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Prof. Mike Young


CPA Congress, Adelaide, 20th November 2008. The business of Managing water ... all state-owned utilities to escape from the tranche-payment incentive mechanism ... – PowerPoint PPT presentation

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Title: Prof. Mike Young

The business of Managing waterWhat should we be
  • Prof. Mike Young
  • Research Chair, Water Economics and
    ManagementThe University of Adelaide
  • CPA Congress, Adelaide, 20th November 2008

Climate Change
  • The adverse effects of climate change
    will express themselves first in water!

Water withdrawals per capita
Australia The driest inhabited continent in
the world.
(Australia 135/161 countries)
We have a water management problem not a water
supply problem! Business Council of Australia
Direct Costs of Water Supply/Demand
Options(Sydney, Adelaide, Perth, Newcastle)
Source Marsden Jacob 2006
  • The price of urban water supply and security is
  • Who should bear the financial risk for increased
    security in a world of climate shifts and change?
  • Security is expensive

Water Policy History
  • 1994 CoAG Agreement- National Competition
    Policy identified water as an arena for reform
  • Separate policy from infrastructure
  • Water trading in rural areas
  • Full cost pricing including the costs of
  • 1996 Agreement extended to cover groundwater
    and storm water
  • 2004 National Water Initiative
  • An internationally renowned template for ongoing
  • Lacked urban policy detail but commits urban
    Australia to efficient urban water use
  • Allowed all states all state-owned utilities to
    escape from the tranche-payment incentive
  • 200508 Awareness of a water supply step change
    caused governments to lose sight of the
    importance of competition and market-opening
    reforms that provide incentive
  • Grants, subsidies and restrictions have become
    the norm!
  • NWI progress has been slower than scheduled

National Water Initiative Intent (s5)
  • .. in recognition of the continuing national
    imperative to increase the productivity and
    efficiency of Australias water use,
  • the need to service rural and urban communities,
  • to ensure the health of river and groundwater
    systems ..
  • clear pathways to return all systems to
    environmentally sustainable levels of
  • greater certainty for investment and the
    environment, and
  • underpin the capacity of Australias water
    management regimes to deal with change
    responsively and fairly.

The Murray-Darling Basin
Scarcity and Trading
  • Source Murray Darling Basin Commission, 2007.

Trading has enabled adoption of new technology
and greenfield development
Benefits of trading
But we have traded into trouble
  • We traded off flawed entitlement, accounting
    management systems
  • Activated licences without reducing allocations
    to others
  • Did not offset impact of
  • Forestry
  • Farm dams
  • Ground surface water interaction
  • Increased water-use efficiency
  • Increased overland flow harvesting
  • Salinity interception
  • Adverse climate change and long drys were not
    included adequately in water sharing plans
  • Problems more than over-entitlement and
  • Need some accounting discipline

Accounting Discipline
  • Doctrines Disclosure doctrine
  • Principles The Accounts must balance
  • Conventions Objectivity (the truth)
  • Standards Accrual vs cost
  • Assumptions -
  • Materiality (Only record contracted activity not
    MOUs, announced intentions, etc)
  • Ongoing concern trading when

1 Water accounting definition
A National Protocol?
2 Reporting entity definition
Conceptual Framework
3 Objectives
4 Structure
5 Elements
Account preparation
6 Basis of recognition
7 Basis of measurement
8 Techniques of measurement
11 Water use Flow Account(Inflows
outflows extractions)
Account Presentation
9 Allocation Balance (Over-allocated Solvent?)
10 Storage Account Reserves
12 Compliancereporting (NWI Protocols)
13 Applicability
14 Elevation (principle vs detail)
15 Research Methodology(due process)
16 Audit requirements
17 Transition policies
Policy change
18 Monitoring compliance
19 prosecution for non-compliance
Adapted from AARF
Reliability is being eroded
Source Waterfind Annual Water Market Report
Need full system specification
  • A challenge for the MDB Authority and its plan
  • Environment needs a share!

Flood water
Environment with a fully-specified share
Volume of water available
Shared Water
Water needed to ensure conveyance
1.8billion now or up to 3.1 billion over 10
National Water Initiative
  • s. 65 In accordance with NCP commitments, the
    States and Territories agree to bring into effect
    pricing policies for water storage and delivery
    in rural and urban systems that facilitate
    efficient water use and trade in water
    entitlements, including through the use of
  • consumption based pricing
  • full cost recovery for water services to ensure
    business viability and avoid monopoly rents,
    including recovery of environmental
    externalities, where feasible and practical and
  • consistency in pricing policies across sectors
    and jurisdictions where entitlements are able to
    be traded.
  • In a grant-dominated world, private investment is
  • National Competition Payment discipline has been

More competition
  • Structural reform of the urban water sector would
    provide opportunities to ensure competitive
    pressure is brought to bear where it makes sense
    to do so (NWC Annual report)
  • Option for discussion and evaluation
  • Review pricing
  • Move away from postage pricing
  • Abandon inclining block tarrifs

Use equity instruments for equity objectives
  • It is the prerogative of governments to offer
    some form of relief for targeted consumer
    groups.(NWC Annual report)
  • Option for discussion and evaluation
  • Offer rebates to the needy on application or
    provision of appropriate concession card

