Water Policy Frontiers

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Water Policy Frontiers

• Prof. Mike Young
• Research Chair, Water Economics
  ManagementSchool of Earth and Environmental
  SciencesThe University of Adelaide
• Wednesday 21st June 2006

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My three year plan

• What
• Catalyse new ways of thinking about water
• Water for a Healthy Country as a National
  challenge
• Adding value to the National Water Initiative
• With the wisdom of hindsight, how would one
  set up a system if one did not have to
  worry about where we are today?
• How
• Play a positive independent role in the
  development of the next generation of water
  reforms
• Prepare a series of Droplets
• Single issue 2 pagers policy options ideas
  for further research
• Collaborate with many to prepare a policy-focused
  synthesis of what Australia knows (reports,
  papers, a book?)

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Droplets a draft list
Water accounting How would an accountant manage the River Murray? Do we manage backwards?
System management Managing dams Should markets allow to carry water forward from year to year?
System management A dynamic versus a constant cap? What would happen if the Cap was dynamic and varied according to a long term trend? Should the environment have a fully tradeable capacity share?
Water entitlements and trading Reducing the number of entitlements. Would a Murray-oh work? What can we learn from European Community experience with the Euro? Can trading be free?
Water entitlements and trading What is the role of the market is sourcing and managing environmental water?
Water entitlements and trading Ground-surface water trading. How should it work? How precautionary should one be?
Cost recovery Should the MDBC collect a water levy or a catchment management levy? A financially independent Commission?
Sourcing and managing environmental water Managing environmental assets How should trade-offs be made when impacts take 50 to 100 years to arrive?
Sourcing and managing environmental water Capital gains tax advantages of compulsory purchasing environmental water. Would it be better just to buy water and then let the market sort out the problems?
Governance Environmental trusts and other ways to hold environmental water? What happens if one develops mechanisms that take management for environmental outcomes out of the realm of government?
Governance Should the MDBC be set up under a separate Act and operate like an independent company?
Urban- Rural Interface Where and how will Australias growing urban population source its water? How much can come from recycling and how much from other sources? What is the role of pricing, trading and other policies in facilitating change in both sectors?
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Plagiarising from the Accountants

• Australia does not have a coherent,
  co-ordinated, consistent body of doctrine Paton
  and Littleton
• Purpose of accounts
• Improve decision making
• Facilitate evaluation
• Beneficiaries of accounting systems
• Those who depend upon the performance of the
  described system

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Insightful accounting concepts

• Aim to maximise the probability that the company
  (the system) will continue to operate for ever
• Focus on full, complete and costed disclosure
• Outcome not input focus allocate according
  to final performance gt reverse planning
  processes
• Challenges
• Setting transmission exchange rates
• Setting entitlement conversion ratios
• Consolidated accounts - No double counting
• Liabilities (Declaring expected future impacts
• Performance ratios beyond benchmarking
• Transparent disclosure of accounting problems

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Key accounting concepts

• Two types of accounts
• Internal Management information for the Board etc
• External reporting to investors (Water users) a
  big research challenge
• Reporting responsibilities
• Obligation to communicate to those with
• limited access to information and
• limited ability to interpret it
• A single investment decision is more significant
  for a small investor
• Timeliness
• Commitment to report by a set date
• Control axiom rule off books at a date

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Ideas from Accounting

• Principles The accounts must balance
• Conventions Objectivity (a true and correct
  description of the situation)
• Materiality (Only record contracted activity
  not MOUs, announced intentions, etc)
• Doctrines Disclosure doctrine (Personal
  governance liability to disclose
  to share holders)
• Standards Accrual vs cost (Accrual accounting
  difficult)
• Requirement to present the accounts as an Ongoing
  Concern so potential bankruptcy is revealed
• Critical governance links from the notion of an
  ongoing concern

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1 Water accounting definition
A National Water AccountingProtocol?
2 Reporting entity definition
Scope
Conceptual Framework
3 Objectives
4 Structure
5 Elements
Account preparation
6 Basis of recognition
7 Basis of measurement
8 Techniques of measurement
11 Water use Flow Account(Inflows
outflows extractions)
Account Presentation
10 Storage Account Reserves
12 Compliancereporting (NWI Protocols)
9 Allocation Balance (Over-allocated Solvent?)
13 Applicability
14 Elevation (principle vs detail)
15 Research Methodology(due process)
16 Audit requirements
17 Transition policies
Policy change
Enforcement
18 Monitoring compliance
19 prosecution for non-compliance
Adapted from AARF
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A water accounting protocol?

