The competition watchdog says water markets in the Murray Darling Basin need major changes if water users and the economy are to benefit from open, fair and efficient water trading.
The $1.5 billion a year basin market has outgrown the frameworks that govern it according to a stinging report from the Australian Competition and Consumer Commission.
It said regulatory oversight of water market brokers and investors was inadequate and recommended a single overarching authority to oversee water trading.
The interim report for its Murray Darling Basin Water Markets Inquiry found change was needed for a market of this scale to operate efficiently and for the benefit of industries depending on it.
However commissioners specifically recommended against existing water markets being dismantled in an effort to remedy the basin's "many problems".
These markets have significant problems
A year ago the federal government directed the ACCC to conduct a public inquiry and recommend options to enhance markets for tradeable water rights in the Murray Darling system, including ideas to enhance transparency, regulation, competitiveness and efficiency.
"Water trading has brought substantial benefits to water users across the Murray Darling Basin, including by allowing irrigators to manage the amount of water they use, to earn income by selling excess water or their water rights, and to release capital to invest in their businesses," said ACCC deputy chairman Mick Keogh.
"However, these markets have significant problems.
"In basic terms, there is overly fragmented or complex regulation in some areas, not enough regulation in others, and a concerning lack of regulatory oversight and robust enforcement in important areas."
"This has led to a lack of trust in the markets among many water users and has undoubtedly reduced the benefits generated by those markets."
He said these problems exacerbated distrust when water was scarce or when demand increased.
"They make a difficult situation worse," Mr Keogh said.
The ACCC identified problems in several key areas, particularly with the current governance arrangements for the basin's water markets.
A significant issue was that a range of different bodies oversaw water markets in the basin under different legal frameworks.
Roles and responsibilities overlap in some areas, while leaving significant gaps in others.
"The basin's water markets, and the bodies that oversee and interact with them, operate in a complex, fragmented and inconsistent system," Mr Keogh said.
"To make real and lasting improvements, we need to rethink how these water markets are governed."
Poor regulatory oversight
The ACCC found the integrity of water markets also needed to improve because there was insufficient regulatory oversight of some market participants, including brokers and investors.
Water brokers, exchange platforms and other intermediaries had no industry-specific regulation, meaning brokers' roles were often unclear and their interests can diverge from those of their clients.
There were few rules to prevent market manipulation or similar conduct, and no regulator was charged with monitoring the trading behaviour in water markets.
Potential responses include a licensing scheme operated at the federal or state level for brokers and other intermediaries, or extending the financial regulation framework to all water products.
The ACCC said a single regulator to oversee trade in basin markets, similar to arrangements in place in the financial services or energy markets, could help address these issues.
Meanwhile, a lack of transparency in the water market was also an issue for water users.
Different record keeping by different states and trade processes meant participants did not get a full, timely or accurate picture of water trading.
The same information was not available to all water market participants.
Information crucial to the business decision-making of irrigators and traders, such as allocation policies and river operations policy, was not always well communicated or easy for users to access.
The ACCC said market transparency could be boosted through practical measures such as the use of standardised identifiers across the Basin, like ABNs.
Increased trade and the resulting changing patterns of water delivery and use were creating new challenges for the management of the river system, its infrastructure, and the environment.
The rules and operational frameworks that manage the trade and delivery of water may not always reflect the physical realities of the river system, particularly in the southern basin.
The ACCC said delivery risk, conveyance loss and storage limitations needed to be properly reflected in trade rules, and where limitations exist, mechanisms are needed to efficiently manage these.
"It is clear the basin's markets need decisive and comprehensive reform," Mr Keogh said.
"There are many problems, but we do not believe that dismantling existing water markets is the answer.
"This would mean farmers, communities and the Australian economy would miss out on the substantial benefits these markets provide.
"The Murray Darling basin's water is a precious and often scarce resource.
"Water trading has the potential to ensure this resource is used to its greatest benefit, particularly for irrigators, but this can only happen if markets are efficient and fair and are underpinned by an environmentally healthy river system."
As part of its inquiry, the ACCC released an issues paper last October and then held 10 public forums to hear directly from stakeholders across the basin.
Its final report will be delivered to the government by November 30.
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