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Managing the Demand for Water

Managing the Demand for Water. John Braden University of Illinois, USA Visiting, Katholieke Universiteit Leuven Lecture2 Leuven, Belgium March 2004. Outline. Economic ideal Prices & elasticities Realistic demand management Ownership. Helpful Resources.

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Managing the Demand for Water

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  1. Managing the Demand for Water John Braden University of Illinois, USA Visiting, Katholieke Universiteit Leuven Lecture2 Leuven, Belgium March 2004

  2. Outline • Economic ideal • Prices & elasticities • Realistic demand management • Ownership

  3. Helpful Resources • Baumann, D. et al. 1998. Urban Water Demand Management and Planning. McGraw-Hill. • Lallana, C. et al. 2001. Sustainable Water Use in Europe, Part 2: Demand Management. EEA, Environmental Issue Report no. 19.

  4. Economic Ideal: Maximize Value • Water should go to the highest value uses • Equalize value at the margin maximize total value • Minimize supply costs

  5. Maximizing Value of Water Pw Drinking Industry Agriculture Total Demand Pw Water Wd Wi Wa W

  6. Value by “Use” (U.S. 1980)* *Gibbons, D. 1986. The Economic Value of Water; Hanemann, M. 1998, in D. Baumann et al., Urban Water Demand Management and Planning.

  7. Value by “Use” (Europe 2001)* • Lallana, C. et al. Sustainable Water Use in Europe, Part 2: Demand • Management. European Environment Agency, Copenhagen, 2001

  8. Price Elasticity of Demand • η = | (%Δ Q) / (%Δ P) | • If η > 1, increasing price reduces revenues • If η < 1, increasing price increases revenues • Sectoral elasticities • Domestic: 0.2 – 1.4 (higher in summer/arid) • Industry: 0.2 – 0.8 • Agriculture: 0.8 – 1.4 (higher w/ low-value crops)

  9. Elasticity and Management • Low-value agriculture most responsive to price • Households & industry do respond to price • Increasing price usually increases revenue, as well as inducing conservation

  10. Ideal vs. Real Water Management a) Geography and jurisdiction b) Marginal vs. fixed costs c) Infrastructure combines uses d) Acceptability and practicality e) Planning

  11. a) Geography and Jurisdiction BORDER LAKE RIVER AQUIFER

  12. Geography and Jurisdiction • Jurisdiction limits value considerations • Cost of moving water limits market scope • Externalities • Interconnected resources • Downstream consequences

  13. Challenges to Geographic Isolation • Local vs. regional perspectives • Unitization of supply • Regional integration of use • Conveyance charges • Free trade imperatives • International uses of shared resources • Exporting embodied water

  14. Resolving Geographic Issues • Supply • Conjunctive management (unitization) • Pricing at opportunity cost of supply • Regulation of conveyance • Quality regulation • Demand • Nondiscrimination • Pricing to include full costs of externalities and delivery

  15. b) Cost of Water Supply Cw (€) Infrastructure Costs Operating Costs (MCw) Water

  16. “Natural Monopoly” € MVw Operating costs not covered By marginal cost pricing. MCw Water

  17. “Natural Monopoly” • High fixed costs, low operating costs • Scale and network economies • Marginal cost pricing fails to cover fixed costs

  18. Solutions to Natural Monopoly • Sole provider (public utility) • Public ownership w/ taxpayer oversight • Private ownership w/ regulatory oversight • Two-part pricing • Connection fees • Use tariffs • Use fees – variable pricing • Cumulative quantities - resource • Peaks - infrastructure

  19. c) Infrastructure • Current practices • Uniform quality standards • Centralized treatment • Integration of supply & conveyance • Uneven metering • Leakage

  20. Smart Infrastructure • Smart technologies • Real-time sensors • Metering • Quality tagging • Recycling • Sophisticated pricing (e.g., waste charges) • Peak shaving • Quality/reliability differentiation • Innovation from markets • System inventories and replacement

  21. d ) Acceptability & Practicality • Public education • System viability • Building codes • Transparent tariff structure • “Lifeline” rates for basic use • Peak-use pricing • Future needs, not previous costs • Minimize cross-subsidies • Performance reporting

  22. e) Planning • Demand forecasting • Short-term vs. long-term • Mutivariate: Population, Real income, Family structure/housing mix, Geographic differences, Economic structure • Technological shifts: Reuse, quality segmentation • Building codes • Real prices (Demand vs. extrapolation)

  23. Planning • Infrastructure & growth • Conserve all resources, not just water • Flexibility • Complementary R&R (sewer, telecom, electricity) • Utilities leading growth • Supply forecasting • Alternative resources • More efficient technologies

  24. Planning - Tariffs • Integrating demand and supply • Revenues to meet full costs (future) • Adequate • Stable • Allocate costs • Fair • Minimize cross-subsidies • Provide incentives • Static & dynamic • Encourage conservation • Transparent & easily administered

  25. Conclusions-Managing Demand • Demand as well as supply must be managed • Forward-looking, w/ mutivariate forecasting • Demand, supply, & conservation respond to price • Equity and transparency in application

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