Transcript Document

The Role of Demand Side Measures and Flexible
Incentive-based Instruments for Addressing Drought
Kurt A. Schwabe, Ph.D.
Associate Professor of Environmental Economics
Associate Director, Water Science and Policy Center
University of California-Riverside
Objectives/Outline
• Describe some economic concepts that (hopefully) help better
frame some of the issues surrounding drought and water scarcity
• Highlight recent findings from studies of water conservation
• Comparison of costs and water savings across strategies
• Illustrate the valuable insights made possible by combing
knowledge and data partnerships between researchers and water
utilities
• (if time) Identify two supply augmentation strategies for
addressing drought and water scarcity
• Water banking / conjunctive use
• Water Markets and Transfers
Concept 1: Scarcity
Definition of Scarcity: The degree to which demand exceeds supply
at a given price
“Australian cities are currently facing severe, and in most cases
chronic, shortages of water, relative to the demand at prevailing
prices.” Professor John Quiggin (2006), Uni Queensland.
Two issues that fall out of this definition…
1. One way to reduce scarcity is to raise price, or…
2. For a given price, scarcity can be reduced by either reducing
demand, increasing supply, or some combination of each
Example: MWD residential gpcd decreasing by 16% since 1990
(208 gpcd to 175 gpcd)
Concept 2: Portfolios, through diversification, may
increase reliabilities and lower costs
Numerous options to address water scarcity/drought on both the
demand and supply side
• Each strategy has a cost and an “effectiveness”
• Often interdependencies among strategies
• Diversified portfolio increase reliability and may lower costs of
drought (i.e., don’t put all your eggs in one basket)
• Strategies that allow water to be moved spatially (via
conveyance) and temporally (via storage) allow water to be used
more efficiently (allocated to highest valued use)
• Water conservation often the cost-effective strategy
• Water markets are extremely diversified
Analyzing Cost-effective Options to Decrease Water Scarcity
Using a Portfolio Approach (Rosenberg and Lund, 2009)
Analyzed short and long-run strategies to increase water supply reliability for Amman,
Jordan
Identified a portfolio of actions along with
their costs and scarcity implications
Results suggested…
• Postpone activities that include
large infrastructure investment and
exorbitant operating costs (e.g.,
Seawater Desal)
• Invest in water conservation
activities such as leakage repairs,
customer education, water conserving
appliances and rebates, at the
household level
• Consider low-cost brackish water
desal in longer term
Concept 3: Cooperation, including those implicit in
water banking and flexible markets, can significantly
lower costs as win-win strategies
Actions in one district / region may have (unintended) positive
or negative impacts on activities in another district / region
 Externalities
When externalities are present, there are gains from cooperation
or markets that allow trade
Can we benefit from cooperation and/or markets?
Central Valley Irrigation and Colorado River Flow
Central Valley, California…
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1/6 of US irrigated land
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$21 billion in agricultural value
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Generates water vapor that ends up increasing streamflow in the Colorado River by
28% (56% in four corners region)
• 325,000 ac-ft annually (supports apprx. 3 million people)
• Increases precipitation by 15%
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Previous models overlooked anthropogenic loop
Question: Could a market ever develop?...Certainly there are potential gains to trade
and/or cooperation….
An understanding of the natural, physical, and economic linkages across jurisdictional
boundaries is important and offers opportunities
________________________
Lo and Famiglietti. 2013. Geophysical Research Letters.
(National Taiwan University and UC-Irvine)
Water Conservation: Residential Water Use
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Private Benefits from water conservation...
• Delayed infrastructure spending to lower municipal taxes for residents
• Enhanced resilience to deal with potential variability in future supplies
• Energy savings potential
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Public benefits from water conservation…
• More water available to contribute to health and quality of aquatic habitats
and ecosystems
• Savings from deferred capital expenditures associated with system expansion.
How does California stack up in terms of urban water use per capita (Hanak et al. 2011;
20x2020 Water Plan; Rancho California Board Meeting 2011)
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California: 201
Australia: 80 to 130
Israel: 84
Spain: 76
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Rancho California: 386 (2003-2007)
Central Coast: 154
Tulare: 285
South Lahontan: 237
Water Conservation: Residential Water Use
Two Types of approaches to water conservation (not mutually exclusive)
1.
Price-based approaches (e.g., volumetric pricing and retrofit rebates)
• Indirectly try to alter behavior through changes in relative prices
• Pricing based on volume of use…
• Albuquerque, NM, instituted summer surcharges in 1995
• Toronto’s volumetric pricing which increases by 9% annually from 2003 to 2013
• Rebates: changing relative prices of appliances (e.g., subsidizing)
• Toilet rebates, subsidizing low flow shower heads, rain barrels, xeriscaping
• Some research finds that subsidies don’t influence water conservation, just the
information campaign increases when people are going to do it.
• Renwick and Archibald (1988) find that water-efficient irrigation techniques reduce
water use by 11%..motivated by environment attitudes rather than potential cost
savings (as does Millock and Nauges 2010).
• Water use must be metered
Water Conservation: Residential Water Use
2.
Non-price-based approaches (e.g., summer water use restrictions, education, etc.)
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Directly try to alter behavior
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Many different types
• Voluntary
• Mandatory restrictions / rationing use and activities
• Education (e.g., educate school-aged children to change preferences; more information
on water bill or send flyers to inform customers of use and issues; education for adults
for landscape)
• Moral suasion
• Israel provides a daily report to education society of level of its major reservoir,
Kinneret
• During 1987-1992 drought in California, 65-80% of urban water utilities
implemented outdoor watering restrictions (Dixon et al. 1996).
• In 2008, 75% of Australians live in communities with some form of mandatory
water use restrictions
Water Conservation: Residential Water Use
How have rebate/technology-based measures stacked up against price-based?
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Timmons (2003). Compared mandatory low-flow appliance regulation vs. a modest water
price increase using data from 13 groundwater dependent California cities
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Mansur and Olmstead (2007). Study of 11 urban areas in US and Canada comparing outdoor
water use restrictions to drought pricing for residential households in short run
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In almost all cases, prices were more cost-effective than technology standards
For same aggregate demand implied by a 2-day-per week outdoor watering restriction, a market
clearing price would result in gains of about $81/hh per summer, about ¼ of a household’s total
annual water bill in the study
Brennan et al. (2007). Studied sprinkler restrictions in Perth, Australia
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Restrictions on use of sprinklers leads to more overwatering from hand-held hoses resulting in little
water savings but additional costs to consumers
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Grafton and Ward (2008). Similar to Brennan but for Sydney, find mandatory water
restrictions to result in costly and inefficient responses relative to prices
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Grafton and Kompas (2007). Find that tying water prices to reservoir levels is most efficient
(cost-effective) means of addressing short-run water scarcity.
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Suggest equity issues can be addressed through rebates to low-income households, water budgets
(and low 1st tier pricing), and negative fixed fee charges.
Water Conservation: Residential Water Use
Grafton and Kompas (2007). Evaluating supply and demand-side options confronting
Sydney, Australia in early 2000s.
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Government uses a 2-tiered price structure based on long-run marginal cost of supply.
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To address shortages in 2000s and decreasing reservoir levels, along with projected
population increases, govt. initiated a number of strategies
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2003: water use restrictions…weren’t very effect (demand > supply)
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2005: more severe water use restrictions (days and hours of week; hand-held approaches)
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Included subsidies to purchases water saving technologies and rainwater tanks
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Undertook major capital works
• Access other surface and groundwater supplies; initiated recycling projects to make potable water
• IPR projects at $3 billion/year capital and $175 million/year O&M
• Increase capacity of dams at $300-400 million
• Desal considered at $1.3 billion capital and $38 million/year O&M or greater
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Results suggest if continue to price at LRMC, will need to increase supply capacity and
demand prices significantly to deal with periods of drought.
