Balancing Environmental Flows and Water Use Values in Texas

SB 3 - Environmental Flows Protection Requires Balancing with all Water Use Values at StakePresentation toTexas Water Summit 2007Texas Water Development Board William W. Wade Energy & Water Economics Columbia TN Wade@energyandwatereconomics.com December 3 2007

Outline of Presentation • SB 3 and Texas Water Code Remarks II. M&I Water Service Reliability III. Value of M&I Service Reliability IV. M&I Reliability Planning Depends on Economic Values and Tradeoffs V. Groundwater Valuation Illustration

I. Texas Water Code Requires Balancing all Public Uses of Water incl Instream Flows • Texas legislature requires the Texas Commission on Environmental Quality to balance all public interests and, to the extent practicable, provide for the freshwater inflows and instream flows necessary to maintain the viability of the state's streams, rivers, and bay and estuary systems. . . .

I. SB 3 Contains Substantial Consideration of Adequate Environmental Flows • Sec. 11.1471. • (a) The commission by rule shall: • (1) adopt appropriate environmental flow standards for each river basin and bay system that are adequate to support a sound ecological environment, to the maximum extent reasonable considering other public interests and other relevant factors; • (b) In adopting environmental flow standards for a river basin and bay system under Subsection (a)(1), the commission shall consider: • (7) economic factors; • (8) the human and other competing water needs in the river basin and bay system;

I. SB 3 - Balancing Competing Uses? • Two inexorable trends press on the Texas’ limited water supplies: • Rising population, with attendant rising demands for water; • Increasing efforts to preserve and protect remaining ecosystems and habitat to support wildlife. • Future water development must carefully weigh alternatives to balance uses of limited water sources. • Water Code and SB 3 appear silent about a process to balance competing uses.

Value Competing Uses to Balance Competing Uses • At the most simplified conceptual level, consideration of protection of natural resources “to the maximum extent reasonable” entails an economic valuation of the water resources instream in context with other competing uses and values of Texas’ water supplies. • Not simply to find the most cost-effective supply alternatives, but to discover the best allocations of limited water resources. • Valuation of M&I water supplies is what I will address – part of the data set necessary to conduct full blown Least Cost Planning (LCP), which is the analytic process used to balance economic values at stake.

II. What is M&I Water Service Reliability? • Turn the switch; pick up the handset; turn on the tap. You expect flawless service. • Electricity and telephone utilities meet extremely high—and regulated—standards of reliability. • Well over 99.99 percent. • What is the reliability standard for water supplies? • Water supply - one of the essential infrastructure utilities on which our society depends. • Long term reliable water supply - essential to protect economic climate and healthy quality of life. • Texas water supply reliability standards are not regulated.

II. What is Water Service Reliability? (2) • Water is a natural resource, endowed by nature and harnessed only after the fact by mankind. • Unlike telephone and electricity service, ultimately a region’s water supply has a hydrologic limit! • You cannot develop what isn’t in the watershed! • You cannot develop what needs to stay in the river/Aquifer! • What if you couldn’t wash the car on Saturday? • . . . Couldn’t water the lawn at all? • . . . Flush the toilet every time?

II. What is Water Service Reliability? (3) • Achieving supply reliability in the face of population and economic growth is an economic challenge, more than a resource issue. • Balancing competing needs with limited watershed resources entails consideration of economic values at stake. • The need for supply reliability stems from three aspects that all utilities share: • 1. Shortages have high cost to society. • 2. Long lead-times are necessary to bring capacity on-line. • 3. Storage and transportation of the commodity is limited.

III. Value of M&I Water Service Reliability • Supply reliability measures a water system’s expected success in avoiding detrimental economic, social, and environmental effects from water shortages. • Reliability is an economic outcome of a balancing process. • What makes economic sense given competing needs?

III. Value of M&I Water Service Reliability (2) • Reliability of water service depends on: • Size and types of M&I water requirements. • Competing watershed water uses. • Options for managing future requirements. • Resources, conservation, contingency actions. • Potential size, frequency,and duration of shortages. • Costs of drought water management measures. • Losses associated with water shortages. • How do these pieces fit together?

III. Value of M&I Water Service Reliability (3) • Starting Point - Direct shortage costs and losses. • Losses: • Residential quality of life and Commercial needs. • Direct economic output losses – industry & tourism. • Landscape losses - trees, shrubs, and lawns. • Golf courses, parks and resort areas impacts. • Landscaping businesses sales. • Costs: • Added costs for conservation programs. • Lost agency revenues for reduced water sales. • Fitting all the pieces together is a data intensive complicated process called Least Cost Planning (LCP).

