39 – Fresh water for Perth 1: the State Government’s attempts

The State Opposition parties in Western Australia made the news this month with their ideas for providing fresh water to Perth. As lamentable as those ideas are, the current State Government has its own history of appalling mismanagement of the issue.

Western Australia has long had the most irrational pricing scheme for domestic water users. All Australian states break their water charges into a fixed charge just for being connected, and a volumetric charge that varies with how much water you use. Obviously, the smaller the volumetric charge, the less incentive users have to conserve water. In Sydney, the volumetric charges account for 80% for what domestic users pay, while in Perth it is the lowest of any state, at only 50%.

The good news about that is that it provides an opportunity to make significant savings in water simply by re-adjusting the water tariff. If you reduce the fixed charge and increase the volumetric charges by just the right amount, you could achieve water savings without any change in costs to consumers (important politically) or revenue to suppliers (important to them). With all the concerns about Perth’s water crisis over the last few years, it would have been an ideal time to make this change. Perth’s water users would surely have accepted it as sensible and desirable. In fact I suggest that they would have accepted overall price increases in the circumstances.

In 2003, the relevant agencies put three options to the State Government, involving different systems for adjusting domestic water tariffs. The most dramatic change was judged to save 15GL, while the least dramatic only affected extremely high water users, and would save only 1GL. All three options were designed to be revenue neutral. In all their courage, the Government chose the 1GL option, presumably out of fear of political costs from a more extreme change. Given that all three were revenue neutral, this reveals an extraordinary degree of political cowardice.

We are left with a situation in Perth where 60% of domestic water users and 70% of business users pay a marginal price for water that is below the marginal cost of supply, which was estimated at about $0.75/kilolitre(KL) in 2003. That cost is based on water from existing developed sources. If we consider the need to bring on new sources, the marginal cost is of course much higher.

Meanwhile, there is another opportunity to save water that is going un-exploited. The biggest set of water users is the irrigation farmers. South West Irrigators pays less than one cent per KL for bulk water, and on-sells it to farmers for around 3 cents. Now irrigation can clearly be a very valuable use of the water, but if you price it that low, irrigators have little incentive to conserve it. Actually, that overstates the case. In some cases water can be sold in a water market, in which case, the “opportunity cost” to farmers from using the water is its market price. Even so, the loss of water from irrigation channels in the south-west is conservatively estimated at 25-30%. And notwithstanding the existence of water markets, the 3 cents per KL price amounts to a massive hidden subsidy to our irrigators. Fixing this is apparently too hard politically.

To rub salt in the wounds, the quality of water provided to irrigators is often higher than that coming out of the taps in Perth. There is actually plenty of good water for Perth for decades to come if we could only fix up this mad set of situations. A responsible solution has to include substantial reform of pricing schedules for all users before we commit to major new infrastructure.

However, the State Government’s next step was to announce a large desalination plant. I’m not sure what the marginal costs of supply will be out of this plant, but based on a review of desalination economics in 2000, I expect it will be well over $1/KL, and could be over $2/KL. The result of this will be a huge widening of the gap between the cost of supply, and the benefit of the lowest value use (in low-value parts of the irrigation sector). Also, it makes the effective subsidy to irrigators correspondingly bigger.

The essentials of the pricing system and the allocations to irrigation are untouched. The imperative for the state to save water just got much greater, but the incentive for water users to do so is absolutely unchanged. The levy that will apparently be charged to cover the construction of the desalination plant will not change incentives to conserve water because it is unrelated to the level of water consumption.

There was one more politically cynical act to come. Recently the Government announced a committee to examine the feasibility of building a channel to bring water 3700km down to Perth from the State’s north-west. The talk in state agencies was that the Government knew full well that the plan is not even remotely economically viable, but they used the committee as a stalling tactic. They can appear like they are doing something about the continuing water crisis, while delaying the actual decision until after the election (which is in just over a week’s time, as I write).

Overall, the State Government’s approach to the issue has been cynical, cowardly, and economically irresponsible. There was an opportunity for the State Opposition to step in and be the good guys. But instead they stepped in with a plan that is so monumentally ill-conceived that it almost makes the Government’s plans look wise and responsible. More on that in PD#40.

David Pannell, The University of Western Australia

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