StochasticEconomic Approach to Headworks Augmentation Timing

ReportNo WSAA 72

January 1994

SUMMARY

Theproblem of deciding when a headworks augmentation should commence and ofoptimizing restriction rules is considered using an economic-based approach.The approach uses information about consumers’ willingness-to-pay for water toevaluate the economic impact of restrictions on water consumption.Multi-replicate simulation, which accounts for uncertainty in futurestreamflows as well as future demand, is used to estimate future expectedeconomic losses due to restrictions for a given drought management plan andoperating policy. Computer software for implementing this methodology wasdeveloped around the WATHNET generalized headworks simulation model and can berun on IBM-compatible and Macintosh computers and on Unix workstationsupporting X Windows.

Acase study based on the Newcastle headworks demonstrates the methodology. It isshown that economic losses can be very sensitive to the shape of the demand-pricecurve in the subsistence region, where prices, well beyond those currently setby water authorities, force the consumer to drastically reduce consumption.However, presently there is insufficient information to reliably define theshape of the domestic demand-price curve in this region. The need for acomprehensive drought management plan is argued. Finally it is shown how theestimation of economic losses can assist in the optimization of restrictionrules and in the selection of the augmentation date which maximizes netexpected economic benefits.

Theviability of the economic loss methodology depends critically on havingreliable demand-price information. Given such information the tools developedin this study are capable of giving planners an economic perspective on systemperformance, which, together with current risk-based measures, should assist inthe search for good solutions to managing headworks systems.

Themain research priority lies in better definition of the demand-pricerelationship in the subsistence region, not only for the outdoor domesticsector but for all other sectors. Willingness-to-pay surveys andcross-sectional studies may better define this subsistence region. A sufficientoutcome of such work would be an objective description of the uncertainty aboutthe demand-price curve in the subsistence region.

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