Water Rewards Pilot Project

Background to Water Rewards

In Australia, urban water is supplied to consumers by monopoly water authorities. To increase the use of available water we have to invest in ways to make better use of existing mains water through consumer behavioural changes and we have to fund costly new supplies from sources such as desalination, storm water collection or new dams. An economic challenge is to manage the disparity between the cost of cheap water supplied by a water authority from rainfall in catchments and existing dams and the higher cost of water obtained by other means – such as rainwater tanks, recycling, desalination etc.

The existing approach relies on governments to invest wisely through monopoly water authorities in new infrastructure paid from profits from the sale of inexpensive water. Governments, through their water authorities, initiate and pay for investments in recycling systems, rebates on rainwater tanks, education in water savings and other ways to enable sustainability of water supplies. Unfortunately, governments have failed to achieve the goal of supplying enough water to meet demand in most urban areas of Australia. These areas are now under permanent water restrictions. There are many reasons for this failure but some reasons are:

• Governments set water prices below the cost of recycling and other methods of making more use of existing water supplies
• Governments tend to place profits from the water authorities into their consolidated revenue and do not apply sufficient funds to reinvest in or build more water infrastructure
• Governments divert political attention away from this situation by supporting economically inefficient methods of addressing water use and supply by spending funds on schemes such as tank rebates

Another approach to the funding of infrastructure is to establish prices for water through trading water entitlements and to use the sale of entitlements to fund infrastructure development and through pricing encourage the development of recycling and water savings systems. Water trading has the potential to set a market price for water entitlements and will result in some infrastructure development by large organisations. Unfortunately there are practical human factor issues associated with establishing and policing entitlements for households which makes water trading difficult for most households.

Water Rewards is an approach designed to change the water consumption behaviour of urban households. Reducing urban water consumption requires education of and cooperation from consumers. It also requires continuous capital investment to develop recycling and significant water saving systems, which on their own are not economically viable when competing in a water market characterized by monopoly water authorities selling under-priced water and failing to address future water needs.

Water Rewards is a voluntary system which households opt into. Each member of a household is given a notional sustainable entitlement of water. The sustainable level of water per head is chosen by the water authority and is based on the region’s water balance and its saving and consumption targets. Households pay for their water use but if they consume less than their entitlements, the participants receive Water Rewards. A household can use more water than its entitlement providing it is willing to pay higher charges for excess water, which in turn helps pay for the Rewards program.

Water Rewards are electronic vouchers that can be spent on any approved water savings method. Water Rewards are transferable to others and if a consumer cannot use them they can sell them or donate them to those who need more water.

The system does not mandate how water conservation is to be performed and makes no recommendations on the methods used. It simply offers economic incentives in an equitable and politically acceptable manner.

The Water Rewards Pilot Project – http://www.waterrewards.org

The Pilot Project will test the efficacy of the Water Rewards concept through a trial program to measure if it achieves its expected objectives. Measures that will be used to test the system are:

• consumer satisfaction
• increase in utilisation of water resources
• economic efficiency

Consumer opinion, attitudes and satisfaction with the program will be measured by surveys before, during and after the trial to assess it in terms of convenience, cost, effectiveness, and fairness. Economic efficiency will be the cost per kilolitre to achieve a reduction in consumption of mains water.

The proposers of the pilot project, Edentiti, EWater CRC and Ecos (Easy being Green), will initially supply services in IT infrastructure, water research and evaluation of water savings schemes and consultancy on the administration and promotion of Rewards systems.

Water trading and entitlements

Setting water entitlements is a central part of a water trading system. But setting water entitlements for use in water trading by household consumers is most likely unworkable. Focus groups say that household water entitlements must be made on a per capita basis. This means it necessary for the entity running water trading to obtain a head count for each household to allow individuals to buy and sell water entitlements. But because the system is compulsory it is likely to meet strong resistance and be difficult to police.

Some advocates of water trading for households suggest a two-tiered entitlement regime where part of the entitlement cannot be traded. This will involve further restrictions and again will be difficult to police those who sell their entitlements. Households will resent having to estimate entitlements before they consume water, and pay larger water fees if they make initial under estimations. In practice, it is likely most households will consume up to their entitlement volume and be both unlikely to trade and ignore voluntary water savings measures in addition to those rationally consequent to price signals. A household water trading regime is difficult to implement and for most households, water trading is likely to be too complicated to utilise.

Water Rewards and entitlements

Water Rewards use entitlements per head to set nominal household water entitlements. This can help develop “water literacy” and are part of the operation of Water Rewards. Water Rewards is an opt-in system requiring a statement of numbers in a household (with spot-checking) and because the household will get Rewards for participating there is an incentive to accurately state the number in the household, particularly as the penalty for abuse of the system will be expulsion from Water Rewards.

As Rewards are seen as a “gift” the exact calculation of the household water entitlement is not as politically sensitive as it would were limited volumes of real water involved.

There is no need for the household to pre-calculate its required level of water use. It simply needs to try to save water and if successful it is rewarded. This contrasts with water trading schemes where households need to pre-calculate their entitlements and if they exceed or underuse their use estimates they are penalised by needing to pay for more water or having bought water which is not consumed.

For these reasons notional entitlements used in Water Rewards are less controversial than they would be in a trading scheme.

Water Rewards as a Method of Exchange

The first part of this background paper outlined how Water Rewards operates from the point of view of the householder. Here we describe how Water Rewards operates in economic terms.

