An Innovative Institutional Arrangement Which Incorporates the Risk Preferences of Water Users

by Norman J. Dudley,

Abstract: An innovative institutional arrangement that incorporates the risk preferences of water users is being refined in Australia. It is especially relevant for river and reservoir management in highly variable climatic environments. Its worldwide applicability is likely to increase markedly if the forecast increases in water supply and demand variability come about because of enhanced greenhouse effects. Uncertainty about water supplies and demands caused by unpredictable climatic events is the focus here, rather than other risks such as failure of engineering structures. Four categories of uncertainty about water supply and demand in the current and immediately following seasons can be identified. These depend on the location and design of the system. For three of these, a water user's lack of control over the allocation of the current reservoir contents between use in the current season and carryover for future seasons is a major source of uncertainty and conflict under traditional, centralized reservoir management. Higher carryover means higher supply reliability as well as changed timing of supply, but it also means higher reservoir spillage and lower mean supply. Even if reservoir carryover decisions are made democratically, the outcome for individual water users is likely to become increasingly unsatisfactory as preferences become more diverse and water scarcity intensifies in the future. In contrast, the new institutional arrangement allows water users to determine their own supply reliabilities by managing their own shares of reservoir space, reservoir inflows, and downstream tributary flows. The arrangement is applicable to uses as diverse as flood control, riverflow maintenance, urban and industrial supply, wetland maintenance, pollution dilution, and irrigation. Known as `capacity sharing,' it encompasses two basic forms - percentage sharing of streamflows and priority sharing of streamflows. It allows individual users, or groups of similar users, to manage their water supplies as if each user had his own small reservoir on his own small stream. Each can manage his water supply according to his risk preferences. As well, each is encouraged to use water efficiently since any water saved in one period is his own to use later. Users can determine their water supply probabilities much more objectively, which aids long-term planning. The plan provides a superior property right for water marketing, which further promotes economic efficiency of water use and incorporation of risk preferences. Diagrams are used to explain these features.

Subject Headings: Reservoirs | Risk management | Water demand | Water conservation | Innovation | Rivers and streams

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