state and local government authorities, is considered in the biannual catchment audits required under the SWCM Act.

1.1.3 Changing institutional roles

The landscape in relation to catchment management, and natural resources management more generally, continues to change and evolve. From January 2004, thirteen catchment management authorities (CMAs) will be established across NSW. Under this arrangement, three CMAs will operate within the SCA’s area of operation: Hawkesbury Nepean; Sydney Metropolitan Area; and Southern Rivers. The SCA is working with DIPNR to ensure co-operative arrangements and to avoid duplication of effort and activities. Other administrative changes have been made that also directly affect the SCA. The Government has created the DEC through an amalgamation of the Environment Protection Authority, National Parks and Wildlife Service, Resource NSW, and Royal Botanic Gardens and Domain Trust. The corporate structure of the SCA was not changed, but the Director-General of the new Department has also been appointed to the role of SCA Chief Executive. This recognises the unique role of the SCA while providing opportunities for a strong strategic linkage in environmental management. An outcome of these new arrangements will be a greater focus on improving the environmental health of the Sydney’s drinking water catchments – currently a central concern of the Operating Licence.

1.1.4 Removal or revision of dated or ambiguous licence conditions

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With the benefit of almost five year’s operations, it has become apparent that a number of the provisions in our current operating licence are outdated while others are ambiguous or otherwise in need of revision. These are discussed in the sections 2 & 3 of this submission. 1.1.5 Streamlined licence review In keeping with international best practice, licence compliance monitoring would be improved if it moved away from large annual audits. In preference, regular compliance and exception reporting by the SCA could be used, coupled with smaller targeted audits to ensure appropriate and focussed regulatory oversight of specific aspects of the SCA activities. This model is similar to proposals being considered in the energy industry. IPART takes a wide interpretation of its annual audit responsibilities and examines all aspects of the SCA operations and the review of catchment health. This approach crosses into the purposes of the biannual catchment audits required under section 42, SWCM Act. The advantage of the catchment audit, in this regard, is that it reviews the responses of all agencies with roles in the catchments’ health, not just the SCA’s role. The SCA encourages IPART to see where its reporting requirements may be met through other audits (eg the catchment audit) and SCA reporting obligations. (Table 1 sets out the SCA’s current major reporting requirements.) The current Licence contains a mandatory obligation for a mid term review of the licence. Based on the last four years experience, a single five-year review would provide an appropriate timeframe, when combined with the proposed regular compliance and reporting requirements and focussed audits. This approach would not preclude a review where IPART considers that circumstances have altered to the degree that a full licence review is warranted.

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Table 1: SCA’s major reporting requirements LEGISLATION/DRIVER REPORT TITLE Report recipient

Sydney Water Catchment Management Act 1998

Statement of Financial Framework

Annually by 30 June to Treasury and Minister

Sydney Water Catchment Management Act 1998

Annual Risk Management Return

Annually by 30 June to Treasury and Minister

Sydney Water Catchment Management Act 1998

Bulk Water Supply Agreement

Minister and Sydney Water

Sydney Water Catchment Management Act 1998

Risk Management Plan

Sydney Water Catchment Management Act 1998

Annual Report Annually by 31 October to the Minister

Sydney Water Catchment Management Act 1998

Catchment audit Biennial by 30 November to the Minister

Operating Licence Annual Customer Complaints Report

Annually to IPART

Operating Licence SASPoM Compliance Report

Annually by 1 September to IPART and Minister

Operating Licence SASPoM review IPART Minister

Operating Licence Wingecarribee Swamp PoM Compliance Report

Annually by 1 September to IPART and the Minister

Operating Licence Wingecarribee Swamp PoM Review

IPART Minister

Operating Licence Environment Plan Annually to IPART and the Minister

Operating Licence Energy Management Plan

Report to IPART and the Minister

Operating Licence Annual Environment Report

Annually to IPART and the Minister

Operating Licence Annual Water Quality Monitoring Report

Annually by 30 November to the Minister

Water Management Licence Annual Water Monitoring and Compliance Report

Water Administration Ministerial Corporation (DIPNR)

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2. SCA RESPONSES TO QUESTIONS RAISED BY IPART IN ITS ISSUES PAPER

IPART Issue SCA’s view

SCA position

The Regulatory Framework What is the appropriate role and scope of Sydney Water and Sydney Catchment Authority’s Operating Licences?

Change required

The role and scope of the SCA’s Operating Licence would maximise benefit by focusing on the operational aspects of the SCA’s delivery of bulk water to its customers: water quality, operating standards, customer protection and risk management. The Operating Licence need not duplicate the responsibilities of other agencies in regulating the SCA, particularly the Department of Environment and Conservation (DEC), NSW Health and Department Infrastructure, Planning and Natural Resources (DIPNR). As specialists in environmental management and health, these agencies are best placed to have regulatory responsibilities in these areas. Moreover, the regulatory duplication creates unnecessary burden on IPART. Under the current Operating Licence, IPART takes the view that this extends to auditing the SCA functions as an environmental regulator under the Sydney Water Catchment Management (Environment Protection) Regulation 2000. The SCA is unaware of similar arrangements applying to other regulators. The SCA’s accountabilities for this function would be better met through the usual requirements placed on regulating agencies, in particular, the SCA’s annual report.

How can the Operating Licences be improved to reflect regulatory best practice?

