HR: 12:05h
AN: H32B-08    [Abstracts]
TI: Using an Integrated Hydrologic-Economic Model to Develop Minimum Cost Water Supply Portfolios and Manage Supply Risk
AU: * Characklis, G W
EM: charack@email.unc.edu
AF: University of North Carolina at Chapel Hill, Dept. Of Environmental Sciences and Engineering, CB#7431, Rosenau Hall, Chapel Hill, NC 27599 United States
AU: Ramsey, J
EM: jeramsey@hotmail.com
AF: University of North Carolina at Chapel Hill, Dept. Of Environmental Sciences and Engineering, CB#7431, Rosenau Hall, Chapel Hill, NC 27599 United States
AB: Water scarcity has become a reality in many areas as a result of population growth, fewer available sources, and reduced tolerance for the environmental impacts of developing the new supplies that do exist. As a result, successfully managing future water supply risk will become more dependent on coordinating the use of existing resources. Toward that end, flexible supply strategies that can rapidly respond to hydrologic variability will provide communities with increasing economic advantages, particularly if the frequency of more extreme events (e.g., drought) increases due to global climate change. Markets for established commodities (e.g., oil, gas) often provide a framework for efficiently responding to changes in supply and demand. Water markets, however, have remained relatively crude, with most transactions involving permanent transfers and long regulatory processes. Recently, interest in the use of flexible short-term transfers (e.g., leases, options) has begun to motivate consideration of more sophisticated strategies for managing supply risk, strategies similar to those used in more mature markets. In this case, communities can benefit from some of the advantages that water enjoys over other commodities, in particular, the ability to accurately characterize the stochastic nature of supply and demand through hydrologic modeling. Hydrologic-economic models are developed for two different water scarce regions supporting active water markets: Edward Aquifer and Lower Rio Grande Valley. These models are used to construct portfolios of water supply transfers (e.g., permanent transfers, options, and spot leases) that minimize the cost of meeting a probabilistic reliability constraint. Real and simulated spot price distributions allow each type of transfer to be priced in a manner consistent with financial theory (e.g., Black-Scholes). Market simulations are integrated with hydrologic models such that variability in supply and demand are linked with price behavior. Decisions on when and how much water to lease (or exercise, in the case of options) are made on the basis of anticipatory rules based on the ratio of expected supply to expected demand, and are used to evaluate the economic consequences of a utilityAŸA›A›ƒ_sAªA›ƒ_zA›s attitude toward risk. The marginal cost of supply reliability is also explored by varying the water supply reliability constraint, an important consideration as the rising expense of new source development may encourage some communities to accept a nominal number of supply shortfalls. Results demonstrate how changes in the distribution of various transfer types within a portfolio can affect its cost and reliability. Results also suggest that substantial savings can be obtained through the use of market-based risk management strategies, with optimal portfolio costs averaging as much as 35 percent less than the costs of meeting reliability targets through the maintenance of firm capacity. Both the conceptual and modeling approach described in this work are likely to have increasing application as water scarcity continues to drive the search for more efficient approaches to water resource management.
DE: 6309 Decision making under uncertainty
DE: 6615 Legislation and regulation
DE: 1803 Anthropogenic effects
DE: 1836 Hydrologic budget (1655)
DE: 1600 GLOBAL CHANGE (New category)
SC: Hydrology [H]
MN: 2004 AGU Fall Meeting