Urban Water Pricing: How might a water trading scheme work? |
February 04, 2007 |
|
Posted by Joseph Taylor at February 4, 2007 03:47 AM |
|
“What’s good for the goose, is good for the gander"
– a proverb of unknown origin.
The Issue: In response to increasing water scarcity, River Murray irrigators have watched the cost of buying a water allocation on the temporary market rise from $44 in January last year to $380 per ML – a 764% increase. Over the last year, the value of a permanent water entitlement rose by 52%.
Contrast this “scarcity” price signal with that given to households in cities like Adelaide. These households face a fixed two-tier pricing structure. The first tier, up to 125 kL per annum, costs $0.50 per kL. The second tier – for any amount above 125 kL – costs $1.16 per kL. Recently, the charge for second tier water was increased a paltry 6.4%.
What would happen if urban and rural Australia were subject to the same price disciplines for water? Should the old proverb, ”what is good for the goose is good for the gander” apply? In a drought, should urban households – like farmers – expect to see annual water prices go up seven times?
Well-designed rural water trading arrangements have the potential to bring significant improvements in water use. What would happen if urban households and industrial water users were able to buy and sell water entitlements and water allocations – just like irrigators? Could it be made to work? Is it worthwhile?
In this droplet, we search for a way to make household and industrial water rights tradeable – to expose urban and rural Australia to the same price discipline. Can a pragmatic, low-cost way be found to do this?
Valuing and Charging for Water
Essentially, there are two ways that water supplies can be managed. Either, a quantity limit – a cap – can be placed on the water supply and the market left to help decide who gets to use water; or the charge per kL fixed and restrictions used to reduce consumption in times of scarcity. Under the former approach, prices rise with scarcity. Under the latter mechanism, increasingly severe restrictions are introduced as scarcity increases. You pay the same but get less access to water and experience considerable inconvenience as the level of restrictions increase.
Conceptually, the more that the price per kL is allowed to increase in times of water scarcity, the less the need for restrictions on when and how people can use water.
Experience
The idea of linking urban and rural water markets is not new and is happening. In Queensland, the Shire of Gayndah currently holds an entitlement to more water than in needs and sells the surplus back to irrigators on an annual basis. SA Water has been buying water from River Murray irrigators.
In Arizona, urban developers in cities like Phoenix and Tucson are required to certify whether or not any block of land they sell has guaranteed access to a water supply for the next 100 years. Given this requirement, most developers choose to buy enough water to guarantee supply to any development.
In Beijing, each person in a household is allocated a quota. When the metered amount of water they use exceeds this amount by more than 20% they are required to pay double for this water.
Allocating Water to Commercial and Industrial Users
Many businesses, like irrigation farms, use large amounts of water. Arguably, there is little reason why a large commercial business cannot be given a water entitlement and required to enter into a water supply contract with a water utility. A price for delivery of a kL of water would be struck in a manner similar to that set by rural water supply companies. There are many different ways of deciding upon the initial entitlement to be given to each business. One option is to give each business an entitlement equal to the maximum amount they have used in any of the last 3 years.
Household Entitlements and Allocations
One of the simplest ways to introduce household trading would be to make the first 200kL tier of water given to each household tradeable. Families and households would then be able to sell off any savings they make. For water use above 200kL, there are two choices. Either a) set a scarcity price for the second tier, or b) “cap” the volume of the second tier pool.
Under a scarcity pricing regime, if the charge for the first tier was $1.00 per kL and the second tier charge was regulated to rise as reservoir levels fall, one might expect a scarcity price to vary from $3.00 to $5.00 per kL. Facing charges like these, there would be an incentive for low water users to sell of part of their first tier to large water users – especially if first tier water was not subject to restrictions in all but exceptional circumstances.
An alternative to the scarcity pricing approach is to cap access to second tier water. Once “capped,” second tier entitlement shares could be sold using a tender process, where anyone – including water utilities – could bid for a share of the available pool. Every quarter shareholders would be notified of the tradable allocation that they could either use or sell.
At the household level, many variants are possible. To protect people under financial pressure, the first 100 kL entitlement issued to each house could be made non-tradeable.
Urban Household Water Trading
With low-cost internet trading platforms, like e-Bay, and a choice of water brokers, trading in household water entitlements and quarterly allocations is conceivable. The average household bill is around $330 per annum and most of these costs are unavoidable.
If first tier water was available at $1.00 per kL, a household with a large water-dependent garden and a swimming pool would have a strong incentive to buy a low-cost first tier entitlement to secure low cost access to the water they need access to every year.
If any household exceeded its first tier allocation, their nominated broker or by default their water supplier would be required to restore balance to their account by purchasing unused allocations and adding the cost of doing this to their next water bill. Households who use less than their allocation would have the opportunity to sell this saving.
It would also be possible to make urban subdivision approval conditional upon the purchase of a water entitlement sufficient to supply the proposed development – as already happens in Arizona. New or expanding industries would also be required to buy water entitlements sufficient to cover their needs.
Water Industry Implications
From a water utility perspective, introduction of urban trading raises many questions. Utilities would still have to charge for delivery and infrastructure maintenance. Amongst other things, part of each water utility’s bulk water entitlement would be broken up and transferred to those that buy access to second tier water.
There may be lessons to learn from electricity and gas reform. The part of their business that manages infrastructure may need to be separated from that the retail part that buys and sells water. Access to delivery capacity may need to be rationed.
As households and industry become exposed to the value of scarce water resources, competition from privately managed sewage recycling, stormwater capture and desalination businesses would increase. Water saving and alternative source development might become profitable. If the annual price saving per kilolitre was $2.00 per year, one can imagine a 100kL tier one entitlement rising in value to over $2,000.
Many buildings are managed collectively and many houses are rented. In each case, someone will need to decide who should pay the water bill and who would hold any entitlement issued.
Where to from here?
We think the concept is worth serious evaluation and, for large industries, could be readily implemented. A broader pilot trial, with no long term guarantees, would be worthwhile. One option would be test urban trading in a large regional centre that is on extreme water restrictions.
Prof. Mike Young
Mike.Young@adelaide.edu.au
Water Economics and Management
Earth & Environmental Sciences
The University of Adelaide
AUSTRALIA 5005
Other Contributors
Jim McColl, CSIRO Land and Water, Email: Jim.McColl@csiro.au
Tim Fisher, Board Member, Land and Water Australia, Email: jiazhu51@optusnet.com.au
For further information read:
“A market solution for water. Malcolm Turnbull thinks we should have as much of the stuff as we want, a long as we pay for it.” AFR 25/11/06
Acknowledgements
The role of Tim Fisher in developing the ideas presented is acknowledged through co-authorship. Darla Hatton MacDonald, Ross Young, Sally Walkom, Bob O’Brien and several members of our Steering Committee provided important input into the development of this droplet.
Copyright © 2006 The University of Adelaide.
This work may be reproduced subject to the inclusion of an acknowledgement of its source. Production of Droplets is supported by Land and Water Australia and CSIRO Water for a Healthy Country. Responsibility for their content remains with the authors. They neither reflect the views of Land and Water Australia nor the views of CSIRO.
