Prof. Mike Young

Research Chair, Water Economics and ManagementThe University of Adelaide

26th July 2007

Water market regulation, infrastructure access and governance for the 21st Century

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Water withdrawals per capita

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Au

stralia

Un

ited K

ing

do

m

New

Zealan

d

Iraq

(Australia = 135/161 countries)

“We have a water management problem not a water supply problem!” Business Council of Australia 2006

Australia = “The driest inhabited continent in the world.”

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COUNTRY RIVER RATIO MAXIMUM over MINIMUM ANNUAL

FLOW

BRAZIL AMAZON 1.3

SWITZERLAND RHINE 1.9

CHINA YANGTZE 2.0

SUDAN WHITE NILE 2.4

USA POTOMAC 3.9

SOUTH AFRICA ORANGE 16.9

AUSTRALIA MURRAY 15.5

AUSTRALIA HUNTER 54.3

AUSTRALIA DARLING 4705.2

Managing supply variability

After Craik 2007

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Melbourne

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Ra

infa

ll (

mm

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14% less 20% less

Rainfall for Jarrahdale

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Str

ea

mfl

ow

(G

L)

N o te s : S tre a m flo w is fro m Ma y o f la b e lle d ye a r to th e fo l lo w in g Ap ri l

48% less

66% less

S tre a m in flo w fo r P e rth d a m s (P rio r to S tirlin g D a m )

PERTH

Less rain means much less water!

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Warragamba + 3 Nepean Dams (Inflows & annual rainfall)

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1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Year

Inflo

w GL

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Rain

fall

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892 GL pa

2,027 GL pa

572 GL pa

780 mm pa 907 mm pa 681 mm pa

Sydney

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“The simple fact is that there is little or no reason why our large cities should be gripped permanently by water crises …

Having a city on permanent water restrictions makes as much sense as having a city on permanent power restrictions.”

John Howard 17 July 2006

Cost of restrictions has been high

Cost to Brisbane 50% of a desalination plant

PMSEIC, 2007

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Total Murray-Darling Basin inflows Annual flows (year ending June) showing forecast for 2006/07

Source: Craik, MDBC

21 years

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Murray System Total Storage (June 2000 to May 2007 with indicative outlook to end Sept.

2007)

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Total Storage

Long Term Average Total Storage

Maximum Possible Total Storage

Source: Craik, MDBC

Two dredges were put in the Murray Mouth in October 2002 – before the drought!The extent of over-allocation and over entitlement is serious.

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Direct Costs of Water Supply/Demand Options(Sydney, Adelaide, Perth, Newcastle)

$0.25

$1.30 $1.45 $1.50 $1.58

$2.61$3.00 $3.00

$4.00

$5.00

$5.60$6.00

$9.30

$1.68

$1.15 $1.30

$0.63

$0.22

$0.30$0.06

$3.00

$0.00 $0.10 $0.20 $0.15 $0.08$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Catch

men

t thin

ning

Purch

ase

irriga

tion

water

Deman

d m

anag

emen

t

Storm

water

reus

e

Groun

dwat

er

Indir

ect p

otab

le re

use

Seawat

er d

esali

natio

n

Dams a

nd su

rface

wat

er

BASIX

Loss

redu

ction

Rainwat

er ta

nks

Nonpo

table

wat

er re

cycli

ng

Long

dist

ance

pipe

lines

$/k

L

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 shift and change?

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Water Policy History

• 1994 – CoAG 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 An internationally renowned template for ongoing reform Lacked urban policy detail but commits urban Australia to efficient urban

water use Allowed all states & all state-owned utilities to escape from the tranche-

payment incentive mechanism

• 2005 – 07 – 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

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National Water Initiative Intent (s5)

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.

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NWI v’s Grants, subsidies & promises

Urban $250 million over four years to fix leaking water pipes and save

155 ML water per annum. (Labor)

$17 million for Australian scout halls to install rainwater tanks

Water Smart Australia Program $1.6 billion for projects over $1 million in value

Rural $10 billion for National Plan for Water Security $3 billion for

entitlement purchase & $5.8 billion for “modernisation”

Necessary transitional payments to speed reform (?)

NWI “..full cost recovery for water services to ensure business viability and avoid monopoly rents..” “upper bound pricing”

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8 Murray Darling Basin outcomes needed

1. Balanced water sharing • Environment & consumptive use in harmony

2. Hydrological integrity Ground water, surface water and interception managed as one

3. Investment security Guaranteed entitlement registers and allocation accounts

4. Continuously efficient resource use• A low-cost trading, free of administrative impediments

5. Water Quality• Healthy rivers and wetlands not degrading

6. Optimal storage management Efficient inter-seasonal storage

7. Resolution of over-allocation (and) over-entitlement• Entitlements defined as shares of that which is available

8. Robust governance• Political and public accountability to deliver objectives – Independent governance

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NWI - Rural Water Trading

1. A well functioning market

• Pre-stated rules so no-delays

• Full price and quantity revelation

• No artificial barriers including exit from irrigation and transfer to another area

2. Consistent pricing and charging rules

• Includes infrastructure access & exit fees policy necessary

• PriceWaterhouseCoopers move entitlement ownership out of supply companies

3. Administrative efficiency Speedy electronic allocation trading as a norm

Tagged trading does should not require registration on two state entitlement registers