Change Required

A fundamental principle of an operating licence is that the licence reflects the agency’s functions having regard to the purpose for which the agency was created. To improve the Operating Licence to reflect regulatory best practice, IPART, at a minimum, need to ensure that operating licences: • do not seek to impose unenforceable obligations

on third parties • contain agreed robust protocols for measuring

performance – to avoid doubt about the meaning of a clause, such protocols would allow for agreed interpretations

• do not duplicate the functions of other regulators • reduce regulatory impact without reducing

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regulatory accountability.

Ensuring safe drinking water

Are the existing health related water quality obligations in Sydney Catchment Authority’s Operating Licence adequate?

No Change required

The SCA’s position is that the existing health related water quality obligations in its Operating Licence are adequate.

Should site-specific standards continue to be included in the Catchment Authority’s Operating Licence?

No The Sydney Water Catchment Management (SWCM) Act 1998 requires the Sydney Water/SCA Bulk Water Supply Agreement to contain the information on the standard of water to be supplied to Sydney Water. Water quality standards for the supply of water to Sydney Water are best placed in the agreement and not duplicated in the Operating Licence. Consistent with the SWCM Act, the Operating Licence could contain conditions covering the review or amendment of the agreement. In addition, it could contain requirements for regular reporting to IPART of compliance with the water quality obligations in the agreement.

Should the quality of raw water supplied for uses other than treatment be regulated and if so how should this issue be dealt with in the Catchment Authority’s Licence?

No The Operating Licence would not be the appropriate instrument for water quality obligations for water supplied for uses other than water treatment. The SCA supplies raw water to customers under signed agreements that contains explicit terms and conditions relating to its use. If water quality guidelines for supply purposes other than water treatment are considered to be required, then IPART would need to consider granting the SCA the capacity not to supply at times when water quality falls outside the guideline values due to natural occurrences, e.g. heavy rain. Alternately, it could consider requiring some form of treatment to the bulk raw water to restore it within guideline values. This would be very expensive and inconsistent with the way responsibilities for treatment is currently arranged.

System performance standards and measures

Should asset management requirements be explicitly linked in the Operating Licences and if so, how?

Yes The SCA must optimally manage its assets - not only to minimise risk to human health, but also to ensure that they continue to meet the needs of its customers. Including Operating Licence conditions requiring the SCA to develop and maintain an asset management strategy would be of benefit. However, rather than a prescriptive approach, the licence condition would best allow the SCA flexibility to adopt the most

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appropriate methodology as asset management techniques develop.

Should public reporting of dam safety activities remain part of the Licence?

No Sufficient regulation with respect to dam safety is currently in place through current legislation. Public reporting of the SCA’s dam safety activities is through a rigorous regime required by the Dams Safety Committee (DSC). IPART may wish to consult DSC on its investigation and reporting requirements.

Customer services standards and consumer rights How should the operation of Sydney Water’s customer councils and the Catchment Authority’s consultative committees be dealt with in their Operating Licences?

Change required

The Operating Licence’s current requirements on the SCA reflect the needs of a utility with very large customer base (e.g., Sydney Water’s four million customers compared to SCA 63 customers, with one customer purchasing 99.3% of the product). The interests of SCA customers and stakeholders (particularly within SCA catchments) would be better served through licence conditions that require engagement with customers and stakeholders based on broad consultation principles, with the method of engagement to be tailored to specific issues at hand. This would also allow the SCA to engage the public in consultation, in conjunction with other agencies where appropriate. This would avoid the criticism previously leveled at government generally about the plethora of committees established by different agencies but calling on the same limited but active group of local participants

Should the Catchment Authority be required to develop a standard customer contract for its non Sydney Water customers as part of its Operating Licence?

Yes The SCA support creating a standard customer contract for the SCA’s customers other than Sydney Water.

How can the Operating Licences ensure that the agencies’ analysis and assessment of customer complaints is more effectively integrated with its asset management?

Not appropriate to SCA

The SCA/Sydney Water Bulk Water Supply Agreement addresses this issue for Sydney Water. For non-Sydney Water customers, while complaints associated with asset management are effectively captured and addressed by the SCA’s compliant handling process, asset-related issues for the wholesale customers (e.g. local councils) are dealt with directly at regular interface meetings. If a problem arises with assets affecting the SCA’s wholesale customers then it is most likely that the retail customers will also be affected.

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In the SCA’s context, its infrastructure is large and visible. Impacts come to notice readily and generally have to be attended to promptly. Attending to infrastructure on the basis of complaints is regarded as too reactive for the system operated by the SCA. It prefers proactive condition based assessment in the context of its overall risk management framework and a program of scheduled routine maintenance.

Catchment management What approach should be adopted to measure and assess the Authority’s catchment management activities?

Include in Operating Licence

The SCA considers that the catchment audit required under section 42, SWCM Act, provides the optimal mechanism for measuring catchment health and management activities. The third and most recent audit adopts the Pressure – State – Response framework of international, national and NSW state of the environment reporting. The advantage of this approach is that the catchment audit examines all management activities, not just those of SCA.

IPART may wish to consider referencing the catchment audit in the Operating Licence as the mechanism for measuring and assessing catchment management activities. Where IPART is looking to assess specifically SCA’s catchment management activities, the SCA recommends that IPART build on the above catchment audit and undertakes a performance audit of SCA’s activities during the life of Operating Licence. Such an audit could adopt the methodology of the performance audits undertaken by the Auditor-General.

What Licence conditions are appropriate for the Special Areas and Inner Catchment? Should separate licence conditions continue for the Wingecarribee Swamp Plan of Management or should it be incorporated into the Special Areas Strategic Plan of Management?

No conditions required.

