Prof. Mike Young Research Chair, Water Economics and Management The University of Adelaide Climate Change and Business, Brisbane 30 th August 2007 Reducing the cost of water

2 Climate Change The adverse effects of climate change will express themselves first in water!

3 Water withdrawals per capita Australia United Kingdom New Zealand 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.”

4 COUNTRYRIVERRATIO MAXIMUM over MINIMUM ANNUAL FLOW BRAZILAMAZON1.3 SWITZERLANDRHINE1.9 CHINAYANGTZE2.0 SUDANWHITE NILE2.4 USAPOTOMAC3.9 SOUTH AFRICAORANGE16.9 AUSTRALIAMURRAY15.5 AUSTRALIAHUNTER54.3 AUSTRALIADARLING Managing supply variability After Craik 2007

5 Melbourne

6 Sydney Less rain means much less water! - 25% - 75%

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9 “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

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

11 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

12 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.

13 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”

14 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

15 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.

16 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

17 2. Competitive Pricing 1.Scarcity pricing coupled with full opportunity cost recovery Entitlements markets Allocation markets Recover 100% of cost of grants (or abandon them) 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 (scarcity price) for entitlements and allocations above, say, 200KL/annum 5.No special industry water supply agreements 6.Independent regulation of supply charges and scarcity prices in all States

18 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 4.Access rules that reveal cost of using obsolete infrastructure and technology

19 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 not water prices  Stormwater credits  Tradable nutrient credit systems  Separate sewage charges based on load not land value

20 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 regulatory disciplines as a new home 3.Mandatory disclosure of water efficiency at house sale Developer & Builder ~ 80% Owners & Occupiers ~ 20% Source: Marsden Jacob 2005 PMSEIC 2007

21 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

22 Concluding comments Out of supply adversity comes competitive opportunity 1.Urban reform Increase competition Allow private investment 2.Remove grant/subsidy culture A water price signal 3.Re-introduce competition payments if States retain control

Contact: Prof Mike Young Water Economics and Management Phone: Mobile: Subscribe to Droplets at