Add picture on dark green area (see slide 7 for an example ......• bigggg p y p ( )est Independent System Operator (ISO) in the world • 134 GW peak load • 165 GW generation capacities

Add picture on dark green area(see slide 7 for

Märkte für Wasser –Theorie und Anwendungen(

an example) Prof. Dr. Christian von HirschhausenKOMDAY, 14. Mai 2009

Background: TUD – DIW – TUB Research Program“Water Economics and Management” (H20)g ( 2 )

- Industrial Organization / Microeconomics:- Regulation theory (yardstick competition, increasing or decreasing block tariffs, regulation and pricing in

developing countries)

- Environment (optimal use of water, external effects)

- Water Management:- Water treatment and sewerage

- Water demand, scenario methods

- "Virtual water", assessment of virtual water flows between nations in relation to international trade

- Accounting rules

- Numeric Modelling:- Economic modelling taking into account network effects

- Scarcity pricing

- Econometrics:- Benchmarking / Efficiency analysis

- Demand estimations

- Institutional / Policy Issues:- Privatization and public-private-partnerships (PPP) in water distribution

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- Organizational reforms in the German and European water sector

Research Program “Water Economics and Management” (H20)

WP-H20-08 Matthias Walter, Hirschhausen, Christian von, Astrid Cullmann, Robert Wand, and Michael Zschille:Quo Vadis Efficiency Analysis of Water Distribution? - A Comparative Literature Review.

WP-H20-07 Hirschhausen, Christian von, Astrid Cullmann, Matthias Walther, and Michael Zschille: Fallende Preise in der Wasserwirtschaft – Hessen auf dem Vormarsch.

WP-H20-06 Christian von Hirschhausen, Matthias Walter, and Michael Zschille: Effizienzanalyse in der Wasserversorgung Internationale Erfahrungen und Schlussfolgerungen für DeutschlandWasserversorgung – Internationale Erfahrungen und Schlussfolgerungen für Deutschland.

WP-H20-05 Gunnar Gaitzsch: Analyse der Auswirkungen des demografischen Wandels auf die Siedlungsentwässerung mit Hilfe des Realoptionsansatzes

WP-H20-04 Martin Nowack and Edeltraud Günther>Scenario Planning: Managing the Effects of Demographic Change on East Geman Wastewater CompaniesChange on East Geman Wastewater Companies

WP-H20-03 Meran, Georg and Christian von Hirschhausen: A Modified Yardstick Competition Mechanism.WP-H20-02 Jekel, Martin, Georg Meran, and Christian Remy: Sauberes Wasser: Milleniumsziel kaum zu

schaffen: Privatisierungsdebatte entspannt sich.WP H20 01 Water Economics and Management A Research AgendaWP-H20-01 Water Economics and Management – A Research Agenda.

Contact: Astrid Cullmann [email protected] Meran [email protected] Nowack [email protected] Matthias Walter [email protected]

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www.water.sc

Agenda

1. Einleitung

2 Marktpreise und räumliche Preisdifferenzierung: Nodalpreise2. Marktpreise und räumliche Preisdifferenzierung: Nodalpreise

3. Marktliche Allokation von Wasser

4. Quasi-marktliche Bepreisung in der Wasserverteilung: Regulierung bzw. Kartellaufsicht

5. Marktanreize bei der Wasserversorgung im Entwicklungskontext

6. Schlussfolgerungeng g

- 4 -

1. Introduction: „Water is Specific … andSubject to Economic and Management Science“

• Water is a time-invariant „mega-topic“, but can be more subject to economic scrutiny

• Water is specific- Vital nutrient- Important ecological implications- Important ecological implications- Network industry, often natural monopoly- Source of conflict, violence, migration

I t di i li h i d• Interdisciplinary approach required:- Economics (~ theory about prices, role of institutions, business strategy)- Management (demand, scenario methods, “virtual water“, accounting)- Engineering (technology of water system, economic-engineering interface)- Political sciences, development (interest groups, collective decisionmaking,

conflict)L d i tit ti (l l l f th l ti )- Law and institutions (legal rules of the game, regulation)

- …Because water is so important, a „more economic approach“ is justified

- 5 -

Welfare and Rents: Price setting in competitive markets for private goods (e.g. bottled water, groundwater)

• The basic model of a competitive market

• Price formation for private goods in a perfect market ...p g p

Price

SupplyA

Price

SupplyA

Producer Surplus

Consumer SurpluspE

pp y

E E

xE Quantity

DemandB

xS

pS

Quantity

DemandB

Deadweight loss

• ... maximizes social welfare, which is defined as the sum of

xS Quantity

Surplus demand!!!