A strategy within the SCA’s Healthy Catchments Program relates to the management of the Special Areas and the Wingecaribee Swamp Plans of Management. Operating Licence conditions relating to these plans are no longer required as their implementation and reporting is captured within Healthy Catchments Program, which is monitored by the SCA Board. Reporting on the plans would be through the catchment audit. Again, a performance audit during the life of the Operating Licence of the plans of management could be an additional licence condition.

Can the existing Licence obligations with respect to the

Yes The SCA’s current risk management planning licence obligations would benefit from being updated to reflect the Ministerial requirements arising from past

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risk management plan be made more effective, and if so, how?

Operating Licence audits. The major requirement is the drafting of the Sydney Catchment Authority’s Water Quality Risk Management Plan. The SCA has developed its holistic Corporate Risk Management Plan, which is approved and monitored by the SCA Board, under section 8(1) of the SWMC Act.

Protection of the environment

Should the existing environmental and ESD indicators monitored by Sydney Water and the Catchment Authority under their Operating Licence be streamlined? How should performance against the indicators be assessed and reported? How adequate and appropriate are the current environment plan requirements?

Change required

The SCA encourages the IPART to explore other mechanisms for planning and reporting on the SCA environmental performance other than the current requirement for the Environment Plan, as much of the current plan’s requirements replicate other planning and reporting functions. See the above comments on proposed reporting on catchment health and management. For non-catchment sustainability measures, a revised Operating Licence condition would require the SCA to demonstrate its environmental obligations via its business plan, with performance reported against these sustainability indicators reported in the SCA annual reports. The revised Operating Licence could require the SCA to develop these sustainability indicators in consultation with the community and SCA stakeholders. IPART’s review of performance against these indicators could be through an operational audit during the life of the Operating Licence rather than on an annual basis.

What energy management requirements are appropriate to include in the operating licences?

No change required

There is no need to change the current licence requirements, subject to an amendment to include “ where cost effectively feasible”.

Administration of the operating licence and other issues Is it appropriate to implement more continuous process for licence administration and reporting? How can the licence audit process be improved?

Change required

The SCA believes that the concept proposed for the Energy Industry could be easily transferred to the water utilities. In keeping with international best practice, licence compliance monitoring would be improved if it moved away from large annual audits to regular compliance and exception reporting by the SCA, coupled with smaller targeted audits to ensure appropriate and focussed regulatory oversight.

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The SCA encourages IPART to see where its reporting requirements may be met through other audits (eg the catchment audit) and SCA reporting obligations. (Table 1 sets out the SCA’s current major reporting requirements.) The SCA supports the re-structuring of the Operating Licence reporting requirements to better align with normal business reporting practices.

Are the current timeframes for review Operating Licences appropriate, and should there be other triggers for a review, and if so what circumstances should trigger these reviews?

Change required

The SCA supports a mandatory end term review of an Operating Licence but not a mid term review. It would, however, support reviews being triggered by changed circumstances such as changes to government policy or legislation. The Sydney Water Catchment Management Act 1998 provides for the Governor to amend the Operating Licence at any time. Therefore, the opportunity to amend the Operating Licence, if required, would not be denied by the absence of a mid term review.

Should the existing licence obligations to annually audit MOUs be retained?

No The SCA believes that no benefit has been gained from auditing each Memorandum of Understanding clause-by-clause. A more efficient process to assess relationships would be to require each agency to prepare a statement on their assessment of the relationship and any perceived shortcomings. The SCA could also provide evidence of co-operation.

Other Issues The SCA suggests that accumulated Ministerial requirements arising from previous audits, which are of an on-going nature be considered as part of any review process of the Operating Licence. Redundant licence conditions should be removed.

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3. SUPPORTING INFORMATION This section considers matters relevant to the SCA’s Operating Licence raised in the issues paper and amplifies where appropriate the SCA’s answers to IPART’s questions (in section 1).

3.1 The Regulatory Framework The SCA’s current Operating Licence was developed at a time when the SCA was still establishing its role in the water industry, as it relates to the protection of water quality in the drinking water catchments of greater Sydney. The licence was modelled closely on that of Sydney Water. The issue now is to establish the appropriate regulatory framework for the SCA as an established bulk raw water supply authority. In 1995, Sydney Water Corporation was established. Corporatisation of the water industry in NSW had commenced a number of year’s prior with Hunter Water Board becoming the Hunter Water Corporation in 1991. The aims of the corporatisation model included introducing a more efficient and commercial business focus, similar to that found in the private sector and distancing the utility from direct Ministerial control thereby allowing greater managerial discretion. Post corporatisation, Sydney Water retained its monopoly status in NSW. To ensure that it did not abuse its monopoly position and that equal weighting was given to its three corporate objectives, the enabling statute provided for an Operating Licence, regulated by the then licence regulator. The licence focused on minimum standards for water quality, continuity of water and sewerage services, water pressure, facilitation of customer consultation, the creation of a customer contract and annual performance audits. The Government’s inquiry into the water quality incident of 1998 (McClellan Inquiry) recommended the creation of the SCA. The SCA was established as a statutory authority and not a statutory corporation, like Sydney Water. A key component of the SCA’s governance framework involves the SCA being subject to Ministerial direction, except in relation to the contents of any reports or recommendations made by the SCA. Sydney Water is subject to Ministerial direction only in relation to matters of public health and safety. Sydney Water’s Board is a governing/decision making Board unlike the SCA’s, which is advisory in nature. The SCA has a different corporate governance structure to both Sydney Water and Hunter Water. The difference in corporate and governance structures calls for an Operating Licence appropriate to each circumstance.