Water Rewards is a method of exchange incorporating both the management of the exchange system and the exchange of units for goods and services between participating entities. In contrast, a water entitlement as used in trading systems represents a volume of water.

The Water Rewards system requires a water authority or government to create a ‘Water Rewards Backing Account’ which acts as the funding pool against which households holding Water Rewards units can redeem the units to buy water saving goods and services. A unit of Water Rewards is created and becomes available to be issued to a household when a unit of regular currency is deposited into the Water Rewards Backing Account.

Water Rewards must be spent on approved methods of increasing water savings or water supply. These can be any type of projects. They can be household based (a new shower head) community based (a storm water system to provide water to a school oval), or system based (money to the water authority for a recycling system). The central feature of spending Water Rewards is that individuals will decide how to spend their money. Thus it is possible to envisage a water authority competing for funds for water infrastructure development sourced from purchase of Water Rewards against a householder seeking to use their Water Rewards to buy a shower head or a water audit. Where a water authority purchases Water Rewards to fund infrastructure it makes transparent where a water authority’s initial profits (or the part of them cycled through Water Rewards) are being spent.

Water Rewards units can only be claimed from the Backing Account when they are spent on approved goods and services which increase the utilisation or supply of water. The water authority, government and the Water Rewards program manager all help establish a list of goods and services and identify approved providers.

Units of Water Rewards are transferable. When a Water Reward unit is transferred regular currency can be exchanged between the parties to the transfer. Water Rewards will tend to move to those who get the best value from spending on the approved products or services. Water Rewards creates a new market to achieve better utilisation of water supplies by moving funds to where they have highest use-value.

The Water Rewards program can grow to cope with more voluntary members. Additional money to fund Water Reward units can be deposited in the Water Rewards Backing Account in different ways. Money can come from a water authority’s profits from the sale of water or from government if it sees value in further facilitating water saving behaviour. The money from new tradeable water entitlements sold to a large user could be deposited in the Backing Account so ensuring the money will be spent on ways to increase utilisation. Importantly, the Backing Account is a fund specifically associated with the operations, stability and guarantee of the Water Rewards program. Governments still decide how much is spent on water sustainability measures but the amount spent becomes more transparent and much passes through to consumers directly.

Who controls Water Rewards

The entity managing a Water Rewards program administers the Backing Account. Expenditure of Water Rewards units on the approved list of goods or services is subject to the approval of the body (or bodies) depositing funds in the Backing Account. This could be the water authority or the state or local government. However, if another organisation or entity (such as the Federal government) deposits money in the backing account they can specify how those Rewards are used and distributed.

The Water Rewards manager receives records of water use from the water authority, allocates Rewards units to households and administers the spending of Rewards according to the rules agreed by the funders. The price of water is set with existing mechanisms and there is no change to existing billing systems. However price regulators are unlikely to veto any price increase if the extra profits resulting from the price increase are passed back to some consumers as Water Rewards units.

Compliance in spending Rewards is achieved by the Water Rewards manager monitoring transactions between consumers and the organisations supplying approved services or goods. Because Rewards are electronic and all transactions are available electronically, auditing is simplified.

Who runs Water Rewards

Water Rewards should be run as a not for profit organisation which would have an independent board drawn from government, water authorities, water experts and consumers. Its ongoing operating funds will come from the Water Rewards Backing Account. It is expected that the cost of operating Water Rewards will be the same or less than other rewards programs like frequent flyer points or about 5% of total funds involved in the system.

The Rewards system is made possible by the use of low cost Internet transactions that leaves most administration in the hands of the consumers. The critical components in the IT infrastructure are web-based information systems, identification services and account management services which are Edentiti’s areas of expertise and experience.

All three parties see part of their future in the ongoing supply of infrastructure services to other similar programs both in Australia and overseas.

Recent papers and Water Rewards

An important paper by Young, McColl and Fisher http://www.myoung.net.au/water/droplets/Urban_trading.doc states

Either, a quantity limit – a cap – can be placed on the water supply and the market left to help decide who gets to use water; or the charge per kL fixed and restrictions used to reduce consumption in times of scarcity.

Water Rewards provides another way of reducing the need for restrictions. It achieves a similar result of giving price signals to households as does existing pricing regimes or water trading but households recover value from their actual water savings as well as reduced expenditure.

Peter Cullen in his paper to the Water Services Association of Australia on 2 February 2007, “The Urban Water Agenda in 2007” http://www.wentworthgroup.org/docs/Urban_Water_Agenda.pdf outlines ways of achieving better urban water use outcomes. To implement these requires, in most cases, investment funds. Water Rewards can provide funds for water infrastructure and be transparently managed to create public expectation that the funds are spent efficiently.

Cullen points out that urban households are paying large sums of money for water which is transferred into consolidated revenue rather than being tagged to improve urban water outcomes. To implement Cullen’s range of practical household initiatives requires investment funds to be put in the hands of households. Water Rewards does this by passing back to consumers funds converted from their Water Rewards unit accounts. While Water Rewards does not prevent local and state authorities using water profits for other purposes, it increases the visibility of their allocative decisions.

Summary

Water Rewards is an innovative system. The pilot project is designed to test assumptions on human behaviour, the efficiency of spending funds through giving control to consumers, the transparency of the disposal of some if not all profits made by water authorities and to reveal the degree of consumer acceptance for such a program. The project has the potential to make a major contribution to helping urban Australia towards a sustainable water future.