The NSW Office of Environment and Heritage is selling water to fund a policy unit that is undermining other water users in the Murray Darling Basin, Regional Water Minister Niall Blair has said, and "it has to change".
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Mr Blair made the revelation during public questioning at a NSW Farmers election debate at Griffith.
Asked about environmental water volumes held by government at both state and federal levels Mr Blair said: "I don't know, because they could still be in the market, buying water from willing sellers".
OEH last financial year sold more than $5 million worth of water.
Confirmation of suspected underlying tensions between the two state government departments comes just weeks after Murray Valley Groundwater Irrigators Association wrote to NSW Premier Gladys Berejiklian requesting she replace Mr Blair.
In the letter, dated February 12, association chairman Greg Sandford said "186,000 megalitres of high security water (68 per cent of the 2006 allocation) was taken from this valley, $7 million compensation (would have) equalled $40 a megalitre.
"Instead of sharing equally, 90pc of irrigators received $0 compensation and 10pc received $400 a megalitre. This water is now trading at $2000 a megalitre."
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In calling for an independent, non-government body to be urgently appointed to determine the Murray Valley's sustainable groundwater yield, Mr Sandford said Mr Blair must be "immediately replaced with someone who can handle the portfolio in a fairer and equitable manner".
This call was backed by Southern Riverina Irrigators Association vice chairman Darcy Hare, who said NSW irrigators had been left holding the bag when it came to sacrifices for other water users in the Murray Darling Basin.
"One of the great problems is that 1800 gigalitres must be delivered to the South Australia border whether there is a drought or not," he said.
"So we've got Victorian irrigators on 100pc allocations, South Australian irrigators on 100pc allocations and NSW irrigators on zero allocation."
On Tuesday night the Australia Institute backed by a host of signatories including local government, irrigators, Aboriginal nations, environment groups and the former Commonwealth Environmental Water Holder called on Mr Blair to back away from the government's proposed floodplain harvesting policy.
The alliance opposes the minister's plan to "give away" rights to divert Northern Basin water into private dams.
Australia Institute senior water researcher Maryanne Slattery said "floodplain harvesting is a major contributor to the fish kills and water crises that have appalled all Australians this year".
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