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Find that short-run pricing adjustments – sort of like peak-load pricing in the elecricity
sector – tied to reservoir levels – are most cost-effective and responsive policy
Water Conservation: Residential Water Use
Water savings from rebates programs often estimated to be smaller than initially supposed
(Olmstead and Stavins 2007)
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Mostly due to incorrect assumptions regarding behavior (rebound effect).
Examples:
• Low-flow showerheads result in longer showers (Mayer et al. 1998)
• Low-flow toilets result in more flushing (Mayer et al. 1998)
• Front load clothes washers result in more cycles (5.6% increase) (Davis 2008)
• Studies of households fit w/ low flow fixtures get mixed results
• Low-flow toilets save 6.1 to 10.6 gpcd in some studies vs. no savings in others
• Low-flow showerheads save from 0 to 9% across studies
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Price (2013) finds no rebound effect and low-flow to reduce demand by 12%
Mandatory water use restrictions…mixed results
• Studies in Santa Barbara and Pasadena find mandatory water use restrictions to
save aggregate water, but restrictions in Corpus Christi did not.
• Detail matters – program, household type, pricing, etc.
Water Conservation: Cost-effectiveness Considerations
Would customers that participate in rebate programs have participated without rebates?
1.
Bennear and Taylor (2013). North Carolina’s Rebate Program for low-flush toilets
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30% of indoor water use consumed by toilets
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Offered rebates to households to purchase low-flush toilets
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Considered “additionality” – did program increase # of hh’s using low-flush toilets and was it costeffective?
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if not, then customers received a windfall gain and agency lost money
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If so, then have to estimate cost-effectiveness
NCSU economists worked with utility agencies to collect household level data on water use
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Included a survey requesting information on motivations for replacing toilets
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Had info on households that did and did not replace toilets
Find that water savings from toilet program are approximately 7% annually (3,612 gallons)
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Only 37% of this attributed to rebate program
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2/3rds of water savings were obtained independent of program
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Program cost $11 to $15/1000 gallons, yet other programs cost $7/1000 gallons
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Therefore not cost-effective
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If target people that wouldn’t have purchased w/o rebate, cost-effectiveness is $4/1000 gallons
Water Conservation: Cost-effectiveness Considerations
2. Price et al. (2014). Estimated water demands that are conditional on rebate information for a
number of alternative rebate programs
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Account for rebound effects that tend to reduce effectiveness of program often observed in
initial stages of program
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Worked w/ utilities to collect costs of different rebate programs and predicted water savings
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Find that most cost-effective water savings for water utility are for low-flow showerheads at
$0.39/1000 gallons saved.
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$0.97 for first low-flow toilets; $8.33 for 2nd low-flow toilet
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$4.51 / 1000 gallons for xeriscaping.
3. Ferraro and Price (2013). Worked w/ agencies to collect info on how information
provisions and pro-social messaging influence conservation behavior
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Results suggest that if strong social norm treatment (all households receiving info on
neighbor’s water use) would have resulted in cost of $0.58 / 1000 gallons saved
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If focus on households that are above median water consumption level, would achieve 88% of the
water savings at 65% of the costs
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Supports Waukesha Water Utility’s (Wisconsin) decision to create on-line tool that allows customers
to track and monitor their daily water use as well as to compare to their neighbors (Behm 2013).
Water Conservation: Residential Water Use
Do moral suasion and social norms matter? (Ferraro and Price 2013)
Cobb County Water System, Georgia: Researchers partnered with agency in 2007 shortly
after a change from a fixed price per gallon to a tiered system…
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Randomized experimental design through mail messages to residential customers
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Three water conservation treatments along with a control
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No info
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Info tip on providing technical advice on how to reduce water use
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“weak” social norm treatment that provided tip sheet and a personally signed letter appealing
to residents to conserve
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“strong” social norm that provided them with personalized information on own water
consumption and comparison to neighbors
Results:
• Tip sheet alone alters behavior slight 7.8% to 8.4%;
• Weak and strong social norms altered prices from 10 to 12%, respectively
• Responses by high uses to strong norm was double that of low users
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Agencies that want to promote conservation may want to consider price and nonpecuniary measures.
