## 30 September 2011

### Friday party

Sexy pancakes -- oh yes! (safe for work!)

## 29 September 2011

### Time to dump increasing block rates?

In "Distributing Water's Bounty" [PDF], Ron Griffin and James Mjelde argue that increasing block rates (IBRs) are less fair to the poor than Uniform Rates (URs) [1]. Their argument goes like this:
1. Start with a \$10/household fixed service fee plus \$4/unit volumetric charge equal to the delivery cost.
2. Assume a poor household consuming 2 units pays \$10 plus \$4*2 (\$18); a rich one consuming 6 units pays \$10 plus \$4 *6 (\$34). Total revenue = \$52 covers total cost of \$32 + \$20.
3. Now create an IBR by reducing everyone's price for the first 4 units to \$2/unit. The rich don't use more [2], but the poor household now uses 3 units of \$2 water.
4. Under the new rates, the rich pay 4*\$2+2*\$4 = \$16 for water. The poor pay 3*\$2 = \$6 for water. Variable revenue is \$22, but cost of delivery is 9*\$4 = \$36. Fixed charges need to rise by \$14 to cover that gap. Since customers pay fixed charges per meter, each one pays \$7 MORE. So now the rich pay \$33 (less than before to consume the same amount of water) and the poor pay \$17+\$6 = \$23 (greater than \$18 from before).
5. Sure they are using more water, but the new tariff structure means that extra unit is costing them \$5 instead of \$2.
This argument makes one pause to consider the "fairness" of IBRs that not only increase consumption (!) but also shift more of the financing burden to the poorer (or lower water consumption) household.

I noted this problem in my book [3], but spent more time trying to design an IBR scheme (Some for Free, Pay for More) that would be more effective -- on the assumption that IBRs were here to stay.

Although I don't agree with everything Griffin and Mjelde say [4], this paper pushed me to reconsider IBRs; they seem to be more about engineering "proper" behavior than recovering costs or limiting demand [5].

At a minimum, I think we need to stop using IBRs. They are complicated to set up, may not be fair and may not even be efficient. It makes more sense to use URs (many "IBR" tariff structures are defacto URs structures) that are high enough to encourage conservation. In fact, I think it's worth looking into covering ALL costs with one tariff (no fixed charge per month), except that method would exacerbate the mismatch between the cost and revenue structure.

Note that the oil industry has VERY LARGE fixed costs but sells gasoline with URs. Water managers also prefer them. Half of the 308 cities in a recent global survey of tariffs (post coming soon!) used URs. Most of the others used IBRs (of which at least some were "de facto" URs).

I guess that my preferred alternative would have a fixed charge to cover fixed costs plus a UR to cover variable costs AND reflect water scarcity. Refunds of excess revenue (per meter, not per person) would transfer money from heavy to light water using households.

What about human rights, social equity and per person allocations? Those may be important in developing countries, but they are irrelevant in developed countries where \$1 per 1,000 liters (250 gallons) of drinking water is still pretty damn cheap.

What do you think?

Bottom Line: IBRs do not deliver benefits in proportion to their complications. Better to charge a uniform price for water (as in a market) and promote conservation via a single, simple lever: higher prices.

Notes:
1. The volumetric price per unit rises as you use more with IBRs; it does not with URs. RM sent this example of "innovative rate designs" as an example of the conventional wisdom.
2. Since they face the same price "on the margin."
3. See note on page 242 ("They prefer IBRs...") as well as Young and McColl [DOC]
4. Their assumptions drive their results (it's possible to design "progressive" IBRs by increasing LATER blocks); their discussion of utility and social welfare does not match my experience in the water sector.
5. See this post questioning their very existence.

## 28 September 2011

### My talk on Water Scarcity Pricing in San Diego

The Surfrider Foundation San Diego Chapter's Know Your H2O Committee will be hosting a Forum on Water Scarcity Pricing with Dr. David Zetland, Senior Water Economist on Wednesday, October 5th starting at 6:30pm at the San Diego Foundation (2508 Historic Decatur Rd., Suite. 200, San Diego, CA 92106). This forum is open to the general public. Complimentary refreshments will be served.

### Urban water management in Milwaukee

I attended Milwaukee's fifth water summit ("Achieving harmony with Water") on 19-20 September. The summit was organized in three tracks (urban agriculture, storm water management, and energy-water), and I spent most of my time on the urban agriculture track.