4. Market discipline Rigorous announcement policy – competitive neutrality

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Competitive neutrality

June 2007 The Victorian Competition & Efficiency Commission found that … “WaterMove is a significant business and … required to comply with the competitive neutrality policy”

03/11/2006 Due to ongoing dry conditions, water trading in the NSW Murray and Murrumbidgee valleys was suspended immediately by the NSW DNR

Date Allocation Price ($) Vol. Traded (ML) # of Trades

01/11/2006 258.93 280.0 9.0

02/11/2006 276.56 785.0 18.0

03/11/2006 288.13 128.0 3.0

04/11/2006 0.0 0.0 0.0

05/11/2006 0.0 0.0 0.0

06/11/2006 0.0 0.0 0.0

May only be coincidence but irrigators are often consulted before announcements

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Administrative efficiency and trading

The state of the art can be found in the world of electronic share trading and the banking sectors accounting systems. Water industry still has long way to go.

A tagged interstate water trade from NSW to Vic requires

Extraction of entitlement from an Irrigation Water Supply Company 17% left behind, $400 admin. fee + $382.96/ML “exit” fee

Organise to get water out of NSW 17 Administrative Steps with NSW govt 8 forms with 8 cheques for 4*$105.69 + 3*$86 +$90 = $665.07 Irrigators can lodge by post but brokers must lodge personally A 28 day statutory process to get a “zero” use approval 3-4 months processing of forms one by one

Compare this with share market’s “one” electronic click

Water licences are handled under “real” not “financial” property protocols – Which regulatory model is better?

Source: Waterfind, pers. com. 2007

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Rural Water Supply Utility Structure

What is the right model?

1. Government businesses

2. Corporatised government entities

3. Private cooperatives

4. Private companies owned by water users

5. Private businesses owned (largely) by non-users

All run as regulated regional supply monopolies.

Many water supply companies hold water entitlements on behalf of “their” shareholders.

Is this the right model?

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Addressing over-allocation

$3 billion to buy entitlement enough to purchase between 1,500 and 5,000 GL depending upon entitlement type purchased

MDB Market current max trade is 100 GL/ year

$5.8 billion to be spent on infrastructure modernisation Reform sequencing reforms is VIP

Voluntary acquisition slowly v’s

Compulsory acquisition with money up front, 2 year’s lease back and no trading charges

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Urban water supply and disposal

Water source management

Water distribution

Water retailing

Sewage disposal

Unbundling would allow competition and markets to emerge. The Prime Minister’s vision of a world without water restrictions could emerge.

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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

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1. Urban supply & disposal separation

1. Bulk supply from other regions Urban – rural trading by developers

2. Storage management and treatment• Indirect re-use can have competitive access

3. Distribution• Dual supply encouraged (Supply system bypass possible)

• Third party access to first-use dsn system for desalination, private dams, private storm water capture, etc

4. Retail• Removal of postage stamp pricing

• Competition and innovation

5. Sewage infrastructure maintenance• Recovering costs via indirect re-use

6. Sewage treatment• Charging households for estimated load

7. Stormwater infrastructure• Load based charging

• Tradeable credits for peak load reduction

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2. Competitive Pricing

1. Scarcity pricing coupled with full opportunity cost recovery

• Entitlements markets

• Allocation markets

• Recover cost of grants

2. Large water user urban-water entitlement and allocation trading

3. Tolerance for retail block tariffs But household trading of blocks allowed

(Access-rights to a cheap block can be traded)

4. Small users pay marginal opportunity cost for entitlements and allocations above, say, 200KL/annum

5. No special industry water supply agreements

6. Independent regulation in all States

7. Replacement of grants with clear price signaling of scarcity and opportunity costs

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3. Competitive infrastructure access

1. Depreciation rules that recognise infrastructure obsolescence (when does the access holiday end?)

PMSEIC observation energy costs for water supply to Kalgoorlie

By pipeline 12 kWhr electricity / kL

By desalination 2-3 kWhr electricity / kL

2. Competitive access to all elements in the supply and disposal system

All classes of water from drinking to sewage

3. Rules that prevent governments from crowding out private investment

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4. 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 Offset infrastructure externalities and reflect them in

access entitlement charges

Tradable nutrient credit systems

Tradable salinity credits, etc

Separate sewage charges

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5. Building and subdivision incentives

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 disciplines

3. Mandatory disclosure of water efficiency at sale

Developer & Builder ~ 80% Owners & Occupiers ~ 20%

Source: Marsden Jacob 2005 PMSEIC 2007

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5 elements of an NWI urban supplement

1. Supply and disposal system separation

2. Pricing structures, investment rules and trading rules that signal Long-run opportunity costs and supply risks

Short-run opportunity costs and scarcity

3. Competitive access to all infrastructure Depreciation rules that recognise assets can

become redundant

4. Independent management of externalities

5. Building and subdivision incentives

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Concluding comment

Out of supply adversity comes competitive opportunity

1. Urban reform

• Increase competition

• Allow private investment

2. Rural reform

• Buy-back entitlements

• Open market with state of the art administrative costs

• Then infrastructure moderisation

• Reduce administrative process

3. Reintroduce competition payments if States retain control

4. Remove grant/subsidy culture

Contact:

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

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