An option for Australia?

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An option for Australia?
Urban water trading Urban-rural trading

• Prof. Mike Young, Jim McColl and Tim Fisher_at_
• Research Chair, The University of Adelaide
  Research Fellow, CSIRO Land and Water
• _at_ Director, Land and Water Australia
• OzWater, Sydney, Tuesday 6th March 2007

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2032 Water Price /KL
25 million people (25) 15 less water in
Eastern Southern Australia
  Current Water price No Initiative Rural -Urban Trade Trade 80 GL water. _at_ 1.50/kL
Sydney 1.36 8.09 2.97 2.71
Melbourne 1.17 5.96 1.57 1.53
Brisbane-Moreton 1.27 10.51 2.61 2.39
Adelaide 1.30 1.42 1.70 1.66
Perth 1.12 11.40 6.33 4.50
ACT 1.11 3.23 1.51 1.47
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Urban-rural trading volume change (25 yrs time)
  Demand growth Non-agric. growth Agric. tech. change Water availability Agric effic. leakage Reduced household requirements Total
Crops Livestock 22 -18 -12 56 -55 0 -7
Dairy 102 -36 44 116 2 -13 287
Cotton -121 -153 -3 -317 131 68 -395
Rice -97 22 -20 16 -57 16 -120
Household -29 37 -13 34 2 -28 61
Other (Industry) 64 76 3 94 -23 -43 171
Australia 0 0 0 0 0 0 0
Urban demand for rural water involves relatively
small volumes(61171)/25,000 GL 0.93
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Urban water realitiesTrading moves jobs?
Effect of the introduction of unfettered urban
rural trading Connect Melbourne to the Murray
system and jobs move from Adelaide
  Consumption Real GDP Employment
Sydney -0.2 -0.2 -0.6
Murrumbidgee -4.5 -4.6 -3.6
Murray NSW -5.3 -5.3 -4.1
Rest NSW -1.9 -1.9 -1.3
Melbourne 1.4 1.4 0.4
Mallee VIC 5.6 5.6 3.3
Rest Irrig VIC 5.0 5.1 2.1
Rest VIC 0.2 0.2 0.0
Brisbane-Moreton 11.1 11.2 6.3
Adelaide -2.3 -2.3 -1.8
Perth 4.6 4.6 2.4
ACT -0.8 -0.8 -0.7
Australia 1 0.6 0
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Urban vs rural water pricing

• Urban
• Nearly all Australian urban supplies on
  restrictions
• Price rises, where they have occurred, have been
  small gt no scarcity signal
• Rural
• Scarcity has meant 700 increase
• River Murray 44/ML to 380/ML
• Scarcity pricing
• Changes behaviour
• Drives innovation
• Drives investment

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Trading opportunities design?

• Whats good for the goose is good for the
  gander?
• Urban trading
• For city utilities?
• For large users?
• For all metered users?
• Unfettered Urban rural trading?
• Issues
• Design issues gt low transaction and
  administrative costs
• Policy questions of equity and efficiency

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Water supply management

• Scarcity pricing approach
• Set a cap and use market to reveal price
• Delivery cost is still charged
• Regulated demand approach
• Block tariff charging
• Regulations in times of scarcity
• Complex equity and political issues associated
  with both approaches

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Experience with scarcity pricing

• Gayndah Shire sells surplus water to irrigators
• SA Water has been buying River Murray
  entitlements
• Arizona requires developers to certify 100 year
  supply and is now running an auction for access
  to recycled water
• Beijing allocates water on a per capita basis.
• Salisbury Council is selling access to its
  storm water
• In Australia, urban water markets are starting to
  emerge but most is under the table and hidden
  from policy makers.

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Allocating commercial industrial water

• Could make all large users hold water
  entitlements and contract a water utility to
  deliver any allocations they hold
• Level playing field with irrigators
• Need to decide on the initial entitlement
• Maximum volume used in last 3 years?

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Allocating household water

• Simple model (two tier charging system)
• Build off household water accounts
• Define first 200 KL as a basic entitlement
• Issue 200 KL allocation in all but most severe
  conditions
• Supply at marginal cost, say, 1.00
• Allow households to trade
• Unused allocations
• Voluntary reductions in their 200 KL entitlement
• Sell access to the second tier
• Tender shares in the remaining pool of water
• Allow trade in shares and allocations

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Possible variants

• Tie first 100 KL entitlement to each house
• No house can sell its basic water entitlement
• Use scarcity pricing for tier two water
• gt No trading for second tier

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Trading scenarios opportunities

• Selling tier one water
• Install a water tank and plumb into house
• Sell a 50 KL entitlement permanently to a pool
  owner
• Increasing the supply
• Buy 1000 ML water from a rural area and convert
  to an urban water entitlement
• Sell entitlements in 50 KL lots to developers,
  households industry
• Sell allocations to households without enough
  allocation
• Trading platform
• E-bay?
• Purpose built platform run by water utility?

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Water industry implications

• Utilities still charge users for delivery
• Bulk water entitlements transferred to users
  without payment of compensation
• Need to negotiate supply contracts with exit
  conditions (Should industry exit be free?)
• Infrastructure management may need to be
  separated from retail supply as with gas and
  electricity supply
• Increased competition from small and large scale
  investors
• 3rd party access to sewage
• Desalination
• Storm water
• Rural purchase
• Different role and structure for account register

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Droplet Questions and Answers

• Why not allocate to persons rather than
  households?
• Administrative costs would be too high.
• What about tenants, strata corporations, etc?
• Trading would create an incentive for individual
  household metering.
• Would participation be compulsory?
• No but you would need to stay inside your
  allocation.
• What happens if some-one uses more than their
  allocation?
• You would have the choice of buying more water or
  leaving your utility to do it for you.

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Interesting droplet comments

1. The real problem is that prices are determined
   according to delivery cost not scarcity.
2. Restrictions on use are ridiculous!
3. How many households survive on 200 kL/year? We
   use 900 1200 kL/yr!
4. Instead of incentives we have the water police
   who walk the streets looking for offenders!
5. Some rural areas want and need to water their
   parks even in drought years!

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Where to from here?

• Would urban trading enable movement past water
  restrictions?
• A Trial
• Large user trading?
• Household trading?
• Where
• Toowoomba, Goulburn, Bendigo?
• Canberra, Gold Coast, Adelaide?

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The future depends upon the options considered
Contact Prof Mike Young Water Economics and
Management Email Mike.Young_at_adelaide.edu.au P
hone 61-8-8303.5279Mobile [phone]

www.myoung.net.au