An option for Australia?

Prof. Mike Young,# Jim McColl* and Tim Fisher@

# Research Chair, The University of Adelaide

* Research Fellow, CSIRO Land and Water

@ Director, Land and Water Australia

OzWater, Sydney, Tuesday 6th March 2007

Urban water trading& Urban-rural trading

2

2032 Water Price $/KL

 Current

Water price* No Initiative

Rural -Urban Trade

Trade + 80 GL water.

@ $1.50/kL

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

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

3

Urban-rural trading volume change (25 yrs time)

 Demand growth

Non-agric. growth

Agric. tech. 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 0 0 0

Urban demand for rural water involves relatively small volumes

(61+171)/25,000 GL = 0.93%

4

Urban water realitiesTrading moves jobs?

  Consumption Real GDP Employment

Sydney -0.2 -0.2 -0.6

Murrumbidgee -4.5 -4.6 -3.6

Murray NSW -5.3 -5.3 -4.1

Rest NSW -1.9 -1.9 -1.3

Melbourne 1.4 1.4 0.4

Mallee VIC 5.6 5.6 3.3

Rest Irrig VIC 5.0 5.1 2.1

Rest VIC 0.2 0.2 0.0

Brisbane-Moreton 11.1 11.2 6.3

Adelaide -2.3 -2.3 -1.8

Perth 4.6 4.6 2.4

ACT -0.8 -0.8 -0.7

Australia 1 0.6 0

Effect of the introduction of unfettered urban rural tradingConnect Melbourne to the Murray system and jobs move from Adelaide

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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

6

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

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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

8

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.

9

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?

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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

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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

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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?

13

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

• 3rd party access to sewage

• Desalination

• Storm water

• Rural purchase

6. Different role and structure for account register

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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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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 kL/year? We use 900 – 1200 kL/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!

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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?

The future depends upon the options considered

Contact:

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