25 April 2015

Flashback: 20-26 Apr 2014

A year later and still worth reading...
H/T to RM

24 April 2015

Friday party!

What do young men do when they can't drink, go to movies, or talk to girls? This:



What do they do when they get free cars from their daddies?

Drifting and crashing. (Better than terrorism, I guess.)

Anything but water

  1. "The End of Asymmetric Information" ("as Described by Yesterday's Economists") does not exclude future, interesting -- and devastating -- examples of one side deceiving the other, but falling transaction costs are removing some barriers to markets that hadn't functioned due to trust issues

  2. This short primer on economical writing [pdf] has good advice for everyone. The author of the primer, Donald Deidre McCloskey, wrote an excellent critique of economics (If You're So Smart, Why Ain't You Rich? [pdf]) that is echoed in this speech by Charlie Munger, i.e., Warren Buffet's billionaire buddy

  3. Interesting conversations: President Obama (!) with David Simon (creator of The Wire) on the failed war on drugs, Peter Thiel (PayPal) tells Tyler Cowen how government and bureaucracy (esp in the academic world, where "publish to the index") have killed innovation, and Russ Roberts, Vernon Smith and Otteson on Adam Smith (remember that he was a moral philosopher who said more than what we see in economics today)

  4.  People keep elective idiots because politicians press simple, shallow buttons. Related: deconstructing the Kremlin's propaganda machine (hint: nothing makes sense, so don't try to think)

  5. Years ago, I wrote an opinion [pdf] favoring free trade over "fair" trade that focussed on the oversimplified (and thus deceptive) side of the fair trade industry. This recent letter from economists [pdf] explain show fair trade is relatively harmful for poor farmers (and costly for rich consumers)

23 April 2015

Speed blogging

  1. False dichotomy: Should California waste $98 billion on a bullet train or on a pipeline to carry water from Alaska? Neither. Save the money (and political controversy over water exports) and reform California water management

  2. This brochure [pdf] from Aquafed (the international association of investor-owned utilities) provides 30 cases studies of how "private" (but regulated!) operators can improve water systems

  3. Sao Paulo's Sabesp is seeking 23 percent tariff increases to correct for inflation and falling revenues (less water to sell in a drought). The increase includes one percent or so for performance improvements. I'm not sure this is a wise move, given (a) disruptive shortages and (b) leaky networks. I left this comment on the story:
    They're going to have a hard time, politically, unless they can show they are improving operations (reducing leaks). It may be better for them to go to capital markets and payback loans with post-improvement tariff increases. Risky? Yes, but it forces them to succeed on their own money.
  4. ERRA is looking for more water regulators from MENA, ex-CIS and Eastern European countries

  5. Climate change (and drought in California) is making it profitable to "farm the north." Great, now all we need to do is amend the Farm Bill to remove the disincentive for states to compete with California in growing tomatoes, etc. Related: The Myth of Europe’s Little Ice Age and Law Symposium on Agricultural Water Use Efficiency
H/Ts to BB,JD and RM

22 April 2015

Canadians (and others interested in energy policy) MUST watch this

A Norwegian* delivers a brilliant, clear and complete critique of Canada's Alberta's failure to manage oil in the interests of its people instead of corporations. (Related: my thoughts on Alberta's tar sands tailing ponds and their risk to the environment.)



Bottom Line: Companies are not going to leave if you raise their tax burden (from $4/bbl to $50/bbl as in Norway): It's not like they can get oil anywhere in the world!
* With Canadian work experience!

H/T to CD

What can I do?

Perhaps a good post for Earth Day...

TF emails:
I'd like to to ask you for advice on the field of resource / water economics and your career. I'm a young professional that's currently working at a large government contractor near DC. After some consideration, I think that I'd like to work in resource economics, as it seems like an objective and insightful way to deal with increasingly urgent and complex problems. My current work has some light statistical analysis, but nothing too technical and certainly no econometrics. I'd also like to work as a research assistant before I go to grad school for economics, just to "dip my toe in the water" and confirm that economic research is as stimulating as I might expect.

What advice would you give me to get this initial experience in economics research? I'm finding in general that I don't quite have the skills required to get a formal RA position. Any input would be fantastic.
In reply, I wrote:
Communication skills are VALUABLE. Near DC, there a numerous nonprofits, water agencies, consultancies AND academics. Ask around to see who's doing good stuff. Use informational interviews to meet people and learn. Somewhere, you may get a job offer, but maybe not until you move, incrementally, with your skills, to gain experience. There are many ways to succeed with patience.

