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Trading out of trouble: Urban water price and trading opportunities Prof. Mike Young Research Trading out of trouble: Urban water price and trading opportunities Prof. Mike Young Research Chair, Water Economics and Management The University of Adelaide Urban water Policy Conference, Brisbane Thursday 7 th March 2007

Urban-rural trade is cost effective 25 million people (+25%) & 15% less water in Urban-rural trade is cost effective 25 million people (+25%) & 15% less water in Eastern & Southern Australia 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 2

Urban v’s rural water pricing Urban § Nearly all Australian urban supply is on 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 3

Trading opportunities & design? “What’s good for the goose is good for the gander? 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 4

Water supply management 1. Regulated demand management § Block tariff charging § Postage stamp 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 5

Urban water price tensions Subsidies v’s full cost pricing v’s scarcity pricing NWI implicitly 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. 6

Experience with scarcity pricing 1. Gayndah Shire sells surplus water to irrigators 2. SA 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 7

Allocating commercial & industrial water Could make all large users hold water entitlements and 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 8

A simple household system Simple model (two tier charging system) § Define first 200 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 9

Administrative implications Add a column to each water account enabling households to change “their” 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 10

Possible variants 1. Tie first 100 KL entitlement to each house § No house 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 11

Trading scenarios & opportunities 1. Sell some tier one water § Install a water 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 12

Water industry implications 1. Utilities still charge users for delivery 2. Bulk water entitlements Water industry implications 1. Utilities still charge users for delivery 2. Bulk water entitlements transferred to users without compensation • 3. • Who owns the entitlement? (the govt or the people? 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 private investment • Desalination, Storm water • 6. Significant household initiative and investment Private rural/urban trade Revenue stream much less predictable 13

Droplet Questions and Answers 1. Why not allocate to persons rather than households? • 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. 14

Where to from here? Would urban trading enable movement past water restrictions? A Trial 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? 15

Cheap water cheapens Australia! Contact: Prof Mike Young Water Economics and Management Email: Mike. Cheap water cheapens Australia! 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