The water storage problem

Transcription

1 Neal Hughes Australian Bureau of Agricultural and Resource Economics and Sciences & Australian National University, Canberra, Australia Discussion Paper 1351 December 2013 This article discusses the increasing use of storage rights in water markets to efficiently allocate water under conditions of scarcity. The Global Water Forum publishes discussion papers to share the insights and knowledge contained within our online articles. The articles are contributed by experts in the field and provide: original academic research; unique, informed insights and arguments; evaluations of water policies and projects; as well as concise overviews and explanations of complex topics. We encourage our readers to engage in discussion with our contributing authors through the GWF website. Keywords: water markets, storage rights, efficient, scarcity, allocation. For a long time our response to water scarcity has been to invest in large engineering projects, particularly new dams. Increasingly engineering solutions are becoming too expensive and we are turning to economists and institutional reforms. Economists main prescription is water trading: place a cap on water extraction and en- courage decentralised trading of water rights. While nowhere is water trading perfect (always being subject to transaction costs and externalities), it has been successful in achieving a more efficient and fairer allocation of water during times of shortage, as it did in the Murray-Darling Basin (MDB) during the recent Millennium drought. However trading can do nothing to prevent water scarcity. Growth in demand and climate change mean that regions like the MDB or the Western US are facing much more frequent scarcity. The costs of water scarcity are concentrated in drought events. Even with efficient trading the costs of droughts can be extremely high. In the absence of an engineering miracle, the only thing we can do to alleviate droughts is alter storage policy. Historically the management of our major water storages has been relatively arbitrary. Storage reserves were accumulated on the basis of simple reservoir operation rules, developed at a time when demands were relatively low and climate change was unheard of. These rules will not be adequate in a future where rainfall and inflows are lower and more volatile and demand frequently exceeds supply. Central management of storages is now extremely complex. Managers face difficult trade-offs between maintaining storage reserves and releasing water for consumptive use whilst also providing environmental flows and Suggested Citation: Hughes, N. (2013), The water storage problem, GWF Discussion Paper 1351, Global Water Forum, Canberra, Australia. Available online at: water- storage- problem/.

2 minimising the probability of flood damage. All of this has to be undertaken with very limited information on future inflows and importantly on the preferences of water users. In response to these challenges we are now seeing a trend toward decentralised management of storages. This has been facilitated by new institutional reforms, specifically the definition of water storage rights. These rights allow users to maintain private storage reserves in public storages (surface reservoirs) and in effect make their own storagerelease decisions. Storage rights are now common place in the MDB. 1,2 While storage rights have existed here for decades the pace of reform has increased dramatically in recent years in response to drought. Similar arrangements are also evolving in a number of Western US regions. Recent developments on the Colorado river are particularly instructive. The Colorado river basin study 3 quantified impending shortages and undertook exploratory work on engineering solutions - everything from desalination to a channel from the Mississippi. The general conclusion was they re all too expensive. What s interesting is that all of the major reforms in the Lower Colorado to date (associated with the interim guidelines 4 ) are related to storage policy, specifically: A change in water allocation/release rules ; Changes to the operation of Hoover and Glen Canyon dams (how storage reserves are distributed across them); and, The introduction of a form of storage right: Individually Created Surplus (ICS). Historically the storage release rule in the Lower Colorado has been: release water until all demands are met. With shortages now looming for the first time, the states have agreed to alter this rule so that reductions in allocations (primarily affecting Arizona) occur earlier, in order to maintain storage levels and reduce the chance of even greater future shortages. ICS effectively allows Lower Colorado contractors to bank unused allocations in Hoover Dam. The rules around ICS are somewhat restrictive, requiring unused water to be de- rived either from a system efficiency project or through extraordinary conservation such as an approved land fallowing project. Despite these restrictions significant volumes have been accumulated to date: over 1 million acre feet, almost 10 per cent of the current balance of Hoover Dam. Surface storage rights exist in a number of other US regions. For example in central California water contractors have storage rights over San Luis reservoir, which evolved in response to shortages during the 90's. There are also some examples of rather sophisticated storage right systems, predating those in the MDB, including the Texas Lower Rio-Grande which evolved in response to droughts of the 50 s. Much research has been undertaken in Australia on the issue of surface water storage rights, including the work of Dudley and Musgrave 5, Brennan 6 and Hughes and Goesch 2. Brennan 6 and Hughes and Goesch 7 make the case for decentralised storage management, outlining the information problems facing central planners, and estimating the costs of sub optimal storage polices. In a pending report Hughes et al. 2 compare the main approaches to storage rights currently prevailing in the MDB. One of the most sophisticated approaches in the basin, if not the world, is at St George in southern Queensland 1 where a user level Capacity Sharing system has been successfully implemented, based on the concept of Norman Dudley 5. Capacity sharing involves allocating each user a percentage share of the storage capacity and inflows of a reservoir. Each user

