ࡱ> 8:7!` Q!bjbj\\ ..>>< < < < X 12x x x x x x x x $chx x x x x x x J J J x vx x J x J J r@T@x l d< :01( @@px x J x x x x x 4 x x x 1x x x x < <   PUBLIC SUBMISSION TO WATER MARKET RULES POSITION PAPER by BAROSSA INFRASTRUCTURE LIMITED on 15 AUGUST 2008 On behalf of the Board of Barossa Infrastructure Limited (BIL), I thank you for the briefing and explanation of the position paper on Water Market Rules. As a Board we support measures to improve the transparency and consistency of trading rules and the removal of unwarranted restrictions on the trade of permanent River Murray Water Rights. We note with interest the concept of transformation of water rights held by an operator to an irrigator as a means of reducing impediments to trade. We can see that this is important for many of the irrigation schemes that were initially Government funded, constructed and managed. These schemes were provided with water rights to extract water for their irrigation customers. BIL is different in that it is a recent infrastructure project having been built in 2000 and delivering water in December 2001. It is totally privately funded by customers/shareholders having built a water pipeline distribution system with their own capital and borrowings using a public company structure. Furthermore, BIL is supplied non-potable water from the Warren Reservoir in the Adelaide Hills catchment by SA Water under a Water Transport Agreement. This contract requires BIL to hold the equivalent volume of River Murray Water Rights to the volume of water supplied. BIL has had to stand in the market place and buy permanent water rights or lease water rights to meet this obligation. Firstly, we argue that BIL should not be covered by the transformation rules because Our legal structure of an unlisted public company issuing stapled securities prevents transformation. A customer is required to hold 1,750 shares for every 1 ML of premium (peak season) water contracted. Conversely only a customer with a water contract for premium water can be a shareholder. This commercial arrangement was necessary to raise sufficient capital to get the pipeline infrastructure built. To transform any water rights owned by BIL would necessitate the cancellation of shares and the customer contract. The Water Transport Agreement with SA Water for the delivery of water, requires BIL to hold River Murray Water rights not the individual customers. Ongoing contractural arrangements with customers are take or pay, and apply until the year 2020. Thus if any customer transformed water rights and sold that volume of water outside the project, they would need to be charged for the ongoing fixed charges to SA Water until 2020. They would also be required to complete the 15 years of levy payments that form part of their customer/shareholder obligations. This is a proportional obligation on all customers/shareholders BIL is effectively the customer in view of the transport agreement with SA Water and does not have direct access to the River. For the fixed portion of the charges from SA Water, BIL cannot in any year, reduce the quantity of water on which the charge is based Secondly, if BIL is deemed to be an Operator for the purpose of the Act, the application of the proposed market rules is impractical The small size of BIL 7 GL contracted with customers and approved environmentally- means that the cost and time of meeting the processes envisaged in the position paper, is an unwarranted burden on BIL and hence its customers. The current water take of 4.5GL in a total extraction from the river system in excess of 10,000GL is miniscule and the exclusion of BIL from the rules would have no impact on water trading. BILs Bankers hold security over the permanent water rights and would want to be paid something to release any security to enable transformation. Most of the water rights held by BIL are leased with just under 25% of the water rights being permanent rights and subject to the market rules. BIL owns a mere 1,643 ML of permanent water rights and compliance with the operation of the market rules is an unreasonable burden and out of all proportion to the impact on the market. Capital gains tax would arise if rights were transformed to individual irrigators. The change of legal ownership from a company to an irrigator would trigger a capital gains tax event even if transferred at no value. The Taxation Commissioner could invoke the non arms length rules and impose a market value on the transaction. To maintain equity within the shareholding of the company, any such tax would need to be recovered from the customer to whom the rights were transformed. Transformation would require the cancellation of a portion of the customers contract and have them pay out the rest of the obligations under the contract for levies. Also the ongoing take or pay obligations for unused water until 2020 when the contracts expire, would need to be recovered from the customer (or at least the fixed charge to SAWater). These obligations would be more than the value of the water rights if traded and hence transformation within the BIL structure is unlikely on economic grounds. BIL could not meet the 15 day time frames envisaged in the position paper in view of the security issues with the Bank. Also, getting valuations of shares and water rights for stamp duty purposes and all the issues involved in those processes, makes transformation both costly and time consuming. In summary we submit that the legal structure of a stapled public company security and the contractural relationship with customer/shareholders means that BIL should not be an operator for the purposes of the Act. The Water Transport Agreement with SA Water means that BIL is a customer rather than an operator of River Murray irrigation infrastructure. Even if deemed an operator the water market rules should provide an exemption for small operators with less than say 2 Gigalitres of permanent water rights. The economics of BIL and the take or pay obligations to provide the ongoing finance for the infrastructure and operating costs, mean that transformation is unlikely to be undertaken by any customer on economic grounds. Hence compliance with the transformation rules by small operators such as BIL imposes significant costs for no benefit to water trading. Please contact me on 08 8100 7666 or the General manager Mr Paul Shanks on 08 8563 2300 if you have any questions or require further elaboration on the matters raised. 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