- Producer surplus (profits)- Consumer surplus (sum over willingness-to-pay minus price paid)

• ... setting prices artificially shifts some rents to consumer

- 6 -

- but reduces overall rents, and creates distributional quarrels and shortages

Agenda

1. Einleitung






- 7 -

Engpassmanagement und Investitionsanreize:Knotenpreise (nodal prices, LMP) bieten richtige Informationen

• Effiziente Lösung für das Engpassmangament: Knotenpreise (engl. nodal prices oder locational marginal prices, LMPs)g )

• Knotenpreise sind unterschiedliche Preise für jeden Entnahme- bzw. Einspeisepunkt des Netzwerkes (räumliche Preisdifferenzen) und variieren mit dem Zeitpunkt der Entnahme bzw Einspeisung (zeitlichemit dem Zeitpunkt der Entnahme bzw. Einspeisung (zeitliche Preisdifferenzen)

• Der Knotenpreis setzt sich aus mehreren Komponenten zusammen (El kt i ität Üb t l t k Üb t(Elektrizitätserzeugung, Übertragungsverluste, knappe Übertragungs-kapazität, knappe Erzeugungskapazität)

• Der Unterschied des Knotenpreises zwischen zwei benachbarten Knoten im pNetzwerk stellt prinzipiell einen Investitionsanreiz dar (Ausnutzung der Preisdifferenz), aber vernichtet ggf. die Engpassrente

• Um Investitionsanreize zu gewährleisten werden zweigliedrige Tarife• Um Investitionsanreize zu gewährleisten werden zweigliedrige Tarifevorgeschlagen

- 8 -

Beispiel: Studie für BeNeLux

Preise

< 15

[€/MWh]

< 20

< 25

< 30

> 30

Netzausbau

- 9 -

Situation 2004Situation 2015Quelle: Freund et al. (2005)

Locational Marginal Prices in PJM (nodal prices)

• PJM (Pennsylvania, New Jersey, Maryland):• biggest Independent System Operator (ISO) in the worldgg p y p ( )• 134 GW peak load• 165 GW generation capacities

728 TWh l ti• 728 TWh annual consumption• 56000 miles transmission lines• 164000 square miles territoryq y• including 13 states• 19% of US GDP produced in PJM

• LMP =Marginal Costs

+ Transport Costs+ Congestion Costs

- 10 -

Locational Price Distribution

• Source: Ott, 2005

Efficient Decisions on Investment Financing Through Nodal Pricing: Example of the Rockies Express Pipeline Project

• I ~ 5 bn. USD, 2,700 km, 15-18 bcm

• FERC-filing, open season, nodal pricing, etc. identification of bottlenecksFERC filing, open season, nodal pricing, etc. identification of bottlenecks

• TPA with „regulated“ ROR, secondary trading, etc. efficient capacity allocation

- 11 -Source map:: IEA Natural Gas Market Review 2008

Why Not for Water ? Example: Nodal Prices in Water Networks(Raffensperger, et al., forthcoming)

• Map of Marlborough (New Zealand)Zealand)

• Showing wells, MODFLOW grid, rivers, roads,

• A1,B3,C1,D3,E3 are control points

• A1 E3 and B3A1, E3 and B3 ensure stream flows

• C1 and D3 prevent salt water intrusion

- 12 -

Source: Raffensperger, et al.: p.16

Example: Nodal Prices in Water Networks(Raffensperger, et al., forthcoming)

• Results of market softwaresoftware

• Positive prices are shown by well; Prices are zero at all other wells

• Circles and three large dots are

ll th t t dwells that trade• Latter three are

major buyers

S R ff t l 17

- 13 -

Source: Raffensperger, et al.: p.17

Agenda

1. Einleitung






- 14 -

Auctioning of Groundwater Rights and General Pricing(Kirsch and Charaklis, 2006)

