23 Apr 2009

Dangerous Consultants

In contrast to the careful study above (academics at their best), we (via DB) have this disaster of a "report" [DOC] given to the SFPUC.

Here's what RFC says:
Since the SFPUC is facing large rate increases over the next several years, it was important to get a sense of the price elasticity of water demand in the service area. As part of this analysis, RFC analyzed the per capita consumption and commodity rate increases from FY 1994 through FY 2007. Using only the commodity rate increase is imperfect, but is the best use of the historical information available.
They go on to estimate (by fitting a line between rate changes and changes in use) that total price elasticity is -0.08, which is MUCH lower than the -0.40 to -0.70 range that I have seen here, there and everywhere...

As RFC admits, "attributing all changes in consumption to changes in rates is questionable" but they then go on to commit the sin of all time, i.e., "we cannot recommend factoring in reduced consumptions to accompany the proposed rate increases," i.e., do not consider how price will affect demand when calculating the impact of higher rates!

Excuse me, but the lack of evidence of an impact of higher rates on demand does NOT invalidate the law of demand.

As RFC admits, their "analysis" omits economic conditions and weather patterns, but it also omits important factors such as income (we spend a tiny portion of our income on water bills), block rates, billing frequency, etc.

I would give an undergraduate who produced this "analysis" -- especially considering its weak economics -- a grade of D.

Bottom Line: I hope that SFPUC got this report for free, since it's worth nothing.