FYI, I didn't have a plan, but things worked out. I am also cross-subsidized by my professor job, so I can help others for free without going hungry. People in industry don't need cross subsidies, but they may not get time/permission to share their knowledge.
That exchange may be helpful for young professionals, but what about (young) activists who want to improve water management around them?

I had an interesting conversation on that topic with Anna from UNC-Chapel Hill. Listen to this 30 min MP3 in which we discuss "tomorrow's managers" (student interns at water utilities) and "experience exchange" (staff swapping seats at neighboring or distant utilities). Both are designed to help people absorb the complexities of the water business while facilitating the diffusion of new ideas.

Also related, via RS, is the idea of "practical authority," i.e., a community-led, multi-stakeholder intervention into the operations (and failures)  in water management. This book review [pdf] discusses the idea as applied (with success) in Brazil.

Bottom Line: Water utilities, as local monopolists, are mostly immune to competition -- and thus the need to innovate. Some try to innovate, some need to be helped. You can help them.

21 April 2015

A change in perspective

Drones will help us see. This view of Oregon's Detroit Dam is from Chris Corbin:

How to price water for conservation in California

Yesterday, a California court ruled that tiered water prices (increasing block rates, or IBRs) were "unconstitutional" because the rates were not based on the cost of service at each tier.

This does not surprise me, as tiered rates were originally designed (as I heard from Professor Michael Hanemann, my UC Berkeley advisor and an early consultant for LA's IBRs) to allow politicians to choose the break between the cheap price for most and higher price for "heavy users." (The higher price was supposed to be based on the marginal cost of additional water supplies, but that target is often missed, sometimes in brutally unfair ways.)

The main idea was that politicians could "move the lever" between blocks and tiers. For example:

Politicians choose the "cut off" between blocks. Red+yellow areas are same in each figure. 
The trouble is that people do not "behave" the same when facing different pricing structures.
In theory, water managers should not care where the line is, since prices would be set (once politicians chose the break between blocks) to recover their full costs, but that target is very hard to achieve. People do not behave as models predict. That's why utilities pay $40,000+ to consultants with complex spreadsheets (sample crazy XLSX) who try to make sure that all the customer "buckets" generate the correct revenue.

So that's why IBRs are so complex to design, destabilize utility finances, do not reflect actual costs, and confuse customers.

It's for these reasons that I decided to end my support of  "some for free, pay for more" water pricing (and all other types of IBRs) a few years ago. IBRs are too complex at the same time as they are ineffective. They are also, of course, unfair when you consider that the number of cheap blocks usually ignores the number of people (i.e., the excuse for "cheap" water).

Instead, I went back to the future, to a single volumetric charge that reflects the cost of water sourcing and delivery and fixed monthly charge that reflects the cost of the water system. Those charges were used for years without many problems before IBRs became trendy in the 1980s.

The only addition I made was of a "scarcity surcharge" that would reflect the cost of getting new water (e.g., desalination).* That charge would be added to the volumetric charge whenever a utility was running out of its "normal" supplies, e.g., California now. This surcharge would apply to ALL water and it would reduce demand in the same way that higher prices reduce demand for any commodity (e.g., coffee, gasoline, etc.).

Let me repeat here the fact that higher prices are also more effective at reducing demand than the very unpopular command and control regulations California has implemented.

* My key innovation was to rebate the resulting excess revenues back to customers. (There are excess revenues because the higher price -- based on the cost of new water -- is charged against ALL consumption, some of which comes from cheaper sources, e.g., groundwater) The rebates would not be in proportion to consumption (as that would cancel the increase) but per meter. What does that mean? It means that heavy users would end up reducing the service cost of light users who tend to be poorer or more careful with water.

For example (from a presentation I am giving next week in London):

My design, therefore, does not destabilize utility finances and promotes water conservation without hurting the poor. Read more about it here.

Would this design be "constitutional"? I would say yes, in the sense that the utility would not retain any revenue. If that doesn't work, then I'd recommend that every utility build a small (100,000 gallons/day) desalination plant that costs $10/1,000 gallons to run and use that marginal "cost of service" to set their rates. (San Diego could do this NOW with its 56 MDG plant that will provide water for 7 percent of the population at three times the average cost of water.) If that doesn't work, I suggest they get smarter lawyers or pack their bags. Californians cannot continue to ignore common sense if they want to avoid drying up and blowing away.

Bottom Line: There are many ways to charge more for water if you need to pay for your water system or protect your limited water supplies. Choose a simple, fair way.

H/Ts to LH, SK, RM and JR

20 April 2015

Monday funnies

True


Water Markets FAQ

NB: I will update this post over time. Please comment or email questions or quibbles.

First
Read my free book (especially chapters 5 & 6) for a different take on these ideas.