The SCA has two clearly defined roles: operator and regulator. As a regulator, the SCA is responsible for enforcing the Sydney Water Catchment Management (General) Regulation 2000 and the Sydney Water Catchment Management (Environment Protection) Regulation 2001. (It is also responsible for assessing land development proposals under State Environmental Planning Policy 58.) IPART defines the objective of an Operating Licence as one of establishing performance targets and obligations that help to ensure adequate service delivery and to protect consumers and the environment. IPART broadly categorise the licences into three sections: • System operational standards (eg. drinking water quality, water pressure and continuity); • Customer service standards (eg. customer complaint handling and redress); and • Environmental issues (eg. demand management, catchment management, and reporting

on environmental indicators). The SCA endorses the above categorisation. Such a division of functional responsibilities is consistent with the intent of an Operating Licence to regulate operational standards, protect

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customers from the abuse of monopoly powers and to ensure that the environment is protected in the exercise of operational powers. The NSW Audit Office1has the brief to monitor and report to government on the SCA’s compliance with its statutory obligations. Regulatory best practice The SCA agrees that the Operating Licence should include simple and unambiguous obligations, minimise regulatory overlap, and provide measurable and auditable criteria against which compliance may be assessed. The licence should also provide for monitoring and reporting of performance of those activities within the scope of the licence, refrain from specifying detail and stay focussed on outcomes. Ideally, an operating licence reflects the following principles: • only prescribe actions and activities where there is evidence of market failure or abuse of

monopoly position, particularly where other mechanisms exist for subsequent reviews of the licence instrument.

• focus on outcomes, outputs and performance rather than inputs or processes • not impose obligations on third parties other than on the regulated agency, unless

enabling legislation also confers the means and the power to achieve compliance on the third party

• avoid stifling innovation. Regulatory complexity As depicted in Figure 1, the SCA is subject to a complex regulatory environment. Effective mechanisms are in place for monitoring and reporting against most of the obligations imposed by all regulators. Currently the SCA, as a bulk water supplier, is regulated by: • the Department of Infrastructure, Planning and Natural Resources (DIPNR) for the water

it takes from the rivers and the passage of environmental flows through storages (Water Management Licence)

• the NSW Dams Safety Committee, in relation to the maintenance of safe dams • NSW Health in relation to the SCA’s contribution to drinking water quality • IPART for all of the above as well as for catchment management and protection, data

provision, customer agreements etc. Regulatory overlap has been most evident during Operating Licence audits in relation to the SCA’s Water Management Licence and its dam safety requirements. As an example, IPART’s auditors seek the same information to determine compliance with the Water Management Licence as DIPNR seek when assessing compliance. Measurable and auditable compliance criteria Auditable clauses of an operating licence must be unambiguous and structured so that there is a clear understanding of how compliance can be demonstrated and assessed. Difficulties have been experienced in the past in relation to the interpretation of clause 7.1.2 “coordinate

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data collection in the catchment” and clause 7.1.1 – “The Authority must manage and protect the catchment to the full extent to which it is empowered to do so”. This has demonstrated the difficultly in determining the actual obligations and levels of compliance. Monitoring and reporting performance A principle of an operating licence is that it reflects the agency’s functions having regard to the purpose for which the agency was created. To improve the SCA’s Operating Licence IPART may consider reviewing the current licence so as to: • avoid imposing unenforceable obligations on third parties. • provide robust protocols for measuring performance • coordinate or build on other regulators’ requirements • test ways to reduce regulatory impact without reducing regulatory accountability.

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SCA the business

NSW Treasury (financial regulator) Monitoring financial performance Requires payment of Dividends

Healthy Rivers Commission (river health regulation) Monitors progress against Statement of Intents for the River Systens within the SCA's operating environment (NB the Commission is about to be subsumed into the Natural Resoucres Commission)

SCA the government body

SCA the bulk water supplier

DIPNR (water quantity regulation) Issues and monitors compliance with the SCA's Water Management Licence

NSW Health (water quality regulation) Water Quality Monitoring requirements reflected in the Operating Licence

Independent Pricing and Regulatory Tribunal (operational/pricing regulator) Setting of water prices and Operating Licence

Dam Safety Committee (Dam Safety regulation) Monitors SCA activities with respect to the management of Dam Safety

FIGURE 1 - SCA Regulatory Framework

SCA the regulator

Land and Environment Court The Court is vested with the power to determine matters arising from environmental and planning Statutes such as the SCA’s powers under the POEO Act

NSW Audit Office (State government regulator) Audits performance against NSW Legislation including the Sydney Water Catchment Management Act 1998

