14 Apr 2009

Why Markets Are Fair

This article poses an interesting question:
Citing three dry years in a row, Silicon Valley's biggest water supplier will vote this morning on whether to call for a 15 percent mandatory summer cutback, the first water rationing in Santa Clara County in 18 years. Yet, just over the county line, Fremont residents will face no restrictions.

On the Peninsula, Redwood City residents will be asked to voluntarily conserve but Los Altos residents may be required to. Sonoma County will face draconian cutbacks of up to 30 percent. Marin County won't face any.

What gives?

"It all depends on geography and source of supply. It's about where your water comes from," said Paul Piraino, general manager of the Alameda County Water Agency. "Every source is not created equal, particularly in a dry year."

Bay Area communities face an uneven — some might even think unfair — water picture in the months ahead. Whether you face restrictions depends on how much your water provider relies on local reservoirs, Sierra Nevada snow, groundwater or San Francisco Bay's delta, along with the politics of its board.
So prices vary because each water retailer is getting its water from a different source, and sources can vary in quality, distance, volume, elevation, etc.

More importantly, the rights to sources vary, so districts with senior rights (e.g., SF's rights to Hetch Hetchy water) have access to better water (quality, reliability, delivery cost) that districts with junior rights (e.g., Zone 7 gets water from the State Water Project). If the junior districts have a greater "need" for this water but cannot get it, that lack of access is an opportunity cost.

(The best example of opportunity cost may be IID and other ag districts in SoCal that get 3.85MAF of California's 4.4MAF entitlement to the Colorado River. The farmers in these districts pay $6-$17/AF for water that urban districts would gladly buy for $200/AF -- and sell at retail prices of $1200/AF or more...)

Anyway, if there was a MARKET for water in northern California, all of these water prices would converge (with adjustments for quality and distance to delivery) -- in the same way that oil prices converge around the price for West Texas Intermediate (with adjustments for quality and distance to delivery).

Bottom Line: Water prices will make sense when water markets replace the legacy systems that reflect the inefficiencies of the past.

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