• Consumers have option to choose- GroundwaterGroundwater- Reservoir water- River basin water

• Idea: Auction groundwater rights- First allocation is discussed- Secondary trading importantSeco da y t ad g po ta t- Trend towards „efficient“ use

• Model: optimal positioning of waterworks in a priced environment

- 15 -

Example: Community Choice Between Groundwater and Reservoir Water with Pipeline (North Carolina, Kirsch and Characklis, 2006)

• Affected cities in the CCPCUA

- 16 -

Source: Kirsch and Characklis (2006): p.7

Example: Community Choice Between Groundwater and Reservoir Water with Pipeline (Kirsch and Characklis, 2006)

• Affected cities in the CCPCUA• Results of including groundwater permit trading:- a) illustrates results of Goldsboro-NRWASA-Greenville schenario- b) illustrates results of NRWASA-Greenville scenario- c) illustrates results of Greenville –Goldsboro scenario

- 17 -

Source: Kirsch and Characklis (2006): p.7

Agenda

1. Einleitung






- 18 -

Tariffication for Natural Monopolies:Trade-off Between Different Pricing Schemesg

• Characteristics of a Natural Monopoly- Exclusion is possible so that user charges can be raised- One firm can produce the requested quantity cheaper than two or more companies y

(subadditivity)- Inversions are irreversible (sunk costs !) so that there is no potential competition

• Price Setting / Tariffication for a Natural MonopolyAllocative Efficiency

Cost Reco-very ?

Distri-butional EffectsPrice

E Unregulated Monopoly(Cournot-Price)

(-) Welfare losses (quantity too low)

(+) Yes (even rents)

(-) explota-tion of demands

PC

Demand

M i l RC

D

EDeficit

Marginal-Cost-Pricing

(+) Optimal(maximizes social welfare

(-) No (fixed costs not covered)

(-) Lump Sump payment necesarry

PAC

P

PMC

Average Cost

Marginal Cost

Marginal Revenue

BF

Average Cost Pricing

(?) Welfare losses (too low quantity)

(+) YESQuantity XC XMCXAC

P gA

- 19 -

World-Wide Use of Benchmarking Studies for Regulatory Purposes

C t i d i

Legend:

Countries covered in cross-border studiesCountries covered in independent studies

- 20 -Sourc: Walter, et al. (2009)

Development of the UK Water Sector:From >2,500 to 28 …

Water supply Sewerage Resources/ environ. regulation

1940s > 1030 separate water undertakings (1956)

> 1300 sewerage and sewerage disposal authorities

River Boards

Pre-1973 consolidation 198 water Still > 1300 29 River AuthoritiesPre 1973 consolidation 198 water undertakings

-64 local authorities-101 joint boards

Still > 1300 29 River Authorities

-33 SWCs

1973 Water Act 10 multi-purpose Regional Water Authorities (RWAs)

75% f t l- 75% of water supply-100% of sewerage treatment

1989 Water Act 10 RWAs become Water and Sewerage Companies (WaSCs)

DWI and NRA take on regulationp ( ) g

2009 28 companies-10 water and sewerage companies-14 water only companies

…Office of Water Services (OFWAT): RPI

- 21 -

y p-4 other regulated companies

Se ces (O )+ K

„RPI + K“ Regulation

• K = Q – X- Traditional RPI-X incentive regulationTraditional RPI X incentive regulation- Q ~ quality factor

• X ~ firm-specific efficiency measure- Quantitative benchmarking- Partial productivity parametersa t a p oduct ty pa a ete s

• Q ~ quality factor- Qualitative and- Capacity incentives

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Regulated Water Tariffs inEngland and Wales

Selected companies (best and worst in benchmarking; 3 people household; 2008/09)

Water and sewerage companiesBill (for 160 m³) (GBP)

Increase from last year (GBP)

Price per m³ (GBP)

K-factor

Anglian Water 2,80 %

-Anglian 219,33 11 1,37-Hartlepool 169,71 14 1,06Dwr Cymru 229,75 15 1,43 4,10 %South West Water

