The Question of Water

The problem with water restrictions – A system to reduce water demand –
Logistics – Cost savings and calculations

“There are growing pressures upon urban water supplies, boosted by increasing urban populations and the recurrence of droughts. All levels of Government, industry and households have an important role in conserving urban water resources.”

Urban Water Use Factsheet Department of the Environment, Water, Heritage and the Arts
Australian Federal Governments

“In an age when man has forgotten his origins and is blind even to his most essential needs for survival, water along with other resources has become the victim of his indifference”

Rachel Carson

“Recent drought conditions across Australia have significantly depleted water storages in most urban centres. While the recent drought has been abnormally severe, current urban water shortages are indicative of a broader long-term trend of increasing urban water scarcity in Australia. This trend has been driven by a gradual long-term decline in mean inflows into storage, increasing demand because of population growth and minimal additions to supply capacity.”

ABARE report: Urban Water Management: optimal price and
investment policy under climate variabilit,
Neal Hughes, Ahmed Hafi, Tim Goesch and Nathan Brownlowe
August 2008

The problem with water restrictions

The early years of the 2000’s have confirmed that Australians do not like water restrictions as a means of reducing water consumption. Restrictions are fundamentally unfair and are disliked by both the authorities and the population, so why do we continue to use them as our primary means of controlling water use during periods of shortage – especially when the normal economic response to a shortage is to allow price to act as the rationing mechanism? Unfortunately authorities are all too aware that the community also dislikes the price of water increasing over the cost of supply because it is seen as a tax on a community resource .

For pricing to work to reduce consumption, the price of water would have to increase substantially above the cost of delivery before it could achieve the same level of reduction as restrictions. But this raises another question of fairness: Should those who can afford to pay be given greater access to a community resource that is necessary for life and seemingly free? It’s a concern that has made the concept of demand management for water politically difficult to implement.

There are times, however, when authorities do increase the price of water to fund new infrastructure or they put in place differential pricing structures depending on how much water is used per meter. Both of these measures are generally accepted as fair and reasonable.

Applying the concept of Rewards to the question of water use is a way of addressing all the above problems and doing it in the most economically efficient manner possible. It achieves this by using price as a demand management tool, by using money as a Reward to reduce consumption of water and by using a free market in ways to efficiently increase the supply of water.

A system to reduce water demand

Water Rewards can be implemented within any community or catchment in the following way:

  1. When it is decided that Water Restrictions are needed, determine the desired level of consumption rather than introducing arbitrary restrictions. Then set the price of water so that the price works to reduce demand to the level required. This would most likely involve tiered pricing that places an additional cost on any water used in excess of the desired consumption level.
  2. The extra money collected over and above the cost of supply is put into a Water Rewards fund.
  3. Money in the fund is distributed to the population as Rewards in inverse proportion to the amount per head consumed.
  4. Stipulate that Rewards may only be spent in an electronic marketplace on ways of saving water or increasing supply.
  5. Allow Rewards to be traded. This ensures that those who cannot think of ways of investing the Rewards still receive some (discounted) benefit for reducing their water consumption. The market and water authorities also gain through through the expenditure of Rewards on ways to further save water or increase the water supply.

Logistics

Water Rewards would not have to be set up by the Government and could easily be controlled by a body external to the local Water Authority. It will however require a board to control policy and should involve representatives from the Government, the Opposition, the Water Authority and the community. This organisation could then – in consultation with the Water Authority – set the amount of money to be collected and distributed as Rewards.

This means that the average price of water stays about the same but that the high consumers pay for water at a higher average price.

Exactly how the Rewards are distributed is a decision for the board, but one suggestion is to issue them in inverse proportion to the amount of water consumed per head.

Mindful of the need for fairness, no-one will have join a Water Rewards system unless they choose to. Participants will also need to be aware that once they have signed up to the system, they will incur some reporting obligations including the need to nominate how many people are linked to their particular water meter.

Similarly, merchants will be under no compulsion to accept Water Rewards for payment. Their involvement is purely voluntary and, like the participants, they will incur reporting obligations. The most important of these is the need to specify what products and services they are offering to redeem for Rewards, and their assertions as to how much water these products and services will save or generate.

If either a Rewards holder or a Rewards merchant goes against the rules of the system they will be excluded from participating for a period of time.

Ease – of enrolment, managing water savings, redeeming Rewards and managing overall involvement in the system – will be critical to attracting participants and to the overall success of the system. Therefore, enrolment must be kept simple such as via a phone call requiring the supply of a small amount of data about the household receiving Rewards.

Ideally Rewards recipients should be able to “set and forget” their Rewards accounts. Having enrolled, the consumer should experience little change other than to receive an account of Rewards that can be spent on anything in the Water Rewards electronic marketplace. It’s not greatly different to the idea of saving up breakfast cereal coupons or frequent flyer rewards to redeem them against a preferred item from a periodic catalogue. It’s just that with Rewards, the goods and services benefit both the consumer and the community.

Cost and Savings Calculations

The price elasticity of water varies from country to country and from state to state. According to the Grafton and Kombas 2007 estimate, price elasticity within the Sydney catchment is generally estimated at around 30 percent. This means that if the price of water is increased by 100 percent, demand will drop by 30 percent.

Projects approved in recent Commonwealth government community water grants also show that for every $10 spent on water saving and water recycling infrastructure we typically save or increase supply by 1 kilolitre per year.

Each Water Rewards system will have its own requirements, but for the sake of example, let’s assume that we are setting up a system in a community that needs to achieve a 20 percent reduction in water consumption within six years. Our starting point is the current average price of water, which is $1.50 per kilolitre. The next thing we need to identify is how much do we need to increase the price of water to achieve our targeted reduction?

According to the elasticity estimate, a 15 percent increase in the price of water will achieve a 4.5% reduction. The money distributed as rewards is likely to cause a reduction of 15% and the money invested in water harvesting, recycling and reuse will save another 11% within six years. The advantage of the scheme is that the price can be increased and decreased according to anticipated demand and supply.

Each $1 Reward will deliver a return of 15 cents per year forever. This means that Rewards will be traded at close to par value. It also means that while community members will have to cope with an initial 15 percent price increase for their water, the result will be an effective net cost reduction due to the ongoing return stemming from the investment of the Rewards.

It also means that many people will invest more money than they receive in Rewards as it gives them a way to get a good return on investment.

How can this be?

What happens with Water Rewards is that the monopoly on water supply by a single authority is broken and the profits from supplying new water and saving water will accrue to individuals who spend Water Rewards, as opposed to profits automatically going to the government and the Water Authority. Of course this also means it is difficult to get such a scheme introduced because the Water Authority and the government are the controllers of the community resource and believe they have an automatic right to the profits – which can then be spent on other goods and services instead of the supply of water.

And the cost to operate such a system? Modern technology makes Water Rewards very affordable. Why else would so many companies model marketing campaigns on similar schemes? Our recommendation is to take a lesson from the credit card companies and recoup the costs of the system from the merchants who wish to offer their water saving goods and services goods to Rewards holders.

Water Rewards is an eminently achievable system but breaking the government/authority expectation of revenue will be difficult. We are confident however that as the problem of urban water management grows under the combined impact of global warming and population pressure, Water Rewards will make headway as a fair and politically acceptable solution that delivers measurable results for the community. 

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