1 Apr 2009

Innovation is HARD

I was extensively quoted by Sean Olson in this excellent article (thanks PP) in the Albuquerque Journal [register to see]. Sean interviewed me back in February, and his summary of the importance (and resistance) to higher water rates is really top notch. For example:
The water authority doesn't charge a higher rate for high water use until someone goes above three times their winter average — or they use more than 62,832 gallons in a single month. Winter averages are based on bills from December through March. The water rate doubles when it hits either mark.

[snip]

Still, it doesn't have the same blood-pressure-raising, eye-bulging, foul-language-causing effect as the dramatic monthly highs and lows of Zetland's offering. More important to proponents of steep block pricing, it doesn't have the same motivating effect...
While the article doesn't present any shockingly new perspectives to aguanauts, this post by John Fleck raises some different, interesting questions. Fleck says:
A guy like Zetland in the new media ecosystem appeals to a self-selected audience of people interested in the issues he’s raising, either because they agree, or disagree and want to argue, or are just trying to understand. But for his work to have the necessary reach to influence policy outcomes, Zetland’s ideas need to reach beyond the self-selected water wonk world. How to do this?
That's an EXCELLENT question, and one I am constantly trying to answer. Here's my comment at JFleck:
It’s indeed hard to push against the door on water stuff — not with the general public (who hate higher prices at first blush but then quickly see the reason — avoided rationing), but with the water managers. They are insulated in their monopolistic cocoons and have little incentive to consider new ideas…

Of course, politicians or the public can get angry and “make” the managers pay attention to new ideas, but the managers just trot out some kinda “we know what we are doing; do you trust an ACADEMIC?” rationalization that gives pause… and it’s back to business as usual.

I am trying to educate water managers with incentives (better water pricing = fewer customer complaints) but that’s a distant benefit compared to the cost of learning a new way of thinking (most are engineers, not economists).

I’m open to ANY suggestions of how to get the word out, but I’ve got to say “thanks God” that I can at least blog. If I had to be get tenure first, we’d all dry up and die before I had the platform from which to proclaim these Econ 1 (NOT 101) ideas…
Does anyone have good/different ideas of how to push aguanomic ideas into practice (even on a trial basis)? I'd LOVE to know...

Bottom Line: The reason that markets deliver change and innovation is that those who DO change make higher profits, and those who do not go out of business. With monopolies (private or public), no such pressure exists, which is why it's hard to find innovation at monopolies.

3 comments:

  1. It seems that the difficulty is politics and human behavior not engineering or economics.

    AT&T got broken up because the US government at the time considered AT&T to be an overly powerful monopoly. This break up created Baby Bells and killed off Bell Labs. Eventually, some of the Baby Bells started working together again once they saw that the mandated breakup was not working.

    So, the cause of the change was monopoly fears not the kind of economics that you talk about.

    In electricity generation, a different dynamic seems to have taken place. One change was to divide electric companies into two parts. One part would do local distribution within a state. The other part, a legally separate company, would make electricity. The distributor would still be subject to state regulations but the producer could now establish a credible electricity market and profit from this market. For the most part, the initial combined electric company would not be allowed to profit from its own efficiencies. State regulators would routinely confiscate any new 'profits.' So, electricity companies were shielded from market fluctuations at the cost of low ROIs.

    Let me know if parts of the above are wrong.

    ReplyDelete
  2. I think the aguanomics approach to pricing is certainly going to be getting more traction/attraction for a couple of reasons:

    1 - the price and complexity of developing/building additional sources of water supply (assuming any are even available) is likely to continue to shoot upwards and the price tag is going to scare off a lot of water managers/city councils/customers.

    2 - selling bonds for those projects may be problematic for many years to come in these uncertain economic times.

    This quick poll on the AWWA site today:

    "In this economy, what is your best source of capital financing?"

    http://www.awwa.org/QuickPollResults.cfm?itemnumber=1663

    shows that rates are the most likely source for capital.

    Rather than dealing with the upfront capital costs of such water resource projects it will quickly become more attractive to avoid those costs by using pricing mechanisms to dampen (heh-heh) water demand by forcing most customers to reevaluate how efficiently they are using water.

    We all know people do modify behavior in response to commodity pricing and I think the aguanomics approach (some for free...) will help allay some fears of unjustified "price-gouging".

    How to actually get a utility to at least give the aguanomics approach a try??

    In areas of the country which are facing continued drought this year and thus an urgent need to lessen demand perhaps some "direct marketing" aimed at those areas city councils/tv stations/newspapers where you can send them opinions/whitepapers/guest op-eds and such would offer the aguanomics idea directly to those outside the water wonk world. I know you are already doing some of that sort of thing but with a little luck you can find a utility that might be open to a fresh approach. Or at least be interested in having the aguanomics approach as part of the dialog.

    Also, have you ever attended any AWWA conferences? the AWWA 2010 Utility Management Conference is going to be in San Francisco in February and they have a call for papers now.

    The big main annual AWWA conference which draws an international crowd in addition to North American suits is in San Diego this year in June and while it is too late to enter a paper this year you might want to keep next year in mind. Some of the topics at this years event cover "The Grapes of Wrath: Water Pricing and Affordability in
    Hard Times" and "Drought—What Did You Do and What Worked?" - might be an opportunity to ask questions and get the aguanomics idea in front of a crowd of international water managers.

    ReplyDelete
  3. Oooops, just after I posted a bit earlier I thought to check your calendar and saw that you will be at the AWWA conference in San Diego.

    Nevermind...

    ReplyDelete

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