IV. M&I Reliability Planning • Objective of reliability planning: • Find the most economic way of adding increments of reliability – not simply new supplies. • So long as the benefits -- avoided shortage costs -- exceed the costs of additional reliability. • Requires an estimate of: • Marginal shortage costs or marginal values of supply. • Marginal costs of supply and management options. • Water supply service enhancement proceeds until marginal cost of investment equals the marginal value of water.

IV. M&I Reliability Planning (2) • Preferred plan: • Combination of water management options likely to produce the lowest overall economic cost. • The economically optimal plan is the lowest total of expected shortage losses and costs plus the costs of additional long-term supply and management alternatives. • In short, find the solution that allocates water resources among competing uses that balances avoided shortage costs with environmental and project costs. • One data point necessary to have in hand is the valueof water supply reliability or adequacy to M&I users. • How do you determine these values?

V. Groundwater Valuation Illustration • Only one estimate of groundwater values for M&I uses is found in the literature for the Edwards Aquifer. • Griffin and Mielde, AJAE 2000. • City of Memphis depends on water supplies from the Memphis Sands Aquifer, a large aquifer underlying West Tennessee, North Mississippi and the eastern edge of Arkansas. • Methods to value incremental supplies of groundwater from the Memphis Sands Aquifer could be usefully applied to the Edwards Aquifer.

V. Value of Groundwater is Derived from Consumers’ Demand for Finished Water. Shape of demand curve depends on elasticity of demand Consumer Surplus Cost of Service

V. Residential and Commercial Water Demand Models • The value placed on water use is dependent upon the demand for water as described by the price elasticity of demand. Elasticity measures the responsiveness of the quantity demanded of water to its price. • MLGW data allowed estimation of Memphis demand curves and calculation of price elasticities for the Memphis service area. Water sales (the dependent variable) typically are analyzed as a function of several independent variables including price, demographic characteristics, and climate variables. • Water sales and revenues for 1965-2006 obtained for MLGW residential and commercial customers allowed separate models to be estimated for these two types of users. Total water sales, in 1000 gallons per year, were divided by the number of connections to obtain average demand per household or commercial user. • Time series models estimated with OLS take the natural logs of some, but not all, variables. Coefficient values have the correct signs and are statistically significant.

V. Memphis Models Explain and Predict the Data Very Well. R2 = 84.7 R2 = 82.8

V. Price Elasticity Estimates for Residential and Commercial Water Use in Memphis. • The price coefficients in each model are interpreted as long run elasticities at the margin. The estimated values, -0.236 for the residential model and -0.341 for the commercial model, are very close to those reported from the literature • The 95% Confidence Interval of the price coefficient for the Residential model, -0.176 to -0.294, closely matches the range of elasticities found for other water service areas excluding the west and southwest. An insufficient range for commercial price elasticities is available. The 95% Confidential Interval range is -0.181 to -0.501 for the price elasticity of the estimated commercial model. • Experiments show that the long time series and price variability among decades of the data support the demand curves statistical properties.

V. Time Series Models work well because of the long period of data availability. Real Water Prices in Memphis, 1965-2005

V. City of Memphis Residential WTP Values of Groundwater Shortages

V. City of Memphis Commercial WTP Values of Groundwater Shortages

V. Annual WTP Values per Connection are Sharply Higher for Commercial due to Higher Water Use.

V. Reported Memphis Price Elasticities May be Lower than Texas Estimated Values • Memphis prices are among the lowest in the Country. • May cause price elasticity to be lower than Texas. • Memphis rainfall sharply higher and more evenly distributed across months than San Antonio. • Memphis average monthly high temperatures lower than San Antonio. • Memphis indoor water use is 86% of total. • May cause price elasticity to be lower than San Antonio. • Different conditions in Texas no doubt militate against transferring Memphis values to San Antonio.

Average Temps and Precip – Memphis v. San Antonio Annual Averages 72.3 79.8 54.4 32.9

Summary: Valuation of Services Provided by Water Resources Essential • Balancing competing values of limited water resources entails an economic valuation process dependent of substantial scientific information and data. • I find abundant reference to scientific studies within the Texas regulations, but no requirements or guidance to how to fit all the pieces together. • I have not looked into how the regional water boards are dealing with the process. • I have suggested a way to measure the values of reliable water supplies specifically to water users in San Antonio. • The valuation method could be applied to raw water supplies, whether groundwater or surface water.

End of Presentation

Least Cost Planning (4) • Figure 1 shows the expected shortage losses and costs • associated with alternative water management plans. • Plan 1 represents existing conditions. • Plans 2 -15 represent increasing effort to diminish losses and costs associated with shortages. • Additional water management options (both long-term and contingency options) reduce shortage costs and losses.

Least Cost Planning (6 ) • Increasing water management expenditures are illustrated by Figure 2. • No Costs are associated with the Base Line. • Costs rise with added increments of supply augmentation or demand management options.

Objectives of Presentation I. II. III.

Balancing Environmental Flows and Water Use Values in Texas