Frontiers in Urban Water Management

1. Frontiers in Urban Water Management Prof. Mike Young Research Chair, Water Economics and ManagementThe University of Adelaide Presentation to Select Committee on SA Water14th November 2008

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

3. Caveat • Many issues in water management are site and case specific • Urban infrastructure is expensive to change • New institutional arrangements take time to develop and even longer to implement • Ideas for discussion not recommendations • Built heavily on the NWC latest annual report

4. Iraq New Zealand United Kingdom Water withdrawals per capita Australia = “The driest inhabited continent in the world.” Australia (Australia = 135/161 countries) “We have a water management problem not a water supply problem!” Business Council of Australia 2006

5. Direct Costs of Water Supply/Demand Options(Sydney, Adelaide, Perth, Newcastle) • The price of urban water supply and security is rising! • Who should bear the financial risk for increased security in a world of climate shifts and change? • Security is expensive Source: Marsden Jacob 2006

6. 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 • 2005–08 – 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

7. National Water Initiative Intent (s5) • “.. in recognition of the continuing national imperative to increase the productivity and efficiency of Australia’s water use, • the need to service rural and urban communities, and • to ensure the health of river and groundwater systems ..” • “clear pathways to return all systems to environmentally sustainable levels of extraction.” … • “greater certainty for investment and the environment, and” • “underpin the capacity of Australia’s water management regimes to deal with change responsively and fairly.

8. 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 • National Competition Payment discipline has been lost!

9. NWC Priority: More competition • Structural reform of the urban water sector would provide opportunities to ensure competitive pressure is brought to bear where it makes sense to do so • (for example in sourcing water at the wholesale level and at the retail supply level). • Option for discussion and evaluation • Review pricing

10. NWC Priority: Use more direct instruments than water charges to pursue equity objectives • Recognising that increasing water charges may lead to higher water bills for some businesses and households, the Commission acknowledges the prerogative of governments to offer some form of relief for targeted consumer groups. • However, the Commission encourages governments to explore the feasibility of using more direct and less distortive measures, rather than suppressing water charges, to address any substantial equity issues. • Option for discussion and evaluation • Offer rebates to the needy on application or provision of appropriate concession card

11. NWC Priority: Greater use of scarcity pricing • The Commission supports further consideration of scarcity pricing in urban areas on the basis that scarcity pricing may be a more efficient way of balancing supply and demand and could significantly reduce the need for water restrictions. • Options for discussion and evaluation • Scarcity pricing triggers that are linked to storage levels. Price goes up every time pass a security trigger point. • Coupled scarcity pricing with use restrictions • Trial allocations to households with trading & or big charge for over allocation water

12. NWC Priority: End of inclining block tariffs • Two-part inclining block tariffs are commonly used in the urban water sector across Australia. A … fixed (service availability) charge and a variable (usage-based) charge. • In most jurisdictions, two or more blocks or tiers (up to eleven) are incorporated into the variable charge levied on residential users so that the variable component of the charge increases as water consumption exceeds these pre-determined blocks…. • Inclining block tariffs are inequitable .. disadvantage households with larger numbers. • They are … not very effective in influencing consumption… The cost impact of reaching higher tiers is often not evident until well after the event, particularly where billing is infrequent. • Inclining block tariffs often result in a departure from marginal cost pricing. …. a single variable charge to be a more efficient and equitable tariff structure, and one which is simpler for customers to understand and respond to. • Option for discussion and evaluation • A single price for all use (billed quarterly).

13. NWC Priority: More transparent security of supply • Decisions to invest in urban water infrastructure involve trade-offs between cost and reliability of supply. • The Commission recommends that levels of urban water security be more clearly articulated in plans and that governments explore the feasibility of a national minimum reliability benchmark for water supply in major centres, specifying expected frequency and severity of water restrictions. • The Commission recommends that the minimum reliability benchmark be developed in consultation with the community. • Options for discussion and evaluations • Promote development of diverse supply sources(Groundwater, Stormwater, recycling, trading, etc) • Set scarcity triggers that require immediate investment and increases in price • Set cap on development without augmentation or offset • Pay for infrastructure or remove the need for it • Issue entitlements to large users and defacto entitlements to households

14. NWC Priority: More transparent pricing and better pricing oversight • Some states must further improve transparency in water charging. • The Commission recommends that, to improve transparency, some governments and economic regulators employ more effective public engagement processes when making pricing decisions. • Some states must introduce stronger independent pricing oversight to ensure approaches to setting charges are technically sound and fully consistent with NWI principles. • Options for discussion and evaluation • Appoint an independent price regulator • Move away from uniform pricing • Move toward cost-reflective pricing in a world where third parties can compete

15. NWC Priority: Improved pricing for new water sources • Urgent progress is required to improve pricing policies for recycled water and stormwater. • Consistent with NWI commitments, pricing policies for recycled water and stormwater should be congruent with pricing policies for drinking water so as to stimulate efficient water use regardless of the source. • Recycled water and stormwater reuse schemes need to be considered in a system-wide context and prices should reflect externalities and avoided or deferred costs. • Prices for recycled water and stormwater should reflect underlying cost differences associated with providing products of different quality and fit for a range of different uses. • Options for discussion and evaluation • Competitive pricing for first use water • Allow third party access to supply network • Allow third party access to sewers

16. NWC Priority: Improved metering and billing • Improving metering and billing practices in urban centres will provide better information to consumers and facilitate better responses to pricing policies. • The Commission encourages governments to consider ‘smart metering’ of households and individual metering of medium and high-density dwellings. • There may be opportunities for the water industry to capitalise on recent developments on smart metering in the energy sector. • Further reform is required in some states to ensure a water usage charge is levied directly on users. • Tenants, for the most part, are not currently billed or provided information on their water usage. • Options for discussion and evaluation • Charge single price to all • Explore opportunities for smart metering of gas, electricity and water. • Encourage metering at apartment level.

