Economics for Sustainability Economics for Sustainability Water - - PDF document

Economics for Sustainability

K Peter Kolf General Manager Economic Regulation Authority

23 August 2006 Institute for Sustainability & Technology Policy

Economics for Sustainability

Water Efficiency

Overview

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

Economic Efficiency

Singularity

• Productive efficiency
• Allocative efficiency
• Dynamic efficiency

Hope for the Future: The Western Australia 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

Environmental Protection Social Advancement Max Welfare

Optimum

Objective Function

Maximise:

• Needs of current and future generations

Subject to:

• Environmental protection
• Social advancement
• Economic prosperity
• Re-elect Minister

Environmental Protection Social Advancement Max Welfare Max election of Minister ?

Matters the Authority must have regard to:

• 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

Max π Max W

kL of Water Consumption

Usage Charge

Number of Connections

Service Charge

π = 0 Optimum

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

Supply of Goods & Services

Bread, Butter & etc. Pipelines, Wires & Etc. Free to air, Defence & Etc. Fisheries, Water resources & Etc.

Monopoly

Other monopoly factors:

• Economies of scale
• Economies of scope
• Barriers to entry – new infrastructure

Other Externalities

• Environmental damage
• Resource management

No Proof of Hypothesis

“The great difficulty in the social sciences (if we may presume to call them so) of applying scientific method, is that we have not yet established an agreed standard for the disproof of an hypothesis. Without the possibility of controlled experiment, we have to rely on the interpretation of evidence, and interpretation involves judgement; we can never get a knock-down answer. But because the subject is necessarily soaked in moral feelings, judgement is coloured by prejudice.”

(Joan Robinson, Economic Philosophy, 1962, p26)

Prejudice

“Anyone who says to you: ‘Believe me, I have no prejudices,’ is either succeeding in deceiving himself or trying to deceive you.”

(Joan Robinson, Economic Philosophy, 1962, p26)

The Economic Regulation Authority

Functions

• Administers industry specific legislation
• Inquiries (Referred by Government)

Features

• Independent of Government & Industry

Economic Regulation Authority

Governing Body

General Manager Corporate Director References and Research Executive Director Licensing, Monitoring & Customer Protection Director Gas and Rail Access Manager Finance & Administration Executive Director Industry Policy

Water Pricing for Sustainability

Maximise Welfare

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

Price

Inclining & Declining Costs

MC1 AC1

Quantity

MC2 AC2

Cost of Water

• Water storage
• Gnangara Mound
• Bore water & tanks

($1.09 - $2.91/kL)

• South West Yarragadee

($1.07/kL)

• Water trading

(Harvey $0.6/kL)

• Recycling

($0.5 - $1.00/kL)

• Desalination

($1.16/kL)

Water Scarcity “due to agriculture” Report

• 7:30 Report – Kerry O’Brian, 16 Aug 06
• Frank Rijsbermann, Sri Lanka

– “..the world needs roughly 70 times more water to produce food than for cities.” – Why desalinate? (agricultural water is 1/10th the cost) – Water trading? – (Water Scarcity is in part an allocation problem)

Long Run Marginal Cost

• Turvey Method (1.20/kL)
• Average LRMC (0.70/kL)

– Future improvements in technology – Impact of future opening of water market

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

Conclusions

• Water is not a special case
• There is no water scarcity
• Water - partly an allocation problem
• Water pricing can assist
• Water recycles real well
• Recycling water may pose an energy issue (CO2

)

• Objective is maximising welfare