Water EconomicsProf. David Sunding

Water EconomicsProf. David Sunding

Used to Useful: Economics

Prof. David Sunding

UC Berkeley

November 13, 2009

4

Water Supply

• At present, recycled water is a relatively small part of world’s water supply

– Global installed capacity: 50 million m3/d

– Actual output is around 60% of capacity

– Would take three years to fill Hoover Dam

– Installed capacity of desal is around 40 million m3/d

• What economic fundamentals explain where we are and drive change in this market?

5

Water Allocation

• Most water customers pay for conveyance, treatment, distribution, but nothing for the water itself

• How then is water allocated?

• Variety of legal allocation schemes around the country

– Riparian Doctrine

– Prior Appropriation Doctrine

6

Water Allocation

• Allocation rules are problematic

– Hard to keep pace with a dynamic economy

– Reserve large quantities for relatively inefficient uses

– Hard to accommodate environmental needs

– Exacerbates scarcity by concentrating shortage on certain users

7

Environmental Concerns

• Traditional surface water diversion projects are increasingly controversial

• Unlikely to be much more dam construction around the world

• Recycled water and desal can take pressure off riparian ecosystems and replenish local aquifers

– Seawater intrusion

8

Water Pricing• US water customers pay relatively little for

water (0.5% of household income)

Country Gallons/$

Germany 88

UK 111

France 132

US 357

China 840

9

Water Rates and Finance

• 2002 GAO study concluded that 29% of drinking water utilities were not covering full cost of service (40% of wastewater utilities)

• One-third deferred maintenance due to insufficient funding, had more than 20 percent of pipelines nearing end of useful life, and lacked basic plans for managing capital assets

• Also a lack of adequate financial planning

10

Rate Trends

• True that US customers pay relatively little for water

• Yet, prices are rising

– In 2007, a 6.1% increase in water and sewer rates

– Dramatic increases in certain regions (e.g., Southern California) caused by scarcity

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MWD Rates vs. Cost of Desalinated WaterMWD Rates vs. Cost of Desalinated Water

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

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Private Investment• Recycled water development projected to grow

rapidly around the world

– Current spending on construction: $2.4 billion

– In 2016: $8.4 billion

• Around 1/3 of all reuse projects are privately financed

• Proportion should increase as size and complexity of projects grows

13

Achieving Sustainability

• A sustainable water sector is

– Mindful of environmental externalities

– Robust to fluctuations in precipitation

– Supportive of economic growth

– Financially sustainable

• Development of recycled water is consistent with a vision of urban water sustainability