17. Sewage pricing • Sewage pricing in South Australia provides no incentive for people to recycle or reduce load. • Options for discussion and evaluation • Charge in proportion to estimated % of use that returns • Allow individual recyclers to apply for special assessment • Charge on the basis of estimated daily rate of use in winter.

18. NWC Priority: Continued structural reform • All urban water providers should be adequately resourced and capable of providing a healthy, safe and reliable supply of water to customers. • Where the lack of financial and technical resources available to small water providers (typically local government) is compromising the quality of service provision, this problem must be addressed urgently. • Option for discussion and evaluation • Make transfer payments to local government rather than through water charging system

19. NWC Priority: Further institutional reform • Institutional reform in the water sector has not kept pace with other sectors such as telecommunications, electricity, gas and ports. • Institutional arrangements in the water sector should be reviewed to provide greater opportunity for private sector investment and innovation. • Regulatory reforms, including price-setting, allocation and tradability of bulk water resource access rights, and third-party access to natural monopoly infrastructure, have the potential to promote more efficient resource use and greater choice in water services and water products. • Option for discussion and evaluation • Explore costs and benefits of unbundling some of SA Water’s functions

20. Unbundling enables • Bulk supply from other regions • Urban – rural trading by developers • Supply onus can shift away from government • Storage management and treatment • Indirect re-use can have competitive access to storage • Storage manager issues bulk water supply entitlements to retail businesses and large consumers • Distribution • Dual supply systems encouraged (Supply system bypass possible) • Third party access to first-use dsn system for desalination, private dams, private storm water capture, etc • Retail • Competition and innovation • Postage stamp pricing is removed • Sewage infrastructure maintenance • Full cost recovery • Sewage treatment • Charging households for estimated load • Stormwater infrastructure • Development as a water source • Tradeable credits for peak load reduction

21. Water source management Water distribution Water retailing Sewage disposal Unbundling institutional arrangements Unbundling would allow competition and markets to emerge.

22. New South East Qld Admin. Structure GRID MANAGER

23. Key Elements of SE Qld Approach • Queensland Water Commission sets policy and performance targets • SEQ Water Grid Manager is sole buyer of bulk services and seller of water to retailers • All contractual relationships are between WGM and “grid participants” • Key objective is delivery of a level of service (LOS) to SEQ – based on frequency, severity and length of future restrictions • SEQ Water Grid Manager is bound by a System Operating Plan (SOP) which Sets operating principles for grid based on hydrology to meet LOS

24. SEQ Pricing Approach • SEQ WGM pays full cost for bulk services immediately (except for differential returns) • Prices developed using regulatory pricing model • 10 year price path for bulk prices to retailers (and power stations) • Differential returns on “drought” and “non-drought” assets • Based on individual Council starting prices and common increments (2 Councils with deferred commencement) • Substantial debt accrues to WGM • Ultimately leads to cost recovery over a medium term timeframe

25. SEQ Contractual Approach • Initial contracts are interim and rudimentary (2008-10) • Interim bulk contracts are cost pass-through • Retail contracts are volumetrically based • Operating protocols are being developed to govern operational interfaces • Future contract development will focus on identifying cost and value drivers, and structuring incentives accordingly. • Recognition that volume is not controllable by bulk entities

26. Councils submit proposed number & form of Retailers New Retailers commence Single Distribution Entity commences Reform Legislation Developed Nov 2007 July 2008 July 2009 Water Grid Manager & interim charges End of Transition Pricing Period for Grid Supply/Sales Bulk Transport Entity Second Phase Policy and Regulatory Reforms Bulk Supply Entities Implementation and timing July 2010

27. 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 • Sewage charges based on load not land value

28. Developer & Builder ~ 80% Building and subdivision incentives • Developers required to source urban water entitlements prior to subdivision • Options • Irrigators • Urban storm water credits • Aquifer storage and recovery • Urban infill and extensions under same regulatory disciplines as a new home • Mandatory disclosure of water efficiency at house sale Source: Marsden Jacob 2005 PMSEIC 2007 Owners & Occupiers ~ 20%

29. Opportunities • Pricing structures, investment rules and trading rules that signal • Long-run opportunity costs and supply risks • Short-run opportunity costs and scarcity • Supply and disposal system unbundling • Competitive access to all infrastructure • Depreciation rules that recognise assets can become redundant • Independent management of externalities • Building and subdivision incentives • Independent Regulator

30. Sequencing • Raise prices to reflect full costs and scarcity • Unbundle the supply and distribution system • Put in place an arrangement that keeps non-competitive government activity out of non-essential water supply • Wait for innovation

31. Concluding comments • Out of supply adversity comes competitive opportunity • SA Water in partnership with industry could turn Adelaide and South Australia into the water management capital of the world.

32. Download our reports and subscribe to droplets at www.myoung.net.au Contact: Prof Mike Young Water Economics and Management Email: Mike.Young@adelaide.edu.au Phone: +61-8-8303.5279Mobile: +61-408-488.538 www.myoung.net.au

33. Implementation and timing • Second Phase Reforms: • Grid by-pass rules, Third Party Access regime • Wholesale Balancing/Trading mechanisms • Regulation of Land use Planning & Approvals • Enhanced Asset Management Regime • Development of Economic Regulation Framework • Review of Scope for Competition • Update of regulatory and contractual framework to reflect retail &distribution restructure