Rural - Urban Water Inter-Dependence Mike Young

The University of Adelaide

Main conclusions

• Consequences of urban rural inconsistencies not well studied • Policy choices have important implications at the regional and national level – Urban-Rural trading barriers remain – Price discipline is lacking from urban markets – Subsidies (grants) inconsistent with the NWI objectives – Cost reflective infrastructure pricing needed – Urban water market could be expanded

Main challenges

• Changing Demand and Supply – Increasing population – Drier regime where we live and grow food – Significant over-allocation in some systems – Decreasing Peri-Urban supply opportunity – Increasing Peri-Urban development & demand (dams) • Need for adjustment away from existing allocation base

Less rain means much less water!

Indicative Population Growth to 2032

3

Population

2.5

(millions)

2 1.5

1 0.5

0 5 4.5

4 3.5

20% 22% 52% Sydney Melbourne Brisbane Moreton 35% Perth 4% Adelaide

2032 2001

ACT 6%

Paper’s Methodology

• Few papers on the urban rural interaction • Two simple policy tests – Efficiency of policy – Consistency of policy approach • Leave detail about water accounting and management of externalities to others

National Water Initiative

• History gave 100% supply security to urban users at price – often a fn (land value) – More recently metered • NWI signals policy shift from an “urban prior right” to – full cost pricing – trading – new source development (when it pays) • s.64 … “facilitate the efficient functioning of water markets, including inter-jurisdictional water markets, and in both rural and urban settings”

Facilitation v’s implementation

• Entitlements – Many urban entitlements normally still defined as a separate pool that is inaccessible to rural water users • SA Urban (Adelaide) = moving average non-tradeable allocation • NSW towns entitlement => fn(population) – Regular two way allocation trade is rare

Value of Urban-Rural trading

• CGE Monash model – Productivity Commission (Dwyer et al. 2005) – CSIRO (Young et al. 2006) • Nationally relatively small amounts • By 2032 => 61GL households + 171GL industry • Increases GDP by 0.6% over 25 years

Redistribution of 10% supply reduction Effect on Gross Regional Product

Gross Regional Product No trade Rural trade only Trade across existing connections Full connectivity & trade -0.28

-0.28

-0.24

-0.23

Source: Dwyer et al. 2006

Effect of 10% volume reduction

Region No Trade Melbourne

-10.0%

Adelaide

-10.0% Goulburn Murray -10.0%

Gippsland

-10.0%

Murray

-10.0%

Trade across existing connections Full connectivity & trade

-6.1% -4.8% -4.1% -9.4% -16.1% -10.7% -4.5% -10.6% -11.2% -11.4%

Source: Dwyer et al. 2006

Long term regional impact of unrestricted urban rural trade (No new sources) Change in real GDP, GSP and GRP 15.0

10.0

5.0

0.0

Bri sb -5.0

e-M -10.0

M to al n le R e es VI t I C rri g VI C Pe M rt el h bo urn R e es t VI C Sy dn ey -15.0

AC Ta T s & R N es T t N SW R es t Q LD R es t SA Ad el ai M urru de m bi dg R ee es M Bu t W urra rn et A y t-D N SW arl in W g es Q te LD rn N SW

NWI aim

Create policy settings which facilitate water use efficiency and innovation in urban and rural areas – Remove administrative impediments to trade – Subject all water users and all water suppliers to the same price disciplines

SA Trading Experience

SA Trading Experience

• 15,000 GL pa recycled sewage water to North Adelaide Plains • Mannum-Adelaide pipeline used to supply water to Barossa Infrastructure Ltd off-season • Purchase 25 GL from Lower Murray Swamps for Adelaide & 10 GL for environment

Other urban rural trading experience

• Harvey Water Infrastructure saving with Perth • Proposals in Victoria – Coliban Water considering purchases from Campaspe – Bendigo and Ballarat • USA transfers are common • Arizona requires suburban developers to prove water availability

Charging and Pricing

• Urban – Upper bound charging for delivery – Postage stamp pricing common – Equity considerations included in price – Regulations used to control supply – No scarcity pricing signal • Rural – Lower bound charging for delivery – Traded prices reveal opportunity cost – Markets used to reveal scarcity pricing – Markets used to drive innovation Taxation policy sleeper!

Scarcity Pricing and Opportunity

• Rural markets set a scarcity price • Urban markets rely on regulations to signal scarcity • Scarcity pricing – Maintain revenue during periods of scarcity – Stimulate private investment and innovation

Full Cost Recovery (Urban)

City Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra

Total

Current degree of full cost recovery 76% 68% 84% 82% 74% 89% 80% 80%

75%

Revenue increase for 100% cost recovery 32% 48% 19% 22% 34% 13% 25% 25%

33%

Source: Marsden Jacob 2006

NWI Infrastructure Pricing

Aim “ promote economically efficient and sustainable use of water resources,

water infrastructure assets

, and government resources; ensure

sufficient revenue streams to allow efficient delivery of services

; … ” • Costs of grants are high – Capitalised into entitlement markets – Crowd out private investment • Households • Business • Studies of benefits of subjecting all water users – rural and urban – and all infrastructure managers to same price disciplines needed

New sources reduce trade (but $)

Option – Indicative cost

Buying high security Murray water for Adelaide Appliance standards and labelling Leakage reduction Residential retrofits and rebates Desalination, Perth Indirect Potable Recycling Rainwater tank rebates

($/kL)

$0.50 $0.05 $0.20 $0.60 $1.17 $2.61 $3.00

• • • • • • •

Indicative Urban Trading System

Allocate tradable entitlement to all users > 2,000 KL (2ML) Use existing water accounts to build small user trading system Indicative block tariffs as follows 1.

100 KL Non-tradeable allocation supplied @ $1.00/KL 2.

200 KL Tradable entitlement supplied @ $1.50/KL 3.

Above entitlement water supplied “scarce” water price $2 - $5(?)/KL – All developers to supply a non-tradable water allocation and 200 KL tradable entitlement by purchasing either Supply guarantees from an urban water supply utility – Entitlements from a rural water entitlement holder Households able to buy and sell tradable water entitlements If tradable entitlements are worth saving of $1.00-/KL/yr then they might sell for around $10/KL over the internet. A house reducing its total need to 150KL/yr could sell its entitlement for $500 over the internet.

Urban-Rural Planning

• Allocation planning – Rural moving to statutory role to manage scarcity – Urban focus on infrastructure planning

Research frontiers

1.

2.

3.

4.

5.

6.

Trading from individual irrigators to cities as a whole well studied – “Within urban” trading poorly studied Need research on design options Benefits of urban scarcity pricing as well as regulation Funding all infrastructure enhancement via loans and revenue without subsidies and grants Removing equity considerations from pricing water policy • • Benefits of accelerating progress to full cost pricing including externalities and infrastructure plus unrestricted trading yet to be analysed