Water Conservation: Summary
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Rebate conservation programs are attractive…but fall short of initial estimates
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Cost-effectiveness of programs depend on “rebound” effects and “additionality” of program
• Some studies suggest rebound effects are small – more research required
• Some rebate programs simply result in a wind-fall for households that would have
participated regardless and hence call into question cost-effectiveness of program
• If considering long-run programs, should consider partnering with researchers to
evaluate individual programs --- could save money and water
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Volumetric price-based conservation program supported by research on elasticities
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Elasticities differ across seasons, socio-economic factors, and in relation to different types of nonprice alternatives available (complementary effects)
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Suggests benefits from targeted program and consideration of complemetarities across program
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Poor water pricing leads to excessive scarcity and costly policies in short run (e.g., drought) and
likely unsustainable land-use patterns in long run
• If water prices rose as reservoir levels fell, consumers would respond by using less
water, reducing or eliminating uses according to their preferences
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Illustrates some benefits of water agencies partnering with researchers to better
understand household behavior for water conservation and the cost-effectiveness of
those programs (particularly to account for “rebound” and “additionality” concerns)
Water Conservation: Summary
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Question: Why so much emphasis on rebate/non-volumetric-based programs when water
pricing can work and are more cost-effective?
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Answer:
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Tucsan, AZ, 1970s.
• First to adopt marginal cost water pricing after 2-year drought
• One year after adoption – entire city council voted out of office (Hall, 2000)
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Fiscal illusion…more expensive than pricing but this not well-known (poor information)
Yet advantages of water pricing for conservation and drought are clear from the literature…
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Increases revenues (since operating on inelastic portion of demand)..rebate programs and
mandated water restrictions often lead to necessary price increases due to revenue losses
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Less costly than rebate or non-prices measures…evidence is clear!
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Gives households the choice of how to respond to prices (as opposed to more costly mandates
and measures provided by district)
Likely a combination is both politically feasible and cost-effective
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Have to account for household behavior when using rebate/technology standards
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Best /cheap to include a good public information campaign, moral suasion, and info on social norms
Water Conservation: Summary
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Regardless of conservation approach, research shows that people’s heightened
sensitivity to circumstances of relatively greater water scarcity mean they often respond
more readily and with more vigor
• Lavee et al. (2013) ~ drought surcharge more effective at encouraging water
conservation than smooth water price increases
• Kenney et al. (2008) ~ introducing block-rate pricing during drought had greater
impact on high water-consuming groups than lower ones.
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Consumers more responsive to price changes during drought (higher elasticities) (Dalhuisen
et al. 2013)
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Seems to support the saying, “Never waste a good crises.”
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Reducing scarcity cost-effectively means considering both demand and supply-side
measures
• Demand side measures, in many instances, are more cost-effective
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Working together, whether it’s through cooperation and/or markets, generally leads to
lower cost solutions as economic theory and empirical evidence suggests
Conjunctive Use / Groundwater Banking
• Aquifers increasingly considered as main storage option
• Allows for low-valued water to be used for high-valued purposes at some
later date
• > 65 water agencies engage in some form of conjunctive management
• Offer between 4 to 30 times more storage capacity than existing surface
reservoirs (Hanak et al. 2011)
• Emergency Drought Bank of early 1990s played significant role in
establishing the value of water and reducing the economic costs of
major shortages
• Reduced drought damages by $104 million (Easter et al. 1998)
• Most benefits accrued to urban areas and some high-valued agriculture
• DWR served to mediate purchase/sale. Allocated 660,000 ac-ft in 1991;
297,000 went to urban
• Dry year program allocated 138,806 ac-ft in 2001
• Australia has mature water banking/carryover system
• Increases agricultural productivity in MDB by nearly 12% (Hughes 2009)
Conjunctive Use / Groundwater Banking
• Several advantages relative to surface storage
• Often considered less environmentally damaging than dam or reservoir construction
• Less evaporative losses relative to dam or reservoir storage
• Conjunctive mgmt. offers 4 to 30 times capacity of surface systems (Hanak et al. 2011)
• In general, lower capital costs than dams or reservoirs
• Some concerns regarding banking/conjunctive use
• Evaporation occurs during transport to groundwater system, and groundwater deposits
may not be 100% recoverable (or not recoverable at particular times)
• May require extensive distribution networks, infiltration areas, and injection wells.
