Defining property rights to water in complex regulated river systems: generalising the capacity sharing concept

It is commonly noted that Australian water rights, specifically those prevailing within the Murray-Darling Basin, represent a significant departure from hydrological reality (see for example Young and McColl 2009). Where water rights depart from the physical realities of water supply networks, water use and water trade decisions may result in external effects and associated allocative inefficiency. This paper examines how a more exclusive set of water property rights based around the concept of capacity sharing (Dudley and Musgrave 1988) might be defined and implemented in complex regulated river systems. In particular, the paper considers how the capacity sharing concept might be generalised to accommodate complex water supply systems (e.g. with multiple storages and or unregulated river flows) and large regulated river basins (e.g. with multiple connected water supply systems). Previous research on water storage rights and capacity sharing (Hughes 2009, Brennan 2008) focused extensively on intertemporal efficiency. In this paper the focus is primarily on spatial efficiency, in particular the potential to improve efficiency by incorporating a more accurate representation of water supply networks into water property rights. The paper also considers some of the challenges that may be associated with implementing such a system of water property rights, including distributional consequences, transaction costs and aspects of ‘jointness’ in the delivery and consumption of water.