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Optimising Reliability: Portfolio Modeling of Contract Types for Retail Water Providers

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  • Renée Kidson
  • Brent Haddad
  • Hui Zheng
  • Steven Kasower
  • Robert Raucher

Abstract

This paper considers the retail water provider’s purchasing decision of a portfolio of permanent contracts from wholesalers with multiple volatile water sources. We consider the reliability of two contract types: (1) fixed annual quantities, and (2) an inflow harvest function with storage. Our four-reservoir case in Sydney (Australia) has cross-correlated inflow data. To accommodate multi-reservoir cross-correlation we adapt Portfolio Theory from finance to lognormal reservoir inflows, re-framing traditional storage theory from the wholesaler’s optimal operating policy to the retailer’s optimal purchasing policy. We find that Reliability improves with access to a source pool (cf. fixed quantities from separate sources), demonstrating the ‘insurance effect’, and the portfolio that minimises lognormal variance also minimises harvest (and thus environmental impact). Reform direction in Australian (and other international) water markets is towards multi-provider vertical disintegration, which may reduce pool opportunities and negate the insurance effect. We consider diminishing reliability returns as reservoir harvesting increases, and conclude a retail portfolio of permanent contracts from reservoirs, plus short-term contracts from alternative sources (either independently or negatively cross-correlated) efficiently secures high reliability. The challenge in incomplete water markets remains in encouraging and sustaining supply diversification that may only be needed aperiodically during extreme droughts. Copyright Springer Science+Business Media Dordrecht 2013

Suggested Citation

  • Renée Kidson & Brent Haddad & Hui Zheng & Steven Kasower & Robert Raucher, 2013. "Optimising Reliability: Portfolio Modeling of Contract Types for Retail Water Providers," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 27(9), pages 3209-3225, July.
    • Handle: RePEc:spr:waterr:v:27:y:2013:i:9:p:3209-3225
    DOI: 10.1007/s11269-013-0320-5
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    References listed on IDEAS

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    1. Dolores Rey & Alberto Garrido & Javier Calatrava, 2016. "An Innovative Option Contract for Allocating Water in Inter-Basin Transfers: the Case of the Tagus-Segura Transfer in Spain," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 30(3), pages 1165-1182, February.

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