Portfolio Management
The Commonwealth environmental water holdings comprise of both a portfolio of assets (water entitlements) and the accumulated annual yield of water (allocations) against those entitlements.
The Commonwealth Environmental Water Holder is responsible for the management of the portfolio so that it is directed to achieving the best possible environmental outcome across the Murray Darling Basin. The portfolio needs to be managed in accordance with the Environmental Water Plan that is to be part of the proposed Basin Plan.
The portfolio is diverse and includes most types of water entitlements in the Basin, including unregulated system entitlements. The water entitlements in the holdings retain the same characteristics as existed before acquisition. The portfolio is managed within the State government rules that apply to other equivalent entitlement holders (typically agricultural users). For example, the Commonwealth pays the same fees and charges for the holdings, receives the same annual allocations as equivalent entitlements, and operates within the same rules including the rules relating to carryover of water between years.
What are the options?
Commonwealth environmental water can be actively managed and this means that there are many possible options and decision points. Active management assists in achieving the maximum environmental outcome from the portfolio, or any given environmental outcome with less acquired water.
The option to use water at a particular time and place is assessed relative to the benefits achievable under other options, including benefits achievable in future years and elsewhere in the Basin. Accordingly, the use of water needs to be assessed against other options for use that may be available through the carryover of water or trade of water. More specifically:
- Use of water within the current year. Decisions to use water are made after assessment against a Framework for Determining Commonwealth Environmental Water Use that focuses on the expected environmental outcomes. Use of water in regulated parts of the Basin could involve an order to deliver a volume of water at a particular site at a particular time, or an order to flow a volume of water along a particular river segment at a time and flow rate. Water may be managed through infrastructure to particular sites or potentially pumped from the river to a site. Use of water in these ways must be within operational arrangements which take account of the delivery constraints of infrastructure and rivers.
- Carryover water to subsequent years. Decisions to carryover water for later use are made after considering the carryover rules that exist for particular entitlements and the expected environmental outcome of using water in future years. Carryover arrangements vary significantly across the Basin. As a general principle water use is prioritised from entitlements where there is less capacity for carryover.
- Trade of the holdings. The Water Act 2007 provides scope for disposal and acquisition of Commonwealth environmental water (entitlements and allocations). Such trade needs to be directed to achieving an improved environmental outcome and in most cases any proceeds from a disposal will be required to be spent on future acquisitions. For more information see Trading of Commonwealth environmental water.
No trade of the holdings has yet occurred. A discussion paper on the trading of Commonwealth environmental water was released in November 2011. The period for submissions of responses to the discussion paper closed on 11 May 2012. However, as the process of developing trading arrangements is ongoing, we welcome feedback, both formal and informal, on trading arrangements at any stage.
Water allocations may be transferred between various accounts to implement the above management options. For example, when a decision is made to use water it is generally transferred to a delivery partner for the purpose of the agreed use. The water required for a particular water use action may be sourced from a range of titles. Transfers may also take place to improve the opportunities for carryover and will occur to facilitate the trade of the holdings.
How does this compare with other owners of water entitlements?
The various portfolio management options are comparable to the type of options available to other owners of water entitlements. In some cases the decision may be to not pursue any of the above options and in these cases the rules associated with the particular type of entitlement would apply. In this circumstance the water that would otherwise have been available would typically be reallocated under the rules of a particular water sharing plan. This may result in reallocation of the water across all entitlement holders in a subsequent year.
Management of Commonwealth environmental water is also subject to the same uncertainties that affect other owners of water entitlements. The best available information is taken in to account including climatic, hydrological, environmental, market and catchment information. Continuous assessment of options occurs but the potential for changes in conditions (for example a sudden change in weather conditions) may mean that plans for the use of environmental water can change during the course of the year.
Some examples of current portfolio management approaches or approaches that may be taken in the future include:
- Water may not entirely be used in the year when allocations become available if there is an opportunity to carry over water to subsequent years and where the environmental outcome in those subsequent years is expected to be higher. It follows that in some years more water will be available for use than was allocated to the holdings in that year. Where the use of environmental water is not required in a wet year to address environmental needs, then the carrying over of the water for use in drier or drought years can achieve significant benefit.
- Water allocations may be transferred between connected catchments where the rules provide for this and if there is expected to be an improved overall environmental result from the transfer. Net environmental benefits may be possible from such a transfer where there are different environmental circumstances between the catchments. Catchment transfer is particularly an option in the southern connected system that includes the Murray River, the Murrumbidgee River and Victorian rivers.
- Water allocations may also be transferred to other entitlements where the rules provide for this and it improves the opportunities for carry over, or if it positions the water in an area where it is expected to be used at a later date.
- Water may be traded in the market, with the proceeds used to achieve improved environmental outcomes through water re-purchase. If allocations cannot be directly transferred between catchments then the issue may be addressed by selling allocations to the market in one catchment and then purchasing in the other. Where carry over arrangements are not sufficient to manage requirements between years it may be an option to sell allocations in one year with purchase of allocations in a subsequent year, thus achieving effective carry over through financial markets. Such strategies will need to take account of the difference in effective rates of return through carry over and financial markets and the price risk implicit in selling and repurchasing water at different times.
A key factor is assessing possible environmental outcomes from the use of water under these strategies will be the current and expected environmental condition of assets compared with the environmental objectives as outlined in the Environmental Watering Plan. Specific environmental assets may require water on a larger scale, but less frequently than agricultural crops. Environmental assets may require certainty of flows over the next few years, but it may be less important that it be in the immediate period provided that there is certainty that it will subsequently occur. The objective of trade of Commonwealth environmental water will be to achieve the maximum environmental outcome across the Basin and across time. As the environmental requirements differ from agricultural requirements, trade of water (both sale and purchase) may occur in periods where there are benefits to consumptive users.