• Plagiarising from the accounting profession
• Australia could set up a water accounting
  framework
• Defines functions of accounts
• Sets objectives for each function
• It could establish a set of
• Doctrines
• Protocols
• Guidelines for preparation
• Guidelines for interpretation (ratios)
• It could establish a role for independent water
  auditors
• That includes links to governance rules may
  force governance reform

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Two new MDBC reports on 6 risks
In 20 years, a further reduction in flow of
around 2,500 5,500GL.
? Effects below dams and hence outside release
rules erode flows most.
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Possible reduction in mean annual River Murray
flow as a result of incomplete accounting
(baseline 1993/94)
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Known accounting solutions

1. Offset the flow reducing effects of establishing
   permanent vegetation, clay spreading etc by
   surrendering an entitlement equivalent to the
   expected mean effect
2. Defining tradable entitlement as a nett
   entitlement to prevent increased WUE erosion
   (return flow reduction)
3. Defining salinity interception as a water use and
   acquiring the necessary water from below the cap.
   Changes the cost benefit of most schemes!
4. Amending the cap to include all unconfined
   groundwater within, say, 10kms of the River as
   part of the system

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Research challenges

1. How to manage with much, much less water
2. The science of keeping wetland and estuary
   systems alive
3. Deciding when and how to make triage decisions

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The Murray Darling Cap

• Was a critically important initiative, with
  hindsight
• Ground water not part of the Cap
• No account of changing land use and technology
• Climate change not accounted for
• Challenging opportunities
• Including groundwater in the Cap (Carry
  forward, low cost storage)
• Defining an adaptive Cap (A 10 year moving
  average of inflows for the high security pool
  autonomous progressive adjustment.)
• Changing the supply rules for South Australia
• A mean as well as a minimum supply guarantee?
• Convert all entitlements into shares of
  standardised High or General security pools???
  (No state entitlements all tagged to the source)
• Moving from a cap to a consumptive pool system

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Thinking about environmental water

• Need to source more water
• Imperfect knowledge of opportunities coupled with
  imperfect science suggests need a very flexible
  environmental governance
• Yet there is a need for rapid responses to
  changing situations judgement!
• A Trust that buys and trades water?

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River Murray Environment Trust

• Board of 3 to 5 members responsible for the use,
  distribution and management of trust assets.
• Selection criteria
• Excellent chairing and public communication
  skills
• Strong but broad environmental and scientific
  credentials and ability to make judgements about
  whats best for River health
• Business sense and understanding of water
  markets, water trading and the needs of
  agricultural and urban water users.
• Trustees appointed as individuals by the Murray
  Darling Basin Ministerial Council (the settler of
  the Trust)
• Replacements appointed, by the Council on the
  recommendation of a non-partisan selection
  committee established by the Trustees in
  consultation with the MDBMC

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Trust Objectives

• To establish principles for and trial experience
  in the use of water trusts and similar entities
  to increase quantity of water available to river
  flow managers responsible for improving
  environmental outcomes throughout the Southern
  Connected River Murray System and its associated
  environments by
• Attracting donations bequests of money, water,
  etc for this purpose
• Operating strategically in the water market with
  a view to both enhancing the value of entrusted
  assets and increasing the Trusts capacity to
  help improve environmental outcomes
• Making water available to those responsible for
  the management of flows of water and the
  distribution of water for environmental purposes
• Seeking opportunities to support, foster,
  co-operate and invest in delivery of
  environmental outcomes in the River Murray
  System.

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Water efficiency tender

• A River Murray Environment Trust offers to
  partner with irrigators to make water efficiency
  savings
• Conditions of the offer
• Irrigators will be invited to offer to tender to
  sell up to 20 of their entitlement and use the
  money received to increase the irrigation
  efficiency. No more than 4 of any licence type
  in a region will be sourced.
• All entitlements sourced will be leased back to
  participants for the following irrigation season
  at no cost. Participants will be given one year
  to make the savings.
• The Trust will be required to use the water to
  improve the health of the River Murray System but
  may make some of water available to irrigators
  during a drought.
• Offers received before 30 September will be
  evaluated during the first two weeks of October.
  All participants will be notified if their offer
  has been accepted on October 15th (two weeks
  later). Payment will be made before 30th October
• For each licence type, a single clearing price
  will be paid. All irrigators who offer to make
  water available at less than the clearing price
  will receive the clearing price.

