Trading out of trouble: Urban water price and trading

opportunitiesProf. Mike Young

Research Chair, Water Economics and ManagementThe University of AdelaideUrban water Policy Conference, Brisbane

Thursday 7th March 2007

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Urban-rural trade is cost effective

 Current

Water price*No new supply

Rural -Urban Trade

Sydney 1.36 8.09 2.97

Melbourne 1.17 5.96 1.57

Brisbane-Moreton 1.27 10.51 2.61

Adelaide 1.30 1.42 1.70

Perth 1.12 11.40 6.33

ACT 1.11 3.23 1.51

25 million people (+25%) & 15% less water in Eastern & Southern Australia

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Urban v’s rural water pricing

Urban Nearly all Australian urban supply is on restriction

Price rises, where they have occurred, have been small => no scarcity signal

Rural Water scarcity has meant a 700+% price increase

River Murray allocations from $44/ML to $380/ML

Scarcity pricing Changes behaviour

Drives innovation

Drives investment

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Trading opportunities & design?

“What’s good for the goose is good for the gander?”

Unfettered Urban – rural trading by utilities?

Urban trading? For city utilities?

For large users?

For all metered users?

Issues Design issues => low transaction and administrative

costs

Policy questions of equity and efficiency

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Water supply management

1. Regulated demand management Block tariff charging

Postage stamp pricing

Regulations in times of scarcity

2. Scarcity pricing Set a cap

Use market to reveal scarcity and to determine who gets to use “discretionary” water

Delivery cost is still charged

Complex equity and political issues associated with both approaches – especially during the transition when the mix is changed

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Urban water price tensions

Subsidies v’s full cost pricing v’s scarcity pricing

NWI implicitly commits Australia to full cost pricing and through trading to scarcity pricing

But governments continue to subsidise water use Rainwater tank subsidies

Shower head subsidies

Leaking infrastructure subsidies

Low subsidised prices cause under-investment

The more governments make water their problem, the less others can get involved.

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Experience with scarcity pricing

1. Gayndah Shire sells surplus water to irrigators

2. SA Water has been buying River Murray entitlements

3. Several rural town water suppliers have bought water.

4. Arizona requires developers to certify 100 year supply and is now running an auction for access to recycled water

5. Beijing allocates water on a per capita basis.

6. 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?

Build a market that allows growth

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A simple household system

Simple model (two tier charging system) 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 entitlements to the second tier Houses who want more than 200 KL must either

buy their water entitlement or buy allocations from an investor

Utilities required to sells shares in the remaining pool of water Users without an allocation are charged the cost of sourcing one

for them

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Administrative implications

Add a column to each water account enabling households to change “their” entitlement

Establish capacity for each householder to access their account and electronically transfer their entitlement or allocation to another account holder

Leave private enterprise to set up trading sites E-Bay

Waterfind

A purpose built site

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Possible variants

1. Tie first 100 KL entitlement to each house No house can sell permanently sell its basic water entitlement

Supply at, say, $0.50/KL

A house could still sell first tier allocations

2. Limit trading to tier two water => 100-200 KL Supplied at marginal cost supply, say, $1.00/KL

3. Use scarcity pricing for water above 200 KL Supplied at, say, $5.00/KL

4. Allow third parties to create tier two entitlements and/or supply allocations

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Trading scenarios & opportunities

1. Sell some tier one water Install a water tank and plumb rainwater into a house

Sell 50 KL of tier one entitlement permanently to a swimming pool owner

2. 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

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Water industry implications

1. Utilities still charge users for delivery

2. Bulk water entitlements transferred to users without compensation

• Who owns the entitlement? (the govt or the people?

3. Industry needs to negotiate supply contracts with exit conditions

• Should industry exit be free?

4. Infrastructure management (wholesale supply) may need to be separated from retail supply – as with gas and electricity supply

5. Increased competition from small and large scale investors

• Significant household initiative and investment

• Significant private investment

• Desalination, Storm water

• Private rural/urban trade

6. Revenue stream much less predictable

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Droplet Questions and Answers

1. Why not allocate to persons rather than households?

• Administrative costs would be too high.

2. What about tenants, strata corporations, etc?

• Trading would create an incentive for individual household metering.

3. Would participation be compulsory?

• No but you would need to stay inside your allocation.

4. 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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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, Melbourne?

Cheap water cheapens Australia!

Contact:

Prof Mike YoungWater Economics and ManagementEmail: Mike.Young@adelaide.edu.auPhone: +61-8-8303.5279Mobile: +61-408-488.538 www.myoung.net.au