• O&M costs may be expensive with banking due to recovery costs (i.e., pumping water
for withdrawal during dry years)
• Local impacts from withdrawals – e.g., possible subsidence and water quality
degradation
• Exchanges require mature institutional infrastructure, including agreements, monitoring,
and accounting methods to guarantee a secure right to the banked water
• Other landowners can pump from basin unless adjudicated/need better regulation
Alternative Storage Options:
Aquifers via artificial recharge from surface water
(Scanlon et al. 2012)
Cumulative water storage in the Arvin Edison groundwater
bank relative to precipitation. Note: drought events
Water Markets to Manage Drought/Water Scarcity
• Reductions in system wide scarcity and operating costs of
supplying water can be achieved with more water transfers from
• low-value to high-value agriculture
• agriculture to urban uses (Draper et al. 2003; Pulido et al. 2004)
• Encourages efficiencies in urban and agricultural settings
• Allows opportunity to allocate over time, space, and to higher
valued users
• Addresses need for more adaptable and responsive method of
allocating water in the state
• Substantial opportunities and gains for allowing short-term
leases and spot markets where water can be traded
Water Markets: Examples of Potential Gains
• Australia: very well developed temporary and permanent water markets
• 2007 to 2010 1/3rd of all water in Murray-Darling Basin was traded
• Decreased economic impacts of drought by 50%
• San Joaquin Valley, California (Howitt et al. 2011, 2013)
• 500,000 ac-ft traded in San Joaquin Valley alone in 2009 significantly offsetting
localized effects of drought
• Southern California (Medellin-Azuara et al. 2013)
• Allowing more flexible operations including transfers from low-value to high-value
agriculture and urban uses is estimated to reduce the operating costs of supply water
by $1.93 billion at 2020 level of development
• Lower Rio Grande Valley: Increasing intrastate and interstate water markets can
reduce future impacts of drought by 1/5th to 1/3rd (Ward et al. 2006)
• Upper Klamath Basin: 2001 curtailment of irrigation water cost irrigators
between $27 to $46 million (Boehlert and Jaeger 2010)
• Allowing more conjunctive use reduces damages by 37%
• Allowing more flexible trading alone reduces damages by 57%
Developing Markets for Temporary Leases and Options
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Expand markets to include more temporary markets (spot leases) and options
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Most markets involve permanent and multi-year leases
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Not as cost-effective in addressing short-term scarcity
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Temporary transfers and options can reduce expected water supply costs substantially while
still maintaining high reliability
Suggests role for spot market leases and options
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Immediate transfer of water with lease price subject to considerable variability based on
supply and demand conditions
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Option – initial payment that guarantees the purchaser the right to lease water at a later date at
an agreed upon exercise price
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Certainty with spot price is a good hedge against spot market price volatility while providing
the additional advantage of postponing transfer decisions until better information is available
Leases and options improve market flexibility relative to permanent transfers alone
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MWD tried options w/ PVID in early 1990s…rejected by farmers
Helps agencies meet the dual objectives of maintaining water supply reliability and
lowering supply costs
“Let me
explain
something to
you…this
business
requires a
certain amount
of finesse”
Jake Gittes
Chinatown (1974)
Role for Government?
• Improve information regarding transfers and transfer impacts
• Establish a process for managing third party impacts
• Reducing the transactions costs of arranging and implementing water transfers
• Increasing the probability that efforts between parties to arrange a water
transfer will be successful, and reducing the risks to parties from involvement
with transfers
• Improved monitoring and metering of surface and groundwater extractions
with property rights consistently defined in volumetric terms
• Provides more accurate price signals as to scarcity value of water
• Promotes more efficient use
• Improvements to allow more flexible interbasin water transfers
• Streamlining approval process for trades through mechanism such as zonebased trading ratios or preapproved trades that identify and account for third
party effects (Hanak et al. 2011)