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3.2 Ensuring safe drinking water The SCA manages the preventative measures at control points within the catchment, storage and delivery systems using a multi barrier approach, in conformance with the framework for the management of drinking water quality as set out in the Australian Drinking Water Guidelines. The SCA is developing its Water Quality Risk Management Plan, which builds on the existing Pollution Source Risk Management Plan. The expanded plan will ultimately provide the framework for directing funding and resources to prevent pollutants from entering the water supply. The proposed plan will give a clearer picture of the most effective control of certain pollutants and therefore provide a clearer picture of what the SCA should reasonably be expected to manage. The forthcoming Water Quality Risk Management Plan and Sydney Water’s Five Year Drinking Water Quality Management Plan will provide a transparent, comprehensive, strategic, multi-barrier approach to protecting water quality. This risk-based approach to water quality management is consistent with contemporary water industry practices for water quality assurance. The SCA supports the position in the IPART issues paper on emerging health-related issues. Compliance with the Australian Drinking Water Guidelines, close strategic liaison with NSW Health and Sydney Water and the SCA’s collaborative research programs ensure that the SCA remains at the leading edge of best practice guidelines for emerging health related issues. Site-specific standards The Bulk Water Supply Agreement between the SCA and Sydney Water documents the obligations on both parties in relation to the supply of water. Its focus is on service delivery. Section 22(2), SWCM Act, requires the agreement to document the standard of raw bulk water supplied. The site-specific standards contained in the agreement, while not explicitly contained in the Operating Licence, are assessed as part of the current annual operating licence audits (see clause 6.2 (b) of the licence). These standards reflect the capability of the water filtration plants to treat the water. They have little applicability to the quality of water at the customers’ tap or the quality of raw water in the storages. The Act also stipulates that review or amendment of the agreement is subject to the terms and conditions of the Operating Licence, the Minister or the agreement itself. The current agreement expires on 31 December 2005. The Operating Licence requires that the agreement be reviewed to ensure that it remains consistent with the SWCM Act, the Operating Licence and Sydney Water’s Operating Licence. The review of the agreement will provide the opportunity for the current site-specific standards to be replaced by the health-related water quality obligations. As noted above, the Act requires the agreement to contain information on the standard of bulk water supplied to Sydney Water. The water quality standards are best placed in the agreement and not duplicated in the Operating Licence. Consistent with the Act, the Operating Licence would contain conditions covering the review or amendment of the agreement. In addition, the Operating Licence would contain a requirement for regular reporting to IPART of compliance with the water quality obligations in the agreement.

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In summary, the Bulk Water Supply Agreement is a requirement of the Act and therefore nothing is gained in a regulatory sense by including the need to comply with the Agreement in the Operating Licence. Site-specific parameters that cannot be influenced by SCA but are related to the surrounding catchment conditions (eg. Hardness, temperature, alkalinity etc) should not be specified in the Operating Licence or Bulk Water Supply Agreement. Regulation of raw water supplied for uses other than treatment

Water quality obligations already apply to SCA bulk water though legislation and policies, including the Water Management Act 2000, the Government’s statewide Water Quality Objectives and the National Water Quality Management Strategy.

Less than 1% SCA bulk raw water is supplied to other customers for uses other than water treatment (Sydney Water and two councils). The SCA supplies water to small customers located close to its canals and pipelines for commercial, industrial and agricultural purposes. The SCA supplies that water to customers under signed agreements that contain express terms and conditions relating to its use. Accordingly, the Operating Licence need not contain water quality obligations for water supplied for uses other than water treatment. This approach is consistent with State Water, which is not subject to quality obligations.

3.3 System Performance Standards and Measures Linking asset management requirements The SCA agrees that there is a need for it to manage its assets, not only to minimise risk to human health, but also to ensure that they continue to meet the needs of its customers. The SCA asset management is in line the NSW Government’s Total Asset Management Guidelines (TAM), which it introduced to achieve better planning and management of state assets. The SCA has focused its efforts on applying the TAM guidelines to its bulk water supply assets. The Catchment Infrastructure2 Asset Management Strategy (CIAMS) draws together the various SCA strategic plans to operate, maintain, renew, replace or create its bulk water supply assets in an effective and efficient manner to achieve service delivery outcomes. The SCA reviews the strategy annually. In 2003, the Department of Commerce reviewed the CIAMS and it determined that the SCA’s documents were consistent with TAM guidelines and that it provided the SCA with the framework for effective asset planning and management. The SCA will apply the TAM guidelines to its other assets such as land, property and office accommodation, which will then provide strategic management of all its assets. The SCA supports the Operating Licence conditions for developing and maintaining its assets that allow flexibility to adopt the most appropriate methodology as asset management techniques continue to develop.

2 The term “Catchment Infrastructure” has been adopted as it is the description that is afforded the bulk water supply assets

in the Operating Licence

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In addition, the SCA is currently taking part in work conducted by the Water Services Association of Australia on benchmarking asset management systems and identifying performance measures for asset management. This work may be sufficiently advanced by the time a new Operating Licence is being drafted to contribute to the development of the revised Operating Licence. Public reporting of dam safety activities The NSW Dams Safety Committee (DSC) is a statutory agency with the following functions: • surveillance of prescribed dams, the environs under, over and surrounding prescribed

dams and the waters or other materials impounded by prescribed dams to ensure the safety of the prescribed dams,

• obtaining information and keeping records on matters relating to the safety of dams, • formulating measures to ensure the safety of dams, • making such reports or recommendations to the Minister or any other person in

relation to the safety of prescribed dams as the Committee considers necessary or appropriate, and

• furnishing reports and recommendations with respect to the prescription of dams for the purposes of the Dam Safety Act 1978.

The DSC provides the necessary and appropriate regulatory framework for regulating SCA’s dam safety. As public reporting of the SCA’s dam safety activities occur via the DSC reporting obligations, this makes redundant similar requirements in the Operating Licence.