NWC Priority Greater use of scarcity pricing
  • Scarcity pricing in urban areas on the basis that
    scarcity pricing may be a more efficient way of
    balancing supply and demand and could
    significantly reduce the need for water
    restrictions. (NWC Annual report)
  • Option for discussion and evaluation
  • Scarcity pricing triggers that are linked to
    storage levels. Price goes up every time pass a
    security trigger point.
  • Coupled scarcity pricing with use restrictions
  • Trail allocations to households with trading or
    big charge for over allocation water

End inclining block tariffs
  • Inclining block tariffs are inequitable ..
    disadvantage households with larger numbers.
  • They are not very effective in influencing
  • The cost impact of reaching higher tiers is often
    not evident until well after the event,
    particularly where billing is infrequent.
  • . a single variable charge to be a more
    efficient and equitable tariff structure, and one
    which is simpler for customers to understand and
    respond to. (NWC Annual report)
  • Option for discussion and evaluation
  • A single price for all use (billed quarterly).

More transparent security of supply
  • Decisions to invest in urban water infrastructure
    involve trade-offs between cost and reliability
    of supply.
  • Minimum reliability benchmarks need to be
    developed. (NWC Annual report)
  • Supply diversity is part of the solution.
  • Option for discussion and evaluation
  • Promote development of diverse supply
    sources(Groundwater, Stormwater, recycling,
    trading, etc)
  • Set scarcity triggers that require immediate
    investment and increases in price
  • Set cap on development without augmentation or
  • Pay for infrastructure or remove the need for it
  • Issue entitlements to large users and defacto
    entitlements to households

Better pricing oversight
  • Pricing decisions involve politics!
  • Why?
  • Option for discussion and evaluation
  • Appoint an independent price regulator
  • Move away from uniform pricing
  • Move toward cost-reflective pricing in a world
    where third parties can compete

Improved pricing for sewage
  • Pricing what goes in and what goes out
  • Why?
  • Option for discussion and evaluation
  • Competitive pricing for first use water
  • Charging for sewage use
  • Allow third party access to supply network
  • Allow third party access to sewers

Improved metering and billing
  • Improving metering and billing practices in urban
    centres will provide better information to
    consumers and facilitate better responses to
    pricing policies. (NWC Annual Report)
  • Option for discussion and evaluation
  • Single meter for gas, electricity and water.
  • Encourage metering for each apartment level.
  • Accounts paid for by tenants.

Sewage pricing
  • Sewage pricing in South Australia provides no
    incentive for people to recycle or reduce load.
  • Its a land tax
  • Option for discussion and evaluation
  • Charge in proportion to estimated of use that
  • Allow individual recyclers to apply for special
  • Charge on the basis of estimated daily rate of
    use in winter.

Managing externalities
  • NWI .. full cost recovery for water services to
    ensure business viability and avoid monopoly
    rents, including recovery of environmental
  • Generally, more efficient to manage externalities
    using separate instruments
  • Options for discussion and evaluation
  • Offset infrastructure externalities and reflect
    them in water access entitlement charges not
    water prices
  • Stormwater credits
  • Sewage charges based on load not land value

Building and subdivision incentives
Source Marsden Jacob 2005 PMSEIC
Owners Occupiers 20
  • Options for discussion and evaluation
  • Developers required to source urban water
    entitlements prior to subdivision
  • Options
  • Irrigators
  • Urban storm water credits
  • Aquifer storage and recovery
  • Urban infill and extensions under same regulatory
    disciplines as a new home
  • Mandatory disclosure of water efficiency at house

Unbundling enables
  • Bulk supply from other regions
  • Urban rural trading by developers
  • Supply onus can shift away from government
  • Storage management and treatment
  • Indirect re-use can have competitive access to
  • Storage manager issues bulk water supply
    entitlements to retail businesses and large
  • Distribution
  • Dual supply systems encouraged (Supply system
    bypass possible)
  • Third party access to first-use dsn system for
    desalination, private dams, private storm water
    capture, etc
  • Retail
  • Competition and innovation
  • Postage stamp pricing is removed
  • Sewage infrastructure maintenance
  • Full cost recovery
  • Sewage treatment
  • Charging households for estimated load
  • Stormwater infrastructure
  • Development as a water source
  • Tradeable credits for peak load reduction

Unbundling institutional arrangements
Unbundling would allow competition and markets to

Emerging South-East Qld Admin. Structure
Single Bulk Entity
ManufacturedWater Entity
Bulk Transport Entity
Distribution Entity
  • Pricing structures, investment rules and trading
    rules that signal
  • Long-run opportunity costs and supply risks
  • Short-run opportunity costs and scarcity
  • Supply and disposal system unbundling
  • Competitive access to all infrastructure
  • Trading among sources
  • Depreciation rules that recognise assets can
    become redundant
  • Allow diverse supply sources to emerge
  • Independent management of externalities
  • Building and subdivision incentives
  • Independent Regulators

  • Raise prices to reflect full costs and scarcity
  • Unbundle the supply and distribution system
  • Put in place an arrangement that keeps
    non-competitive government activity out of
    non-essential water supply
  • Wait for innovation

Concluding comments
  • Out of supply adversity comes competitive
  • A competitive water industry could turn Australia
    into the water management capital of the world.

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