PRINCIPAL INVESTIGATOR:

Dr. James Roumassett, Water Resources Research Center/Economics, University of Hawaii at Manoa (UH)

SPONSOR:

USGS State Water Resources Research Institute Program

PROJECT PERIOD:

03/01/06 - 02/28/07

ABSTRACT:

Our current research involves two parallel extensions to the work done by James Roumasset and Basharat Pitafi in 2004. The first involves a reassessment of the Honolulu aquifer distribution and consumption, analyzing the new pricing scheme instigated by the Honolulu Board of Water Supply (HBWS), effective October 1, 2006, against the efficiency pricing scheme proposed by Pitafi and Roumasset (2004). The second is a multi-aquifer analysis assessing the current pricing scheme against marginal cost pricing in this context and analyzing the effectiveness and efficiency of a multiple aquifer distribution system for policy implications.

The goal of the first analysis is to show that marginal cost pricing is feasible when block pricing schemes are used for natural monopoly goods. Switching to marginal cost pricing is a more effective way to increase revenues and conservation than standard price increases. Users at different elevations face different distribution costs, therefore a pricing scheme which does not take this disparity into account effectively cross-subsidizes residents in higher elevations facing higher user costs but not required to pay the difference.

Most of the data necessary for the analysis of the Honolulu Aquifer has been collected. Remaining data gathering requirements include consumption data for different categories of users, booster station activity, and inter-aquifer connectivity. We are currently evaluating alternative methods for updating distribution cost data, and are investigating recent work done by the US Naval Research Laboratory on underground transfers through valley fill barriers which may affect our initial assumptions.

Once this process is complete, the analysis will begin using Mathematica 5.2 software and following a process similar to that used in Pitafi and Roumasset (2004). We will analyze the effects of this new pricing scheme and compare the welfare from it and from the efficiency pricing mechanism we propose. The refined data will allow the reevaluation of the assumptions in the original model, as well as provide an opportunity to refine the original model, build on the original results and account for some of the assumptions and/or discrepancies therein.

We expect to find that the efficiency pricing policy recommended by our work will induce greater conservation in the future, as well as provide sufficient revenue for the maintenance and improvements necessary to the distribution system. Preliminary results suggest significant welfare gains to water users, and a delay of the use of a backstop resource as much as 20 years, suggesting that the new pricing scheme does not achieve maximum efficiency.

The second extension to the work of Pitafi and Roumasset (2004) involves introducing an additional source to the model and integrating extraction, distribution, and consumption from the two sources. This model will provide an analysis of a situation must closer to that actually observed in HBWS practices. Currently, HBWS extracts from both the Pearl Harbor and Honolulu aquifers, pumping the resource into an interconnected pipeline serving the Pearl Harbor and Honolulu water districts. HBWS imports water extracted from the Pearl Harbor Aquifer to meet Honolulu demand.

The process of data gathering for this project is also incomplete. As in the previous discussion, the issue of updating distribution costs must be resolved. Pumpage data is still being collected, primarily concerning the import/export activity among the aquifers, and a literature review will be completed to evaluate the most appropriate measure for demand elasticity. It has been suggested that the estimates used previously were low.

Mathematica 5.2 software will be utilized to complete the second analysis as well. We will compare the welfare gains from the current pricing policy to that from efficiency pricing. Efficiency pricing policy is intended to increase the useful life of an integrated system of aquifers, Honolulu and Pearl Harbor, through demand management and conservation efforts induced by holding consumers responsible for the marginal user cost of the water they consume. It accounts for the growing water demand by transferring some of the gains from this new regime to the current users, so that they will be no worse off than under the status quo pricing scheme.

The efficiency price paths will be calculated with the corresponding consumption levels. A large difference in the price paths of the two aquifers is not expected, however a difference in the shadow price of water in each district, resulting from this analysis, will determine in which district water is more scarce. The size of the differential will also be used to determine if imports are warranted under our alternative efficiency pricing scheme. Efficiency pricing may eliminate the need for imports by increasing conservation among high elevation users in the Honolulu water district. This intertemporal model dynamically optimizes water use in Southern Oahu, as supplied by both the Pearl Harbor and the Honolulu aquifers, with minor imports from the Windward side of the Island.

Following this process the analysis will be repeated using an integrated model that accounts for extraction from both aquifers, imports or exports, and aggregate water use. The spatial component of this model optimizes allocation over different elevation level users (we will analyze six elevation categories separately), and the integration of both groundwater systems. We will therefore derive the optimal price path and aquifer head paths of multiple aquifers, also revealing the time at which desalination will be efficiently incorporated into the supply of water to Southern Oahu. The resulting price and consumption path will be used to evaluate the welfare gains from switching from the status quo pricing policy to the efficiency pricing policy we will propose. We expect the necessity of switching to the backstop resource to be delayed by several decades, as in the case of separate analysis of the Honolulu Aquifer. The maximum capacity of the current water extraction and distribution network will be taken into account, along with the costs of expansion, when policy recommendations are reported.

Pitafi, B. and J. Roumasset (2004) "Pareto Improving Water Management over Space and Time: The Honolulu Case," paper presented at the Annual Meeting of the American Agricultural Economics Association, Denver, Colorado, August 1-4, 2004. Currently under review at American Journal of Agricultural Economics.