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The water storage problem 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. and fairer allocation of water during times of
shortage, as it did in the Murray-Darling Basin
(MDB) during the recent Millennium drought.
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. 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.
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
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: http://www.globalwaterforum.org/2013/12/09/the-­‐water-­‐storage-­‐problem/. The water storage problem 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.
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.
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.
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.
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
study3 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
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 Musgrave5,
Brennan6 and
Hughes
and
Goesch2.
6
7
Brennan and Hughes and Goesch 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 Queensland1 where a user level
’Capacity Sharing’ system has been successfully
implemented, based on the concept of Norman
Dudley5. Capacity sharing involves allocating
each user a percentage share of the storage
capacity and inflows of a reservoir. Each user
The water storage problem 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.
The water storage problem 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: http://www.usbr.gov/lc/region/programs/crbstudy.html&gt.
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): 649–658.
available at: http://www.usbr.gov/lc/region/programs/strategies/RecordofDecision.pdf&gt.
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: 471–485.
7. 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.
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