The business of Managing water What should we

The business of Managing water What should we be recommending? Prof. Mike Young Research Chair, Water Economics and Management The University of Adelaide CPA Congress, Adelaide, 20 th November 2008

Climate Change The adverse effects of climate change will express themselves first in water! 2

Water withdrawals per capita Australia = “The driest inhabited continent in the world. ” Iraq Australia New Zealand United Kingdom (Australia = 135/161 countries) “We have a water management problem not a water supply problem!” Business Council of Australia 2006 3

Direct Costs of Water Supply/Demand Options (Sydney, Adelaide, Perth, Newcastle) Source: Marsden Jacob 2006 The price of urban water supply and security is rising! Who should bear the financial risk for increased security in a world of climate shifts and change? Security is expensive 4

Water Policy History • 1994 – Co. AG 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 externalities • 1996 – Agreement extended to cover groundwater and storm water • 2004 – National Water Initiative § § Lacked urban policy detail but commits urban Australia to efficient urban water use § • An internationally renowned template for ongoing reform Allowed all states & all state-owned utilities to escape from the tranche-payment incentive mechanism 2005– 08 – 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 5

National Water Initiative Intent (s 5) 1. “. . in recognition of the continuing national imperative to increase the productivity and efficiency of Australia’s water use, 2. the need to service rural and urban communities, and 3. to ensure the health of river and groundwater systems. . ” 1. “clear pathways to return all systems to environmentally sustainable levels of extraction. ” … 2. “greater certainty for investment and the environment, and” 3. “underpin the capacity of Australia’s water management regimes to deal with change responsively and fairly. 6

The Murray-Darling Basin 7

Scarcity and Trading 93/94 Source: Murray Darling Basin Commission, 2007. Trading has enabled adoption of new technology and “greenfield” development 8

Benefits of trading Psi-Delta 2007 Bjornlund and Rossini 2007 9

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 over-allocation Need some accounting discipline 10

Accounting Discipline Doctrines – Disclosure doctrine Principles – The Accounts must balance Conventions – Objectivity (the truth) Standards – Accrual v’s cost Assumptions § Materiality (Only record contracted activity not MOU’s, announced intentions, etc) § Ongoing concern – trading when ……… 11

1 Water accounting definition A National Protocol? 2 Reporting entity definition Scope Conceptual Framework 3 Objectives 4 Structure 5 Elements Account preparation 6 Basis of 7 Basis of 8 Techniques recognition measurement of measurement 9 Allocation 10 Storage Balance Account (Over-allocated Solvent? ) 13 Applicability Reserves 14 Elevation (principle v’s detail) 18 Monitoring compliance 11 Water use & 12 Compliance Flow Account reporting (Inflows (NWI – outflows Protocols) – extractions) 15 Research Methodology (due process) 16 Audit requirements 17 Transition policies 19 prosecution for non-compliance Account Presentation Policy change Enforcement 12 Adapted from AARF

Reliability is being eroded Source: Waterfind Annual Water Market Report 13

Need full system specification A challenge for the MDB Authority and its plan Environment needs a share! 14

Flood water Volume of water available Entitlements Environment with a Environment fully-specified share Shared Water needed to ensure conveyance 15

$1. 8 billion now or up to $3. 1 billion over 10 years? 16

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 risky National Competition Payment discipline has been lost! 17

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 18

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 § 19

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 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 20

End inclining block tariffs Inclining block tariffs are inequitable. . disadvantage households with larger numbers. They are … not very effective in influencing consumption… 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 respond to. (NWC Annual report) Option for discussion and evaluation § A single price for all use (billed quarterly). 21

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 offset § Pay for infrastructure or remove the need for it § Issue entitlements to large users and defacto entitlements to households 22

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 23

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 24

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. 25

Sewage pricing in South Australia provides no incentive for people to recycle or reduce load. It’s a land tax Option for discussion and evaluation § Charge in proportion to estimated % of use that returns § Allow individual recyclers to apply for special assessment § Charge on the basis of estimated daily rate of use in winter. 26

Managing externalities NWI. . full cost recovery for water services to ensure business viability and avoid monopoly rents, including recovery of environmental externalities, 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 27

Building and subdivision incentives Source: Marsden Jacob 2005 PMSEIC 2007 Developer & Builder ~ 80% Owners & Occupiers ~ 20% Options for discussion and evaluation 1. § Developers required to source urban water entitlements prior to subdivision Options § Irrigators § Urban storm water credits § Aquifer storage and recovery 2. Urban infill and extensions under same regulatory disciplines as a new home 3. Mandatory disclosure of water efficiency at house sale 28

Unbundling enables 1. Bulk supply from other regions § Urban – rural trading by developers § Supply onus can shift away from government 2. Storage management and treatment • Indirect re-use can have competitive access to storage • Storage manager issues bulk water supply entitlements to retail businesses and large consumers 3. Distribution • Dual supply systems encouraged (Supply system 29

Unbundling institutional arrangements Water source management Water distribution Water retailing Sewage disposal Unbundling would allow competition and markets to emerge. 30

Emerging South-East Qld Admin. Structure Single Bulk Entity Manufactured Water Entity GRID MANAGER Bulk Transport Entity Distribution Entity 31

Opportunities 1. Pricing structures, investment rules and trading rules that signal § Long-run opportunity costs and supply risks § Short-run opportunity costs and scarcity 2. Supply and disposal system unbundling 3. Competitive access to all infrastructure § Trading among sources § Depreciation rules that recognise assets can become redundant § Allow diverse supply sources to emerge 4. Independent management of externalities 5. Building and subdivision incentives 6. Independent Regulators 32

Sequencing 1. Raise prices to reflect full costs and scarcity 2. Unbundle the supply and distribution system 3. Put in place an arrangement that keeps noncompetitive government activity out of nonessential water supply 4. Wait for innovation 33

Concluding comments Out of supply adversity comes competitive opportunity A competitive water industry could turn Australia into the water management capital of the world. 34

Download our reports and subscribe to droplets at www. myoung. net. au Contact: Prof Mike Young Water Economics and Management Email: Mike. Young@adelaide. edu. au Phone: +61 -8 -8303. 5279 Mobile: +61 -408 -488. 538 www. myoung. net. au