Economic Regulation in Energy Economics for Sustainability Water - - PDF document

Economic Regulation in Energy

K Peter Kolf General Manager & CEO Economic Regulation Authority

20 June 2007 Institute for Sustainability & Technology Policy

Economics for Sustainability

Water Efficiency

Overview

• The Economic Regulation Authority
• Analytical Framework
• Water Pricing for Sustainability

The Economic Regulation Authority

Functions

• Administers Access to Infrastructure
• Licenses Service Providers
• Monitors & Regulates Markets
• Inquiries (Referred by Government)

Features

• Independent of Government, Industry & Consumer

Groups

Economic Regulation Authority

Governing Body

General Manager Planning & Executive Support Director References and Research Executive Director Licensing, Monitoring & Customer Protection Director Gas and Rail Access Manager Finance & Administration Executive Director Competition Markets & Electricity

Inquiries in the Water Industry

• 1. Annual Urban Water & Wastewater Pricing May 2007
• 2. Harvey Bulk Water Pricing May 2007
• 3. Country Water & Wastewater Pricing July 2006
• 4. Esperance – Kalgoorlie Bulk Water Supply Nov 2005
• 5. Urban Water & Wastewater Pricing Nov 2005

Future Inquiries in the Water Industry

• 1. Competition in the Water & Wastewater Services Sector
• 2. Developer Charges

Analytical Framework

Economic Efficiency Singularity:

• Productive efficiency
• Allocative efficiency
• Dynamic efficiency

Hope for the Future: The Western Australian State Sustainability Strategy Sustainability is defined as: Meeting the needs of current and future generations through an integration of environmental protection, social advancement, and economic prosperity.

Objective Function

Maximise:

• Needs of current and future generations

Subject to:

• Environmental protection
• Social advancement
• Economic prosperity

Economic Prosperity Environmental Protection

Max W Optimum

Matters to which the Authority must have regard:

• Promote the public interest
• Consider the long-term interests of consumers
• Encourage investment
• Consider the interests of investors & service providers
• Promote competition & fair market conduct
• Prevent abuse of monopoly power
• Practice transparent decision making

Section 26 Economic Regulation Authority Act 2003

Objective Function

Maximise:

• Long term interests of consumers

Subject to:

• Social advancement
• Environmental protection
• Economic prosperity
• Interests of investors & service providers
• Re-elect Minister

Objective Function

Maximise:

• Re-elect Minister

Subject to:

• Social advancement
• Environmental protection
• Economic prosperity
• Interests of investors & service providers
• Long term interests of consumers

Economic Prosperity Environmental Protection

Election of Minister Long Term Interests

• f Consumers

Interests of Investors

Supply of Goods & Services

Private Goods Bread, Butter etc Mixed Goods Pipelines, Wires etc Public Goods Free to air, Defence etc Common Property Fisheries, Water resources etc

Monopoly

Other monopoly factors:

• Economies of scale
• Economies of scope
• Barriers to entry

– infrastructure – legislative (legal)

Externalities

• Environmental
• Social
• Technical

Price

Inclining & Declining Costs

MC1 AC1

Quantity

MC2 AC2

First Principles of Intervention

• There is a demonstrated need for intervention
• It creates the right incentives
• It’s least restrictive on consumer sovereignty
• It’s benefits outweigh its costs
• It’s administratively simple, user friendly &

⇒ It actually works

Types of Intervention (Regulation)

• Public sector ownership & control
• Price control of private sector
• Market based regulation:

– Open access – Structural separation – Markets in contestable elements – Artificial markets where possible – Price or revenue cap if all else fails

• Monitoring / transparency

Water Pricing for Sustainability

Maximise Welfare

• Short run marginal cost ?
• Long run marginal cost ?
• Trade-off

Cost of Water

• Average Cost

($0.80/kL)

• Long Run Marginal Cost

($1.40/kL)

• Bore water & tanks

($1.10 - $3.00/kL)

• South West Yarragadee

($1.40/kL)

• Water trading

(Harvey $0.6/kL)

• Recycling

($0.5 - $1.80/kL)

• Desalination 2

($1.75/kL)

Tariff Structures

MC AR

Price Quantity

T1 q1 T2 q2 A B C Excess π = 0 A + C = B

Distribution of Residential Water Consuption

10 20 30 40 50 60 70 80 90 200 400 600 800 1000 1200 1400 1600

Household Consuption Kilolitres Aggregate Consuption GL

Total Consumption = 165 GL Ave Household Consumption = 283 kL Estimated 2005/06

Urban Residential Tariffs

0.00 0.40 0.80 1.20 1.60 200 400 600 800 1000 1200 1400 1600

Kilolitres per annum $/kL

Original Tariff

Urban Residential Tariffs

0.00 0.40 0.80 1.20 1.60 200 400 600 800 1000 1200 1400 1600

Kilolitres per annum $/kL

Original Tariff Proposed Tariff

PЄD

Service Charge (Original) $152.30 pa Service Charge (Proposed) $110.24 pa

Max π Max W

Number of Connections Water Consumption GL

Excess π = 0 Optimum

Water Company

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 S1 S6 S11 S16 S21 S26 S31

• 800
• 700
• 600
• 500
• 400
• 300
• 200
• 100

100 200 100-200 0-100

• 100-0
• 200--100
• 300--200
• 400--300
• 500--400
• 600--500
• 700--600
• 800--700

Profit

Number of Connections Water Consumption

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 1 6 11 16 21 26 31

• 200
• 150
• 100
• 50

50 100 150 200 150-200 100-150 50-100 0-50

• 50-0
• 100--50
• 150--100
• 200--150

Welfare

Number of Connections Water Consumption

Concluding Remarks

• Is water a special case?
• Is there water scarcity?
• Does water suffer an allocation problem?
• Can water pricing assist?
• Are there institutional problems?
• Can competition assist?
• Can markets assist?

Economic Regulation in Energy