Water scarcity has always been a challenge in water resource management. Now coupled with climate change, rapid population growth, and increasing urbanization, many urban centers are struggling to meet escalating water demand. Improper management can result in large and severe economic, social, and environmental consequences. The conventional “close-the-gap” and “all types of water are the same” type of management can no longer serve its purpose. Responding to the challenges in future planning, there has been a change in paradigm, from a single-sourced, “meet demand” approach to a diverse, “risk management” framework.

This study explores some concepts and techniques that can be used by municipalities and utilities that are making such a transition. In particular, we develop a systematic decision tool that is derived from the principles of portfolio theory. The decision tool defines Pareto optimal portfolios of cost and reliability. These Pareto-optimal portfolios are useful for decision makers to evaluate tradeoffs between desirable water supply reliability and consumer willingness to pay. Two case studies, in the city of Melbourne, Australia and the city of Kunming, China, will apply this analytical tool to trace out the Pareto-optimal choices and discuss policy implications that face decision makers.