3.4 Customer service standards and consumer rights To comply with the relevant conditions of its Operating Licence, the SCA initially established four consultative committees: two regional committees, a local government reference panel and an expert panel. The local government reference panel has, to date, operated effectively and the SCA believes it has been a valuable tool in developing the relationships between the catchment councils and the SCA. The expert reference panel has been less effective and has met only once in the last financial year due to lack of items of substance for its consideration. The SCA has recently reviewed the effectiveness of its regional committees and reduced the regional committees to one. A tension lies in the confusion of regional committees’ roles as a customer council and catchment stakeholder forum. Committee members are generally less concerned about customer service and operating issues and more concerned with broader environmental, catchment management and regulatory activities. The concept of customer forum has little applicability to the SCA, with extremely small customer base (see Standard customer contract below). The SCA, however, must maintain appropriate contact with stakeholders. Rather than a committee approach to engage the public, the SCA believes focussed consultations on specific issues would be more appropriate. These consultations would need to ensure that: • extent of the consultation is correct • relevant interest groups are engaged • approach to the consultation is equitable, with participation being possible regardless

of language, distance, technical knowledge or lack of resources

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• information is in an accessible format, able to be understood and suitable for informed discussion

• links to wider issues and problems are considered • adequate timing is given for response, and • appropriate measures are developed to determine the consultation’s effectiveness. IPART may wish refer to consultation from the draft Framework for the management of drinking water quality and the Australian drinking water guidelines.

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Standard customer contract The SCA has sixty-three customers. Sixty retail customers (drawing water from the Upper Canal, Warragamba pipelines, Fish River Pipeline and the Upper Cordeaux pipe works) and three wholesale customers. (Sydney Water, Shoalhaven City Council, Wingecarribee Shire Council) The SCA has signed agreements with all its retail customers. These agreements are largely generic with some minor differences relating to connections and plumbing standards. The SCA has not established agreements with the two councils. This situation has not hampered the delivery of water to them. From the council’s perspective, little imperative exists to sign agreements. The Operating Licence auditors and IPART have concluded that the SCA has used its best endeavours to enter into signed agreements with the two councils to which it supplies water. One method for resolving this issue would be for IPART to consider whether the Operating Licence should contain a standard customer contract. The Operating Licence could then deem customers to have entered into this agreement until such time as an alternative agreement is negotiated between the parties. Effective integration and assessment of customer complaints with its asset management As indicated in the IPART Issues Paper the number of customers’ complaints received by the SCA is small. The SCA’s complaints handling system captures all complaints received by the SCA; not only those that relate to its water supply function but also its community service activities, such as picnic areas and construction activities. A minimal number of complaints relate to assets, which causes difficulty in identifying systemic asset faults through the complaints system. Asset-related issues for the wholesale customers are dealt with directly at regular interface meetings. If asset related problems for SCA’s wholesale customers arise, then retail customers will also be affected. The SCA infrastructure is large and visible and impacts are noticed readily and are generally attended to promptly. Attending to infrastructure on the basis of complaints is too reactive. The preferable approach to asset maintenance is set out above (see Linking asset management requirements).

3.5 Catchment Management

Measurement and assessment of catchment management activities The SCA has developed extensive catchment management activities that focus on sustainability, water quality protection and cost effectiveness. The model uses the internationally accepted Pressure – State – Response model for managing complex environments with finite and known degrees of variability and uncertainty. Figure 2 sets out how SCA programs fit within this model. They provide the essential mechanisms for establishing the catchment’s state (identification of issues), assessment of catchment pressure (eg population, sewage, cattle) and developing and implementing the SCA response. The SCA’s catchment information system, new scientific research, water quality information, community consultations, strategic land and water capability studies and

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Water Quality Risk Management Plan all contribute to identifying and assessing pressures and drivers. The SCA’s Healthy Catchments Program and the draft regional environmental plan provide the delivery platform for the SCA’s response to priority issues by implementing catchment improvement works across the 27 sub-catchments in the hydrologic catchment. The catchment improvement works are tangible, on ground improvements to catchment health, which can be quantified. Figure 2

Regional Plan Rectification Action

Plan

Water Quality Risk Management Plan

Healthy Catchments

Program

SewerageStormwaterRural LandsEnvironmental ComplianceRiparianSpecial AreasCatchment Information

§§§§

§§§

PRESSURE STATE RESPONSE

* New development* increasing population pressures* Neutral or beneficial impact test* environmental offsets* Rectification action plans dealing with past problems

* Community Consultation* Catchment Information System* SLAWCA's* Water Quality Data* New Scientific Research

Implementation

Catchment Sustainability Model

The Healthy Catchment Program provides a flexible strategic framework, aligned with catchment-health priorities. The Program currently consists of seven strategies: • Sewage • Riparian • Urban Stormwater • Rural Lands • Compliance Strategy • Special Areas Strategic Plans of Management • Catchment Information (System).

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Each strategy has a schedule of smaller programs and deliverables, which include forward projections and costings, subject to annual review and priority setting. The program draws together existing programs and projects into a comprehensive catchment focused and co-ordinated program. It creates a clear, flexible, co-ordinated and agreed framework by which the SCA can implement the catchment management aspects of its business plan and review performance on an annual basis against the program. It takes an adaptive management approach, which will change in response to such things as new science, catchment audits, new developments, reports, environmental programs, community priorities and institutional changes. The annual review and reporting cycle for the program align so that its achievements and performance can be reported in the SCA Annual Report, and its priorities and programs (forward projections) can be considered in the SCA business planning and budget cycle. The proposed Rectification Action Plans (RAPs) within the draft Regional Environmental Plan will assume the strategic guiding role for the remedial programs implemented by the Healthy Catchments Program based on greater scientific or technical knowledge gained through their preparation. The SCA’s catchment management and improvement model is robust and focuses on sustainability, responsiveness, cost effectiveness and risk management and incorporates the essential mechanisms for ongoing improvement and review.

The most recent catchment audit required under section 45 of the SWCM Act and undertaken by the Department of Environment and Conservation adopts the Pressure – State – Response framework, thereby bringing the audit in line with national and NSW state of the environment. The report will be released in December 2003.

Catchment audits provide the optimal mechanism for measuring catchment health and management activities. IPART may wish to consider referencing the catchment audit in the Operating Licence as the mechanism for measuring and assessing catchment management activities. Where IPART is looking to assess specifically SCA’s catchment management activities, the SCA recommends that IPART build on the above catchment audit above and undertake a performance audit of SCA’s activities during the life of Operating Licence. Such an audit could adopt the methodology of the performance audits undertaken by the Auditor-General

Special Areas and Wingecarribee Swamp As indicated above, one of the strategies in the Healthy Catchments Program relates to the management of the Special Areas and the Wingecaribee Swamp Plans of Management. The revised Operating Licence would not require conditions specifically dealing with these plans, with reporting requirements to be captured in the Healthy Catchments Program. Reporting on the plans would be through the catchment audit. Again, a performance audit during the life of the Operating Licence of the plans of management could be additional licence condition. Licence obligations with respect to the risk management plan The SCA has developed its holistic Corporate Risk Management Plan, which is approved and monitored by the SCA Board, under section 8(1) of the SWMC Act. The SCA has developed two strategic plans for water quality risk management. They are the Pollution Source Risk Management Plan (2000) [required by clause 6.7.1 of the Operating Licence]

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and Bulk Raw Water Quality Management Plan (2001) [required by section D, Schedule 1 of the Bulk Water Supply Agreement between the SCA and Sydney Water]. The Operating Licence’s current risk management planning obligations require updating to reflect the Minister for the Environment’s requirements and the proposed Water Quality Risk Management Plan, described below. Incorporating this plan, which is at early draft stage, into the SCA business planning process, via the Corporate Risk Management Plan, will be a key corporate governance tool that will facilitate the early identification, treatment and management of risks. In response to the findings of the 2001 Operating Licence Audit in relation to the development of the Risk Management Plan, the Minister for the Environment required the following of the SCA:

Further expand the Pollution Source Risk Management Plan by working with SCA customers and other regulators of the catchment to incorporate existing knowledge regarding sources of pollution and catchment infrastructure operation, bulk water, and water supplied to consumers. The Plan must clearly locate where the key controls lie (at the source, reservoir or filtration plants); identify the important control requirements, the extent and overall effectiveness of the various controls; and determine whether additional controls are required.

To address the Ministerial requirements, elements of the above two plans are being combined into the Sydney Catchment Authority’s Water Quality Risk Management Plan. This plan will encapsulate a holistic management of risks in relation to water quality protection through: • identifying and categorising water quality hazards • providing for minimised risks to human health from the raw bulk water supplied to

customers • providing for water supply of sustainable quality is provided to customers • giving context and direction to SCA actions that address key hazards to water quality • engaging the community and government in the promotion of water quality and

catchment health • contributing to the “catchment-to-tap” philosophy of risk management for public water

supplies • satisfying SCA regulatory obligations. The SCA also proposes to use the existing relationship with the Co-operative Research Centre for Freshwater Ecology (CRCFE) to access scientific experts with knowledge on targeted key water quality hazards. NSW Health will review the plan. The plan will complement Sydney Water’s Five Year Drinking Water Quality Management Plan. Both plans will enable the SCA and Sydney Water to exhibit transparency in a multi-barrier approach to minimising risk to public health see Figure 3. The Water Quality Risk Management Plan forms part of a co-ordinated approach to risk management by the SCA. Risk management is a key element of the SCA’s decision making processes when planning activities and allocating resources. Where risks are identified and management action is required, the SCA ensures that those actions are adequately resourced, and incorporated in the business planning process. The Water Quality Risk Management Plan is to be used in planning SCA programs and actions for

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the catchment, storages and transfer system to guide management. Actioning this plan as part of the SCA’s overall corporate risk management framework will become a key component of the SCA’s business and corporate governance. This process will facilitate the early identification, treatment and management of risks

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Figure 3: SCA Water Quality Risk Management Plan in relation to other Plans and Programs

SCA/SWC catchment-to-tap risk assessment

SCA Corporate Risk Management Plan

SWC Drinking Water Quality Management Plan

SCA Water Quality Risk Management Plan

Other SCA Risk Management Initiatives:

Occupational Health and Safety

Catchment InfrastructureFinancialInformation technologySecurity

�

����

SCA Information:Water Quality monitoring and

modellingSCA Research ProgramCatchment Information System

�

��

Catchment Management Storage and Delivery System Management

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3.6 Protection of the Environment When the SCA was established there was need to ensure that the SCA appropriately addressed its environmental obligations. The Operating Licence required the SCA to develop environmental and ecologically sustainable development (ESD) indicators. The Licence also required the SCA to develop a five-year environment plan. The 2000-2005 SCA Environment Plan identifies the SCA’s environmental objectives, strategies and targets and draws together all its environmental initiatives for this period. The SCA proposes that the following mechanisms would replace the need an environment plan: • SCA’s business plan, which is reported against through the SCA annual report • Biennial catchment audit required by the SWCM Act • Operating Licence conditions relating to SCA non-catchment sustainability