During the Monday lunch keynote, Jamie Workman and I collaborated on a presentation [60 min 28 MB MP3] in which I discussed each of the tracks and Jamie talked about his experiences with sustainability in Botswana and his urban water trading start-up.

My main points were that:
• Urban agriculture will only take off if it's price competitive with local agriculture (although food stamp subsidies can't hurt).
• Storm water management may be easier when agencies coordinate with prices instead of command and control.
• Energy-water management will not work until the price of water accurately reflects scarcity.
During the Q & A, I suggested that people spend a lot more time on adapting to climate change, since mitigation efforts are going nowhere (earlier post). That upset some people working on mitigation technology.

Speaking of technology, I was VERY pleased to use Square (app+device) to accept credit card payments from people buying The End of Abundance. It's free to install and they take a 3% charge. Check it out.

The local TV station also interviewed me on Milwaukee's potential as a global leader in water technology innovation (I speak for about 15 seconds @ 1:20)

The Tuesday morning keynote by EPA Administrator Lisa Jackson was slightly interesting (she talked about green jobs, etc.) but mostly irrelevant -- she didn't do any Q & A -- but I'll let you decide: here's her 18 min talk [8MB MP3]

Bottom Line: I enjoyed learning about the way water is perceived and managed in the Great Lakes area, home to 20 percent of the world's freshwater.

## 27 September 2011

### Speed blogging

• This post on the legal/financial shenanigans of the owners of Fiji water and the Kern Country Water Bank provides a warning: people in the habit of exploiting loopholes are likely to overuse water when institutions for dealing with scarcity are absent.

• "Researchers from Conservation International and WWF... suggest that the climate change impacts on long-lived water infrastructure for energy production, agriculture, transportation, and supply and sanitation demand a much higher level of coordination between economists, engineers, and ecologists to achieve a viable vision of sustainable development and green economies over the coming century. The authors also propose a methodology for integrating effective climate adaptation into long-term water resource management and conservation."

• The Water Challenge is offering \$50,000 for innovative solutions to flood management in New Orleans. Preliminary application deadline 30 Sep!

• The NSF has just awarded lots of \$\$ to researchers looking at How Humans and the Environment Interact. Many interesting projects there.

• Pepsico and The Nature Conservancy have a short report on sustainable management of water risk in communities [PDF]
H/Ts to CC and EF

### Water Follies -- the review

I've been hearing about this 2002 book (subtitle: Groundwater Pumping and the Fate of America's Fresh Waters) for years. Robert Glennon wrote it before Unquenchable.

In this book, Glennon describes the failure to sustainably manage groundwater via case studies that concentrate on the rising cost of falling groundwater levels and the hapless -- and often cynically sabotaged -- efforts to reverse the damages. Glennon's background as a lawyer provides a useful complement to his detailed descriptions of the people and institutions in every location. Readers like me will come away with a new understanding of just how badly wrong -- and how achingly long -- a misconceived policy can continue.

In most cases, the original sin is a combination of laws that fail to acknowledge the hydrologic connection between surface- and groundwaters (dating from a legal opinion of 1894 that was reaffirmed as recently -- in the book -- as 2000) and which thereby put no limit -- from a Public Trust or property rights perspective -- on the use of groundwaters from "under" one's property.

In a typical scenario, what we get is a situation in which Actor A's use of groundwater starts to affect the water that Actor B cares about -- usually by sucking water from under B's property, but also by sucking water from streams, wetlands and other water environments that B -- and plenty of plants and animals -- would prefer to see wet. B, having no institutional basis for claiming harm from A's actions, struggles to change A's behavior -- often to no avail.

I discuss this theme -- the causes and consequences of institutions that fail to respond to an end of abundant water -- in my book, which looks at surface and ground-water management across a number of topics and spends more time on the incentives for success and failure and how to change them.

Glennon's book is an excellent complement to my book, as its case studies describe just how barriers to change are assailed (or erected) and how harmful "business as usual" is to innocent people and the environment.

Now to some detailed comments on the book, which focuses on groundwater in the United States:
• Some places restrict groundwater extraction but allow unlimited numbers of "exempt wells." These provide a loophole large enough to drive a subdivision through -- with unfortunate results for new homeowners who find their water gone in a short time [related blog post].

• Florida public officials went out of their way to deny and obscure their heavy pumping of aquifers surrounding Tampa Bay. Local lakes and wetlands dried up. Homeowners saw their properties -- and dreams -- ruined for the sake of endless growth. It seems that the same managers were responsible for the later failure of the Tampa Bay desalination plant -- of which I know few details. Got stories?