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Coles-Myer Schedule
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Extracts from Coles Myer 2005 Press Release

• Buy-back price 8.30
• 9.2 discount to Fridays closing price of 9.14
• 70.4 million shares bought back for a total of
  585m approximately 5.7 of Coles Myers
  shares
• All shares tendered in the buy-back at or below
  8.30 were bought back.
• Shares tendered into the buy-back at a price
  above 8.30 were not bought back.
• .
• On-market buy-back of up to 15 million shares

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Draft offer form

• Type of Licence South Australian River Murray
  Licence
• Note No more than 20 of any holding may be
  offered.
• Offer 1 .. ML _at_ not less than 1,500.00
  per ML
• Offer 2 .. ML _at_ not less than 1,475.00
  per ML
• Offer 3 .. ML _at_ not less than 1,450.00
  per ML
• Offer 4 .. ML _at_ not less than 1,425.00
  per ML
• Offer 5 .. ML _at_ not less than 1,400.00
  per ML
• Signatures
• Licence holder
• Registered interest (if any)
  ..

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Facilitating Structural Adjustment

• Impede
• Trading barriers because rules on partially
  specified
• Exit fees rather than supply contracts
• Facilitate
• Unbundle into separate components
• Remove purpose-based entitlement specification
  (Urban Rural - realise the gains)
• Low cost allocation trading (Qld free, SA over
  500 per temp. trade 20 per trade should be
  possible)
• (Entitlement reform is not urgent and expensive)
• Expedite
• Source environmental water using market-like
  processes

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Generalised framework for unbundling
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Alternative governance arrangements

• Research agenda
• Applicability of European concept of
  subsidiarity
• Can call in powers only when needed rather than
  delegated down
• Role of independent commissioners
• Role of corporate-like accountability

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Market-based instruments

• Allow all to be part of the solution rather than
  part of the problem!
• Markets are excellent servants but poor masters
• Potential Instruments
• Offset mechanisms
• Offset credit banking mechanisms
• Bundled cap and trade mechanisms
• Unbundled cap and trade mechanisms

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Salinity markets

• Currently
• Individuals are largely excluded from the market
• There is no formal incentives to encourage salt
  to the sea
• Potential solutions
• Defining obligations in term of tonnes
• Dilution flows
• Strategic releases

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A Storm Water Markets

• Could modify rules for the proposed Storm Water
  Authority to reward councils and developers who
  act to reduce storm water loads
• Less rates to pay
• Less state government expenditure
• Proactive business opportunities

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Storm-water trading model

• Indicative elements
• Local Govt contributions for cost of new works in
  proportion to increased load
• Anyone can get credit for decreasing the storm
  water load by gaining exemption from a storm
  water levy
• Credits generated by reducing load are tradable
  across Adelaides Metropolitan Area
• Storm water credits could be banked until sold

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An emerging agenda

• 1) Accounting properly
• 2) Trading to build and maintain regional
  prosperity 
• 3) Restoration of river and aquifer health at
  least cost
• 4) Smart management of externalities
• 5) Excellence in governance
• 6) Robust definition of entitlements that builds
  upon hydrological knowledge

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Some ideas

• On accounting work out how to
• Deal with the flow reducing activities
• Manage unconfined groundwater and surface water
  as one! (Bring groundwater in under the cap.)
• Adjust allocation pools autonomously
• On Trading work out how to
• Unbundle so you don't have to move registers from
  one state register to another. Bring urban users
  into the market place.
• Make the cost of electronic allocation trading
  less than 20 per trade
• Replace exit fees with contracts
• Allow carry forward for all water (and rewrite
  the management plans to enable this)
• Separate water management policies from
  structural adjustment

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Some more ideas

• On restoration of health work out how to
• Buy water from irrigators and empower independent
  environment trusts to manage this water with
  confidence
• Allow counter-cyclic trading and build a
  portfolio of instruments that deliver water when
  it is needed
• Facilitate and expedite adjustment and cope with
  changing land-use and climatic conditions
• On externalities work out how to
• Use markets to manage storm water
• Use salinity offsets as a first step to cap and
  trade
• Combine levy on all irrigators to pay for
  salinity interception but exempt them if they are
  part of the solution
• Introduce Dilution flows and flushing

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A few more ideas

• On governance work out how to
• Advise environmental water trustees
• Set up water accounts to
• inform water users and
• establish performance ratios for governors
• Design instruments that produce autonomous
  trade-offs
• On planning work out how to
• Unbundle catchment, trading and allocation plans
• Set up exchange rates and entitlement conversion
  ratios
• Specify entitlement pools that autonomous adjust
  to change
• Tag entitlements at source and reduce the number
  of entitlement types to two

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Drops of water create rivers and aquifers
Contact Prof Mike Young Water Economics and
Management Email Mike.Young_at_adelaide.edu.au P
hone 61-8-8303.5279Mobile [phone]