17 Dec 2010

About those CAP auctions

Two weeks ago, I mentioned that Central Arizona Project (CAP) administrators were planning to auction additional water supplies to contractors. I wondered why CAP didn't just auction ALL its water -- especially when it appears to have a variety of prices for different "types" of contracts.

Fleck commented on the post, pointing out that some auctions are better than no auctions.

Yes, indeed, the glass is half full.

So, I have a few additional thoughts on how CAP can run auctions for additional water:
  1. These auctions should be open to anyone who can take delivery in the current CAP system. Bidders should face price adjustments for delivery costs according to their distance/elevation from the "fountainhead." Conveyance capacity constraints may create problems that will need to be solved (I'd prefer an auction for capacity, of course).
  2. Bids and prices should be free to fluctuate, without ceiling or floor. A single price (before adjustments) will give the clearest signal of the value of new water.
  3. In the best case, these prices should determine the price that the CAP pays for additional supplies. It would be a horrible mistake to buy water at one price and auction it at a different (lower!) price.
  4. Auctions should be run every year, to allow for adjustments in supply and demand on the CAP system. Bidders wanting long term contracts should make options agreements via bonded third party brokers, not the CAP.
Then the CAP can look into auctioning all its water, to avoid the financial problems that MET (a Southern California wholesaler) is having, i.e., "cooler weather in the summer of 2010 may reduce water sales below budgeted levels, resulting in reduced financial performance for another year." MET, like the CAP, needs to sell its water (and cover its costs) with a flexibility that matches the weather, not a hopeful spreadsheet.

Bottom Line: Auctions increase efficiency in water allocation and financial stability.

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