• Texas. What a place. Not only do they practice Right of Capture (the biggest pump on a border between two properties wins), but they also pump water from an aquifer to create a "river" that San Antonio tourists can walk by and admire -- for all its natural engineered beauty. I was amused to see T. Boone Pickens' [recently-discarded] plan to pump and export water from the Panhandle to San Antonio. That guy's a persistent resource exploiter!

• Glennon describes a complex effort to coordinate a rescue of the Ipswitch River from the perils of wells located next to its banks that deplete wetlands and base flows. Glennon also showed me the (now) obvious: it's better to discharge treated wastewater upriver -- not to "export" it downriver or into the ocean. (I know of one town in Colorado -- Aurora? -- that discharges wastewater ABOVE its drinking water intake, so it use it again -- just like Vegas, Orange County, et al.)

• The Corps of Engineers defines "flood control benefits" in terms of protection to homes at risk of flooding. That takes one option off the table -- NOT building in the flood plain -- while promoting another option -- building defenses around new homes in the floodplain. Even worse, USACE is happy to accept a project that costs taxpayers \$1.00 while providing \$1.20 in benefits to real estate developers. Yes, it passes the benefit/cost ratio test, but it's also an explicit subsidy to silly construction. (Apparently, this kind of stupid still happens, but often as the result of myopic legislative direction.)

• The Sacramento Delta gets a mention, by way of a "dewatered" Cosumnes River and death of a salmon run. (According to a recent email, there is water in the Cosumnes. Not sure if that's because of record precipitation or a long-term restoration.)

• Speaking of salmon, I didn't know that the Atlantic salmon were being put under pressure by... blueberries. Yes, "wild" blueberry irrigation harmed salmon by changing the quantity and timing of river flows. Local politicians -- as tenacious as an Iowan defending corn ethanol stupidity -- fought tooth and nail to get those blueberries into your snak-pak muffins. Can it get any worse? Sure -- they started to farm salmon in pens. When the salmon all died (virus + close living), the USDA spent \$17 million to "compensate" salmon farmers for being stupid. Really? Are you kidding me? Maybe they will pay me for playing on train tracks?

• Nevada mining companies pumping water out of their open pits and into a river dried up springs and groundwater used by Native Americans for thousands of years as well as creating an artificial surge in water flows that will end -- like a Disney ride -- when the mines are closed and the pumps turn off. Although the abandoned pits turn into lovely lakes, I am not so sure that the remaining chemicals will be nice for swimmers or fish.

• Atlanta's urban sprawl and irrigating farmers managed to dry out an area that gets 50 inches of annual precipitation (1.27 meters!) -- mostly because there were no restrictions on groundwater use. The Apalachicola River ecosystem was put under severe pressure. The fight over water from Lake Lanier can be traced to the conflicting demands for environmental flows, irrigation and urban consumption.
After the onslaught of bad news case studies, Glennon turns to solutions. After presenting a (thankfully brief) caricature of "free market environmental" and "dysfunctional political" alternatives, he offers a set of sound solutions:
1. Set water conservation standards.
2. Establish minimum environmental flows.
3. End unregulated groundwater pumping.
4. Set an extraction tax on pumping near surface waters.
5. Collect data on the number of wells and how much they pump.
6. Limit total pumping (cap) and allow offsets for new pumping (& trade).
7. Raise water prices (in Atlanta, e.g.) to reflect scarcity (yay!).
8. Allow water rights trading, but leave some water in-stream when diversion points move.
I support, without exception, everything on this list.

I had a few minor quibbles with this book (the discussion of bottled water extractions seems a little strong sometimes, but I agree that there can be local problems with overpumping for "spring" water), but it was almost always an excellent read.

Bottom Line: I give this book FIVE STARS for its clear explanation and demonstration of the follies that result from our failure to recognize groundwater's natural characteristics. The resulting destruction of the environment and damage to innocent bystanders far exceeds the benefits to those who exploit (and expand) this failure of markets (profiting on "free" water) and governments (mangling property rights).

Glennon was kind enough to answer some questions (18 Sept 2011):

Q: What catalytic moment led you to writing a book on groundwater policy/failure?

It started with work I did with a UA hydrologist on a couple of grants, including an NSF one. We focused on a river in AZ and one in CA. I was slack-jawed to find out the disparity between the legal rules and scientific reality. That led to some academic articles, which in turn led to a very long article on the problem around the West. That convinced me it was a huge national problem that no one had addressed. I decided to write a book for a general audience that would also speak to those in the professional fields who deal with water.

As remarkable as it seems, WF was the first book ever published on the environmental consequences of groundwater pumping. Indeed there had never even been a magazine article.

Q: What interesting changes have happened in the places you describe since the book came out in 2002? Atlanta surely looms large, but are there instances where developments surprised you -- or confirmed your darkest fears?

As for changes, a lot has happened. How much is directly attributable to WF I can’t say. Causation in these matters is quite tricky. But it is clear that I was the first to blow the whistle on bottled water. Since then, lots more local groups have weighed in, as I note in Unquenchable, and Peter and Elizabeth have written their books. Wisconsin, which I highlighted, changed its gw law the year after WF was published.

Policy changes have been implemented in lots of states. Again, I can’t unravel the cause and effect links. It certainly put my name on the national map. I maintained a very busy speaking schedule and became a regular source for journalists. Even hydrologists seemed to enjoy hearing a lawyer make fun of “hydrostitutes.”

## 26 September 2011

### My webinar on water, food and development

The Water Channel is hosting my live video webinar -- Water and Food: Agricultural Flows and Water Markets -- on Wednesday @ 15:00 GMT (8:00 in California; 17:00 in the Netherlands).

I will be talking for 15-20 minutes about:
1. Farmers will only use less water if it's profitable.
2. All-in-Auctions for reallocating water to its most valuable uses.
3. Fish-as-Food
After the introduction, I will answer viewers' questions from around the world!

### Monday funnies

 That Custom-Tailored Obama Scandal You Ordered Is Finally Here
Government should not be picking winners. Government should let the market innovate (making the pie bigger) under simple rules -- distributing the pie -- that protect citizens (not jobs!)

### Non-profit games

In Chapter 7 of my book, I wrote [p. 145]:
Good managers protect us from ourselves, but bad managers magnify waste and inequity. How can we tell good from bad? How can we tell if they serve the public or themselves? The main barrier is asymmetric information. Managers and politicians know their abilities and actions. They understand the mixture of skill, effort and luck that resulted in success or failure, but outsiders will never know the exact mix.
This paragraph refers to the Principal-Agent problem, i.e., we do not know if managers are serving customers or their own interests.

This problem is particularly acute in the utility sector where customers must buy from a local monopoly and it's difficult to measure performance efficiency.

Some people claim that mangers -- as public servants -- can be trusted; they also assume that "non-profit" status means that managers cannot personally benefit from exploiting customers, but plenty of evidence contradicts these hopeful thoughts:
• In my PhD dissertation on the Metropolitan Water District of Southern California (MET), I measured "public mindedness" among MET managers, which was average. That means that managers are just as likely to put themselves first as you and me. The key is that they -- as our agents -- have the opportunity to do so.

• How? The OC Register reports that 70% of the MET's staff make more than \$100k per year -- 90% make more than I do! I've visited MET's very nice Los Angeles headquarters and can affirm that those workers are well compensated for their 9 - 4:30 efforts. Managers use MET's \$2 billion budget to take care of water AND themselves. But remember kids, they do NOT make a "profit" :)

• Speaking of MET, one of its member agencies, Central Basin MWD, spent customer money planting fake news stories extolling the virtues of CBMWD. Fleck details his involvement as a journalist and watcher of utility incompetence. Looks like CBMWD also has a little too much money to spend.*

• In totally-related news, the San Diego County Water Authority (another member agency of MET) is -- again -- suing MET for charging "too much". In my dissertation, I explain how cross-subsidies unequally distribute costs and benefits among member agencies, even as MET "makes no profit."
Can for-profit, investor-owned utilities abuse customers in the same way? Sure, but they are watched much more carefully by regulators (MET is "self-regulated"). I am going to their annual conference next week, and I will ask more questions on IOU performance and transparency.

Bottom Line: Water monopolies CAN put customers first, but they do not automatically do so. That's why I want to increase competition and transparency in water utilities; they can deliver better customer service at the same time as they make "no profits."

* These problems are not limited to Southern California: Japan's TEPCO -- the local monopoly responsible for the Fukushima nuclear meltdown -- spends \$340 million/year advertising its virtues and more on lobbying politicians, instead of just cleaning up its act.

H/Ts to CG, DL, AR and NT

## 24 September 2011

### Flashback: 19 -- 25 Sept 2010

A year later and still worth a read...