Success!
Australia and Chile have successful, large scale water markets that have allowed farmers to grow more with less and made it easier to reallocate water across sectors. Markets in both countries have had problems, but those pale in comparison to the problems in places without markets.

Bulk water vs urban water
When we talk about water markets, we're really talking about trading bulk quantities of water, not markets for water among urban residents. Urban water is priced/rationed/managed by a local monopoly with a duty to cover its costs and maintain service reliability (read this). Bulk water can be bought and sold by the government, utilities, farmers and environmentalists. In my book, I describe how governments should reserve environmental water flows "for the people" before allocating remaining water in markets among agriculture, industry and cities.

Markets, auctions and occasional sales
Markets, by allowing buyers and sellers to trade water, make it easier for communities to face their realities and harder to blame neighbors. A system of "shared" water is easier to administer while everyone is "fair" but treacherous when water is short and neighbors take "more than they deserve"

Markets are good for ongoing trades. Auctions are good for reconciling many values in a short time. Trading should occur as often as its necessary to make bulk water allocation decisions, which means everything from daily (larger urban systems) to annually (irrigation districts).

Quantity and quality
It's much easier to trade water in one-dimensional quantity than multi-dimensionsal quality, but quantities need to be identified. Surface water trades need to consider conveyance losses between buyer and seller. Only "wet water" should be traded, since "dry- or paper-shares" (shares or rights that may not yield water until there's a big increase in supply) may not ever yield wet water.

The main idea is to trade only in "consumptively used" water, i.e., ignoring the water that is initially diverted but then returns to the local system for another's use. Read more here.

Groundwater and surface water
You CANNOT trade surface water without knowing who has rights to groundwater. Ground- and surface water are usually physically connected, even if they are not legally connected. This post discusses "groundwater adjudication" (rights).

Rights and Laws
Water rights fall into three main categories: riparian, ground and prior appropriation. Riparian rights allow one to take water as long as that diversion does not affect others; these rights tend to be used in water rich regions. Groundwater rights allow one to take "as much as needed for beneficial use" from under one's land. These rights can be problematic if groundwater rests below several properties. Prior appropriation rights, or "first in time, first in rights" to divert a quantity water from a river without regard to the impact of the diversion on others may seem easy to trade, but they are defined in quantity at a place.

Some people think that those who got rights "for free" should not be able to sell them. Such a prohibition ignores the benefits of reallocating water from a social perspective as well as the fact that rights holders either (a) paid money for the rights (by buying land -- including valuable water rights -- from the original owner) or (b) do not pay attention to what they paid as much as what the water's worth (for local irrigation or traded cash). Water markets also make it more likely that farmers will be able to collect cash that can be used to repay debts on water infrastructure.

In many western US states, these rights are heterogeneous, which makes them hard to trade or value. They also tend to be, simultaneously, absolute (in quantity) but poorly defined for trade. This is because rights are often defined as a quantity for a beneficial use, in a place. "Beneficial use" tends to be associated with "use it or lose it, but don't trade it," thereby making it more profitable to flood irrigate alfalfa than sell water in a market because flood irrigation in its defined place is allowed, but trade "to another place" means that one does not have a beneficial use for the water at its defined location. Farmers thus "waste" water on "low value crops" because they are not allowed to sell that water for use elsewhere.

The Australians reformed their water rights by (a) defining them as licenses that the government could take back in the public interest (usually by reserving some water for the environment), (b) simplifying rights into "high security" and "low security" in terms of their wet allocations (not year of issue), and defining trades as "beneficial use."

Dams, canals and rivers
Dams hold water; canals and rivers make it easier to move water. Water markets function best when trades occur within a watershed or distribution network that allows buyers and sellers to complete the deal. In some cases, owners of the "conveyance" should be forced to allow traded water to pass in their infrastructure at a fair price, i.e., prohibited from inhibiting trade with high "wheeling" (water moving) charges. Evaporation and leakage losses need to be factored into water trades, to ensure that buyers and sellers do not "rob" the commons.

Society, the poor and the environment
Water markets benefit society by putting scarce water into higher-valued uses, whether these be lawns, pools, showers, or almond crops. The alternative -- political conflict over allocations -- is more harmful in its opaque waste of resources (via lobbying) as well as less than best allocation outcomes.

The poor need not suffer with water markets. First, they can be paid "dividends" for the rental of "the people's" water by their government. Second, poor farmers will not lose from markets if their rights are protected (my all-in-auctions idea) or if markets make it easier for them to get water otherwise allocated in a political process. Poor people in corrupt countries are usually screwed, but markets make it harder by revealing the value and allocation of water.

Some useful posts on water markets: