Urban water trading Urban-rural trading An option

Urban water trading & Urban-rural trading An option for Australia? Prof. Mike Young, # Jim Mc. Coll* and Tim Fisher@ # Research Chair, The University of Adelaide * Research Fellow, CSIRO Land Water @ Director, Land Water Australia Oz. Water, Sydney, Tuesday 6 th March 2007

2032 Water Price $/KL 25 million people (+25%) & 15% less water in Eastern & Southern Australia Current Water price* No Initiative Rural Urban Trade Sydney 1. 36 8. 09 2. 97 2. 71 Melbourne 1. 17 5. 96 1. 57 1. 53 Brisbane-Moreton 1. 27 10. 51 2. 61 2. 39 Adelaide 1. 30 1. 42 1. 70 1. 66 Perth 1. 12 11. 40 6. 33 4. 50 ACT 1. 11 3. 23 1. 51 1. 47 Trade + 80 GL water. @ $1. 50/k. L 2

Urban-rural trading volume change (25 yrs time) Demand growth Non-agric. Agric. tech. growth change Water availability Agric effic. & leakage Reduced household requirements Total Crops & Livestock 22 -18 -12 56 -55 0 -7 Dairy 102 -36 44 116 2 -13 287 Cotton -121 -153 -3 -317 131 68 -395 Rice -97 22 -20 16 -57 16 -120 Household -29 37 -13 34 2 -28 61 Other (Industry) 64 76 3 94 -23 -43 171 Australia 0 0 0 0 Urban demand for rural water involves relatively small volumes (61+171)/25, 000 GL = 0. 93% 3

Urban water realities Trading moves jobs? Effect of the introduction of unfettered urban rural trading Connect Melbourne to the Murray system and jobs move from Adelaide Consumption Real GDP Employment Sydney -0. 2 -0. 6 Murrumbidgee -4. 5 -4. 6 -3. 6 Murray NSW -5. 3 -4. 1 Rest NSW -1. 9 -1. 3 Melbourne 1. 4 0. 4 Mallee VIC 5. 6 3. 3 Rest Irrig VIC 5. 0 5. 1 2. 1 Rest VIC 0. 2 0. 0 Brisbane-Moreton 11. 1 11. 2 6. 3 Adelaide -2. 3 -1. 8 Perth 4. 6 2. 4 ACT -0. 8 -0. 7 1 0. 6 0 Australia 4

Urban v’s rural water pricing Urban § Nearly all Australian urban supplies on restrictions § Price rises, where they have occurred, have been small => no scarcity signal Rural § Scarcity has meant 700+% increase § River Murray $44/ML to $380/ML Scarcity pricing § Changes behaviour § Drives innovation § Drives investment 5

Trading opportunities & design? “What’s good for the goose is good for the gander? ” Urban trading § For city utilities? § For large users? § For all metered users? Unfettered Urban – rural trading? Issues § Design issues => low transaction and administrative costs § Policy questions of equity and efficiency 6

Water supply management 1. Scarcity pricing approach § Set a cap and use market to reveal price § Delivery cost is still charged 2. Regulated demand approach § Block tariff charging § Regulations in times of scarcity Complex equity and political issues associated with both approaches 7

Experience with scarcity pricing 1. Gayndah Shire sells surplus water to irrigators 2. SA Water has been buying River Murray entitlements 3. Arizona requires developers to certify 100 year supply and is now running an auction for access to recycled water 4. Beijing allocates water on a per capita basis. 5. 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. 8

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? 9

Allocating household water Simple model (two tier charging system) § Build off household water accounts § 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 to the second tier § Tender shares in the remaining pool of water § Allow trade in shares and allocations 10

Possible variants 1. Tie first 100 KL entitlement to each house § No house can sell its basic water entitlement 2. Use scarcity pricing for tier two water § = > No trading for second tier 11

Trading scenarios & opportunities 1. Selling tier one water § Install a water tank and plumb into house § Sell a 50 KL entitlement permanently to a 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 3. Trading platform § E-bay? § Purpose built platform run by water utility? 12

Water industry implications 1. Utilities still charge users for delivery 2. Bulk water entitlements transferred to users without payment of compensation 3. Need to negotiate supply contracts with exit conditions (Should industry exit be free? ) 4. Infrastructure management may need to be separated from retail supply – as with gas and electricity supply 5. Increased competition from small and large scale investors 1. 3 rd party access to sewage 2. Desalination 3. Storm water 4. Rural purchase 6. Different role and structure for account register 13

Droplet Questions and Answers 1. Why not allocate to persons rather than households? 1. Administrative costs would be too high. 2. What about tenants, strata corporations, etc? 1. Trading would create an incentive for individual household metering. 3. Would participation be compulsory? 1. 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

Interesting droplet comments 1. The real problem is that prices are determined according to delivery cost not scarcity. 2. Restrictions on use are ridiculous! 3. How many households survive on 200 k. L/year? We use 900 – 1200 k. L/yr! 4. Instead of incentives … we have the water police who walk the streets looking for offenders! 5. Some rural areas want and need to water their parks – even in drought years! 15

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? 16

The future depends upon the options considered 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