3 can then manage their own water account independently. At St George user accounts are updated daily to reflect new inflows, withdrawals (releases) and even storage and delivery losses. As with water markets, the problem with decentralised storage is that defining property rights to a commodity as complex as water is difficult and costly. If storage rights are poorly defined they can make matters worse, particularly if the effects of storage decisions on reservoir spills are not internalised. 2,7 To avoid this problem storage rights need to adequately reflect hydrological constraints. This is one of the many strengths of sophisticated systems like Capacity Sharing. The simple prescriptions of economists - be it trading or storage rights - are powerful theoretical ideas, but they can be difficult to implement in practice. Realising their potential requires sophisticated water accounting systems which accurately reflect the physical realities of water. Getting this right demands a cooperative interdisciplinary approach, one that can combine basic economic ideas with hydrological and engineering knowledge.

4 References 1. Hughes, N. and Goesch, T. (2009a), Capacity sharing in the St George and MacIntyre Brook irrigation schemes in southern Queensland, Australian Bureau of Agricultural and Resource Economics. 2. Hughes, N., Gibbs, C., Dahl, A., Tregeagle, D., Sanders, O. and Goesch, T. (2013), Storage rights and water allocation arrangements in the Murray-Darling Basin, Australian Bureau of Agricultural and Resource Economics and Sciences (publication pending). 3. United States Department of the Interior Bureau of Reclamation (USBoR) (2012), Colorado River Basin Water Supply and Demand Study, available at: 4. United States Department of the Interior Bureau of Reclamation (USBoR) (2007), Colorado River Interim Guidelines for Lower Basin Shortages and the Coordinated Operations for Lake Powell and Lake Mead. 5. Dudley, N. J. and Musgrave, W.F. (1988), Capacity sharing of water reservoirs, Water Resources Research 24(5): available at: 6. Brennan, D. (2008), Missing markets for storage and the potential economic cost of expanding the spatial scope of water trade, Australian Journal of Agricultural and Resource Economics 52: Hughes, N. and Goesch, T. (2009b), Management of irrigation water storages: carryover rights and capacity sharing, Australian Bureau of Agricultural and Resource Economics. About the author(s) Neal Hughes is a Senior Economist with the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). In 2012 Neal was awarded a Sir Roland Wilson Foundation Scholarship for Phd study at the Australian National University. Neal's PhD research focuses on the design of water property rights in rivers with large reservoirs. About the Global Water Forum The Global Water Forum (GWF) is an initiative of the UNESCO Chair in Water Economics and Transboundary Governance at the Australian National University. The GWF presents knowledge and insights from leading water researchers and practitioners. The contributions generate accessible and evidence-based insights towards understanding and addressing local, regional, and global water challenges. The principal objectives of the site are to: support capacity building through knowledge sharing; provide a means for informed, unbiased discussion of potentially contentious issues; and, provide a means for discussion of important issues that receive less attention than they deserve. To reach these goals, the GWF seeks to: present fact and evidence-based insights; make the results of academic research freely available to those outside of academia; investigate a broad range of issues within water management; and, provide a more in-depth analysis than is commonly found in public media. If you are interested in learning more about the GWF or wish to make a contribution, please visit the site at or contact the editors at editor@globalwaterforum.org. The views expressed in this article belong to the individual authors and do not represent the views of the Global Water Forum, the UNESCO Chair in Water Economics and Transboundary Water Governance, UNESCO, the Australian National University, or any of the institutions to which the authors are associated. Please see the Global Water Forum terms and conditions here.

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