requirements In 2001, the SCA commenced a process of developing a comprehensive Business Plan for the period 2002-2007. This process incorporated a thorough environmental analysis whereby comments and input was sought from a wide range of SCA stakeholders to inform the planning activities. This analysis also considered the expectations of the communities served by the SCA including the Local Councils and other government agencies. The outcome of this process was a comprehensive Corporate Business Plan, which is designed to set a broad direction for the SCA over an identified timeframe. The 2002-2007 SCA Business Plan focuses on seven key areas of business for the SCA. These are: threats to water quality minimised; sustainable and reliable water supply; commercial success; building and sharing knowledge; results through relationships; dynamic and supportive workplace and quality systems and processes. The Business Plan is reviewed annually. Furthermore, the external environment is constantly monitored to ensure that the SCA responds to ongoing changes such as organisational and policy changes, international debates in the water and environment industries etc. Performance reporting against the Business Plan takes place through the SCA annual report. The structure of the Annual Report reflects the structure of the Business Plan and this has promoted the transparency of the SCA’s operations. As discussed above (Measurement and assessment of catchment management activities), the SCA’s catchment protection activities which are audited through the statutory audit and specific IPART performance audits provides the framework for sustainability planning and review for the SCA’s catchments. For non-catchment sustainability requirements, IPART may consider requiring in the revised Operating Licence that the SCA develop sustainability indicators against which it reports in its Annual Report. Review would be by exception. Energy management requirements The SCA has prepared and is currently implementing a detailed 5-year Energy Management Plan. Major improvements have been achieved in the SCA’s energy

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management performance over its first four years of operation. A recent benchmark audit has found that the SCA’s performance is in line with best industry practice in Australia. Reporting would be in line with the above proposal for above non-catchment sustainability Indicators.

3.6 Administration of the Operating Licence

The SCA endorses IPART’s view that the administration of licence should not involve high compliance costs for the agencies or an excessive administrative burden for IPART. The cost of compliance with the Operating Licence both in SCA staff time and resources is significant. The SCA employs up to ten full-time staff to monitor and report on compliance with the SCA’s Operating Licence, annual Operating Licence audits, and other regulatory obligations (see table 1). Significantly further resources also go in reporting progress in complying with ongoing Operating Licence obligations and on the annual Operating Licence audit interviews. Nor does it take account of other statutory or licence obligations. The timing of the annual audits has also been problematic. The annual audit has raised major issues for the SCA, including differing views on: audit scope; interpretations of licence conditions; and compliance expectations. There has also been an expectation that an audit should result in recommend actions, regardless of high-level compliance. Opportunities exist to replace the costly and often redundant annual reporting with an effective and focussed reporting and auditing program through: • non-compliance reporting • regular (though not necessarily annual) audits based on non-compliance • specific operational audits (using The Audit Office model) • adopting other existing auditing and reporting mechanisms, e.g. catchment audit and

SCA annual report • self-reporting • end-of-licence review. The SCA supports self-reporting and management compliance certification that would include: • immediate reporting to IPART of significant non-compliance • reporting of trends that indicate potential licence non-compliances • regular reporting to IPART of customer complaints • auditing of implementation of asset management obligations, say, once every two

years. These would be supported by variable degrees of regular auditing driven by the types of non-compliances that have been identified within a year. One-off operational audits could be specified in the licence for specific conditions or for high-risk areas. This alternative approach would allow for ‘audit holidays’ as a reward for good performance.

As noted through this submission, opportunities exist for IPART to reference or adopt other auditing and reporting processes undertaken by specialist agencies.

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Much of the SCA’s consideration for these proposals derives from IPART’s considerations in this respect to the Energy Industry. Timeframes and triggers for review The mid term review of the SCA’s Operating Licence, while providing an opportunity for public input and debate about the SCA and its performance, did not result in any changes to the Operating Licence at the time. As with annual audits, the mid term review consumed a considerable amount of time and effort on the parts of both the SCA and IPART. The SCA supports a mandatory end term review of the Operating Licence but not a mid term review. It would, however, support reviews being triggered by changed circumstances such as changes to government policy or legislation. The Sydney Water Catchment Management Act 1998 provides for the Governor to amend the Operating Licence at any time. Therefore, the opportunity to amend the Operating Licence, if required, would not be denied by the absence of a mid-term review. Hunter Water’s new Operating Licence does not include provision for a mid term review. Annual audit of Memorandums of Understanding (MoUs) The SCA’s compliance with the MoUs is audited in detail each year. These audits involve extensive provision of documentary evidence. As co-operative relationships between the agencies covered by the MoUs continue to function well, audit recommendations have related to technicalities ranging from, renegotiating the MoUs to continuing to develop strategic work programs. At times, however, there have been problems with some parties to the MoU failing to fulfil a commitment, such as attending inter-agency meetings. This has resulted in the SCA’s compliance assessed as being inadequate. As mentioned in this submission, an efficient regulatory environment should not seek to impose obligations on a third party. Procedural failures would also suggest that a party should not be held accountable for the failings of another, unless there is power bestowed to enforce compliance. Only small benefit has been gained from auditing each MoU, clause-by-clause. A more efficient process to assess relationships would be to require each agency to prepare a statement on their assessment of the relationship and any perceived shortcomings. The SCA could also provide evidence of co-operation.

3.8 Other Issues In any review of the Operating Licence, the review process should consider Ministerial requirements imposed on the SCA, that are of an on-going nature. These requirements are often imposed to clarify licence clauses or rectify deficiencies identified in previous annual audits. Should these requirements still be relevant, they should be included as a licence clause. This process would result in a reduced administrative load for licence compliance by eliminating, every five years, compliance monitoring and reporting of multiple Ministerial requirements. The SCA suggests that accumulated Ministerial requirements of an on-going nature be considered as part of any review process of the Operating Licence.

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It should be noted that the SCA is currently in the process of conducting the five year statutory review of the Sydney Water Catchment Management Act 1998 on behalf if its Minister. It is envisaged that a final report on the outcomes of the review will be presented to the Minister by September 2004. The SCA will keep IPART informed of proposals arising from the Act review that, relate to its functions or the current end of term review of the Operating Licence.