281,08 21 1,76 9,80 %

Thames Water 196,34 14 1,05 1,20%

Wessex Water 274,10 20 1,71 5,60 %

Yorkshire Water 3 60 %Yorkshire Water 3,60 %

-Yorkshire 213,10 13 1,33-York 128,35 8 0,80

- 23 -

Sourc:http://www.ofwat.gov.uk/consumerissues/chargesbills/household/prs_lft0809_waterseweragebills.pdf; http://www.ofwat.gov.uk/regulating/reporting/rpt_tar2007-08.pdf

Agenda

1. Einleitung






- 24 -

Rate Structure - Water Based Charges (I)

• Uniform rate (“Coase Tariff”)• Favored by economic efficiency criterion

Volumetric charge = tan β

ExpenditureR(q)

ββ

Quantity q

- 25 -

Quantity q

Increasing Block Tariffs (IBT)

R(q)• Increasing block rate R(q)• Large users are penalized• Problem: Influence of household size on water consumption

q

Tariff 3Tariff 1 Tariff 2

Volumetric chargecharge R´(q)

Tariff 3Tariff 1 Tariff 2

- 26 -

Menge q

a 3Tariff 1 a

Water Tariffs – South Asia

Examples from South Asia

Parameters: number and size of blocks, price level of each block

- 27 -

Source: Whittington (2003)

Case-Study Bangladesh - Facts

• 36 % are living below the poverty line (1 USD/day)

• One of the poorest countrys in the ldworld

• Water-rich country

• 74% have access to piped water

• Population: 153 mn. /23 mn Households23 mn. Households

• Average residential water consumption: 87 l/day/capitaconsumption: 87 l/day/capita

- 28 -

Case-Study Bangladesh - Assumptions

Population 153 mnPopulation Income

Lowest household income: 15 USD• Population 153 mn.

• Access to piped water three fourth: 113.22 mn.

• Lowest household income: 15 USD per month

• Average income: 380 USD per month

• Average household size 4.9 persons per household → 23.1 mn. households

• Average income of the 10 per centmost wealthy people: 1,060 USD

Water Consumption

• Average residential water

Water Supply

• Fixed costs of 20 000 000 USD perAverage residential waterconsumption: 87 l

• Subsistence level: 6 cubic metresper household and month

Fixed costs of 20,000,000 USD per month

• Variable costs of 1 USD per cubic metreper household and month metre

- 29 -

Total Utility Decreases After a Critical Threshold of Progression

- 30 -

Comparison Between Coase-Tariff and Increasing-Block Tariff:„Almost Poor“ May Particularly Suffer

Deviation from economic“ pricing does not necessarily lead to higher welfare

- 31 -

Deviation from „economic pricing does not necessarily lead to higher welfare„Das Gegenteil von gut gemacht „pro-poor Regulation“ ist gut gemeint …“

Agenda

1. Einleitung






- 32 -

Conclusion: „Water is Specific … andSubject to Economic and Management Science“

• Water is a time-invariant „mega-topic“, but can be more subject to economic scrutiny

• Water is specific- Vital nutrient- Important ecological implications- Important ecological implications- Network industry, often natural monopoly- Source of conflict, violence, migration

I t di i li h i d• Interdisciplinary approach required:- Economics (~ theory about prices, role of institutions, business strategy)- Management (demand, scenario methods, “virtual water“, accounting)- Engineering (technology of water system, economic-engineering interface)- Political sciences, development (interest groups, collective decisionmaking,

conflict)L d i tit ti (l l l f th l ti )- Law and institutions (legal rules of the game, regulation)

- …Because water is so important, a „more economic approach“ is justified

- 33 -

- 34 -

Conclusion on Tariffs

Tariff Structure

M i l T P tI i P i it

Revenue Sufficiency

Marginal Cost Tariff

Two-Part Tariff

Increasing Block TariffFlat Rate Priority

Pricing

+- - +y

Economic Efficiency --

+- -

+

+

Objectives

Equity and Fairness - ++ +

Simplicity ++ -+

Taking into account the poor +- -- +

- 35 -

Tariff with regard to objectives:positivenegative neutral/depending

Source: own compliation

Efficient Access Policy: Water Kiosks in Zambia

- The Problems• Zambia has abundant water resources, but only 47% have

access to clean drinking water

• 44% have no access to sanitation

• Desolate water infrastructure in low income areas

• Low service level

• Wastewater pollutes drinking water

- Service Provision• 84% are served by the 10 Commercial Utilities owned by84% are served by the 10 Commercial Utilities owned by

