16 November 2010

Water and financial risk

A few weeks ago, Ceres released a report calling attention to the risks of water shortages on the financial health of municipal utilities that have issued bonds (NYT piece).

That report, like this recent piece on US cities that face a risk of running dry (nearly 3,000 comments, some of them typical of Yahoo! people) fits the water crisis meme that I've been fighting for years. Why are they wrong? What are they missing?
  • Nature makes a drought, man makes a shortage: These problems can be traced to mismanagement.
  • Politics makes it hard to implement economic solutions -- either because it's too hard to get political approval to do anything or because a change in rules can eliminate shortage (the profit motive).
  • Scarcity pricing in water-short areas (in the US, for sure) can end shortage overnight.
(The water footprinting fad -- like the carbon offset fad -- reflects an attempt to do something while ignoring prices or politics, but I think that footprinting wastes too much energy that could be better spent on root and branch reform, to bring rational economics and conventional resource management to the water sector. That said, this piece on footprinting mentions the value of understanding the "water supply chain" to understand weak points. I like that idea because it quantifies the impact of local mismanagement on any part of the supply chain.)

But the biggest problem with the Ceres report is that there is ZERO financial risk of default on bonds when municipal agencies can just raise prices (or property taxes) to meet their obligations. So I guess that revenue risk is really about political risk -- that populist politicians just decide to default or shift the burden to outsiders (as recently happened when Placerville, CA decided to raise sales taxes to lower water and sewer rates; tourists are now subsidizing lawns).

Bottom Line: The biggest financial risk to water users (and bond holders) comes from failing to price water for scarcity and balance supply and demand for sustainability.

H/Ts to DL and BP


Anonymous said...

While I agree with you on the need to acknowledge the political hurdles that cause water shortages and obstruct proper pricing, I beg to differ on your general point that water footprinting is a waste of time and resources. As you well know, water use is not well monitored in many places and I posit that the markets you envision will not operate efficiently unless water use is well documented and reported.

It seems to me like this is a chicken and egg problem: without a market, water use or footprint information cannot be utilized effectively, as you point out. However, without adequate and transparent information available to buyers and sellers, the market you envision won't be efficient.

Given the myriad and seemingly insurmountable obstacles preventing an efficient water market as you envision, it makes sense to me that we start heading down the water market path by improving our understanding of water footprints and building a foundation of water use information for the markets to build upon.

David Zetland said...

@anon -- I agree, but I think you're too far ahead. First, let's fix "water use is not well monitored in many places" with meters, groundwater measures, etc.

Surely that's a better first step, for sustainable water supplies for communities, homes, businesses and the environment?

Then we can have markets, and then we don't need footprinting :)