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Urban water supply & insurance

I have been reading with interest the draft report of the Productivity Commission on urban water supplies*.   A specific claim made is that the use of a ‘real options’ or adaptive approach to urban water planning would have reduced the costs of water supply augmentation hence enabling lower water prices to consumers.  For the cities of Melbourne and Perth the specific claim advanced was that using this approach would have reduced costs of supply by $1.1b over 10 years.  Taking the combined population of these cities to be 5.8m and ignoring discounting this corresponds to an annual additional annual cost per citizen of about $19.  

The Commission also saw the use of quantitative restrictions on water demands as costly.  They cited evidence that Sydney in 2004-05 incurred extra costs of $275m in 2010 dollars while Melbourne incurred costs of from $420-$1500m over a 10 year period.  Taking Sydney’s population to be 4.6m these costs are around $60 per capita while, ignoring discounting, the Melbourne costs are from $10-$37 per capita annually.

I suppose I would question whether these figures are large enough in themselves to justify much public concern.  The costs of providing a rainfall-independent secure source of water supply for cities like Sydney and Melbourne does not seem excessive at $19 per head. 

On the basis of these figures the desalination technologies sounds like cheap insurance to me.  The implication is that using more sophisticateed evaluation techniques such as real options analysis might not provide big gains.

 The costs of the water supply restrictions are the costs that arise when restrictions are used rather than pricing.  These are larger but again smaller per capita than I might have expected.  I assume that state governments did not expect that the national drought problem would be so extended and originally saw the restriction policies as short-term measures.  I certainly thing pricing is a prefereable way of managing water markets medium term but this view is partly here made with the benefit of hindsight.  But the costs of the restrictions are surprisingly small to me.

*Productivity Commission, Australia’s Urban Water Sector, Draft Report, Canberra, 2011.

1 comment to Urban water supply & insurance

  • conrad

    I guess whether you want to call desalination cheap or expensive depends somewhat on what your baseline is. If you use the cost of recycled water as your baseline, then I think that desalination is vastly expensive. The fact that they didn’t have the balls to implement recycling (which is already done in many other places in the world) instead of desalination shows what a pathetic government they were — and I’m someone that happens to think that protecting the water supply is most probably a good investment.

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