Local Authorities as shareholders

• 16 % are served directly by Local Authorities

- 36 -

Source: GTZ, http://www.gtz.de/de/dokumente/en-casesheet-regulation-water-sanitation-zambia.pdfhttp://web.mit.edu/urbanupgrading/waterandsanitation/resources/examples-pdf/MonthlyCardPaymentSystem-ZA.pdf

Efficient Access Policy: Water Kiosks in Zambia

- Regulatory Framework• National Water Supply and Sanitation Council (NWASCO)

regulates urban water and sanitation services

• Solution for poor areas: Water Kiosks (since 1994)

• operated by private individualsoperated by private individuals

• they have concluded an agreement with water utilities and the municipalities

• Charge: 0,50 EUR / m3

• Funding and management support is provided by the Devolution Trust Fund (DTF)

• Incentives for service providers

• Tariffs are designed to stimulate efficiency

− Results• Improved access rate• Improved access rate

• Improved water / service quality and efficiency

• Cost coverage

- 37 -

• TransparencySource: GTZ, http://www.gtz.de/de/dokumente/en-casesheet-regulation-water-sanitation-zambia.pdfhttp://web.mit.edu/urbanupgrading/waterandsanitation/resources/examples-pdf/MonthlyCardPaymentSystem-ZA.pdf

Economic Regulation of Water in England and Wales

Water and sewerage companies

Water Sewerage

Band A to E Rank 1-21 Band A to E Rank 1-10

Anglian A (Lower) 3 B (Lower) 4

Dwr Cymru C (Lower) 16 C (Upper) 8

Northumbrian B (Lower) 9 C (Upper) 7

Severn Trent B (Lower) 8 B (Lower) 5

South West C (Lower) 18 C (Upper) 6

S th B (U ) 7 C (L ) 9Southern B (Upper) 7 C (Lower) 9

Thames C (Lower) 15 A (Upper) 1

United B (Lower) 12 C (Lower) 10United Utilities

B (Lower) 12 C (Lower) 10

Wessex A (Lower) 4 A (Lower) 3

Y k hi A (U ) 2 A (U ) 2

- 38 -

Yorkshire A (Upper) 2 A (Upper) 2

Sourc: http://www.ofwat.gov.uk/regulating/reporting/ltr_rd0209_releffassess07-08#figure1

Economic Regulation of Water inEngland and Wales (2)

Water only companies

Band A to E Rank 1-21

Bournemouth & W. Hampshire Water B (Upper) 6

Bristol Water C (Upper) 14Bristol Water C (Upper) 14

Cambridge Water D (Upper) 19

Dee Valey Water C (Upper) 13

Folkstone & Dover Water D (Lower) 21

Portsmouth Water A (Upper) 1

South East Water B (Lower) 11South East Water B (Lower) 11

South Staffordshire Water A (Lower) 5

Sutton & East Surrey Water B (Lower) 10

Tendring Hundred Water C (Lower) 17

Three Valeys Water D (Upper) 20

- 39 -


Economic Regulation of Water inEngland and Wales (3)

Water e

Within 5% of benchmark

Anglian Wessex,

Yorkshireefficiency

Between 5% and 15% of benchmark

Northumbrian,

Southern,

Severn Trent

y banding

United Utilities


Dwr Cymru

Thamesg

Cymru,

South West

Between 25% and 35%Between 25% and 35% of benchmark

Greater than 35 % of benchmark

Greater than Between Between Between 5% Within 5% ofGreater than 35 % of benchmark




Within 5% of benchmark

Sewerage efficiency banding

- 40 -


Sewerage efficiency banding

Documents

Add picture on dark green area (see slide 7 for an example ......• bigggg p y p ( )est Independent System Operator (ISO) in the world • 134 GW peak load • 165 GW generation capacities