Macroeconomic managers [sic] are still trying to control the economy. Give up and let it fix itself! On a related note, read Governments fail: delay and fiscal policy.

Intrinsic motivation is what managers and politicians need if they are going to serve the Public instead of themselves. It's hard to detect, but we suffer when it's too weak.

My paper describing the real estate market is more accurate than Case-Schiller (which tracks prices, not "the market") but nobody has adopted it. I wonder if there's a profit opportunity there?

## 23 September 2011

### Friday party!

These words from my dad are not THE party, but they will make it easier for you to join one:
Just a quick note from your ever-loving dad to remind you that your life stretches before you like every other unwritten story. That you have endless choices and time to do whatever you want. You have been very gifted and have lots to give. So take a deep breath and keep trucking. Stay true to yourself and great things will happen, as they always have.
Everyone -- from 5 years old to 85 years old -- needs to keep these ideas in mind!

### Poll results -- Who gets the water?

Hey! there's a new poll (local food!) on the right ==>
We need to direct more water to (choose one)
Agriculture 24%22
Energy 9%8
Environment 56%51
Residences 3%3

This poll was a little bit of a trick question. The bigger question is either "who put you in charge?" or "why should we allocate water according to a I-win-you-lose vote when that water can be allocated in a market?"

I think that most of you will agree that a dictator-type decision is not a good idea (either because dictators are corrupt or make mistakes in deciding what's good for all of us), but the case against a majority rule is a little more subtle.

First, there is the fact that political decisions should only be used for collective goods (e.g., funding a fire department), but not for private goods (e.g., let's vote on who gets the water for a pool/business/farm).

Second, there is the complication of "environmental water" in this poll. A majority of people are willing to vote for more water to the environment, which means less water for other -- private -- activities, more costs (to replace the lost water), lower profits, and/or lower happiness. So there's a cost to that reallocation that would be better represented by willingness to pay (I'll pay \$1 for the environment but \$10 for more food), which would allow voters to express their private value of water instead of a simple "yea" that is just the same as any other "yea."

But what about the social -- or collective -- value of water for the environment? Well, here's where it gets interesting. Two voters who assign a value of \$5/each to environmental flows could put their money together to vote \$10 for the environment that they both appreciate. Two businessmen with \$5 values could not, since they each want the water for their own private uses.

From this example, you can see that environmental voters should prefer money votes. The strange thing is that they prefer a political process. I think that reflects a decision to garner the [weak] support of the masses signing petitions outside the Whole Foods and avoid a discussion of the value of water in other uses.

Bottom Line: Everyone wants something for nothing, but they will have to pay up when the quantity of something approaches nothing.

## 22 September 2011

### How do we know when a utility is efficient?

GS and I had another exchange of emails based on this post on utility performance, in which he said:
How nice would it be if the regulators published a metrics drive comparison of utilities? Then they could actually drive some efficiencies through things like ROE incentives for meeting prescribed benchmarks!
Well, we're getting closer to that goal, via benchmarking initiatives like the International Benchmarking Network for Water and Sanitation Utilities (IBNET), which -- unfortunately -- covers very few developed countries.

That said, we know what we need: better ways to measure and improve performance. To that end, I just uploaded a longer version of my post/idea on using insurance to improve performance at water utilities by creating virtual, or second-hand, competition among water utilities via the price they pay for insurance against service interruptions, etc.

"Creating Utility Competition Via Performance-focused Insurance" [link]

Abstract:
A monopolistic urban water supplier may succeed or fail in providing good service to its captive customers. Regulators can use benchmarks to rank performance and create virtual competition, but quantified outputs are imperfectly correlated with outcomes that matter to customers. Even worse, regulators face weak incentives to identify and target these outcomes. This paper suggests that insurance companies can supplement regulatory effort while improving outcomes, by providing policies based on difficult-to-measure factors such as water managers' effort and talent. Insurance will protect consumers from paying too much for water service or experiencing too many service interruptions.

It is DEFINITELY a draft, so please give me your comments and suggestions on how to improve the idea. I am also looking for earlier expressions of similar ideas, to make sure that I do not unintentionally re-invent the wheel.

## 21 September 2011

### Golden culture

Some people dislike economics for its central emphasis on individual behavior motivated by rational self-interest. They see these words and assume that economists believe in some form of every-man-for-himself cold calculation.

Economists have not helped with this impression: many propose theories of behavior based on "homo economicus" models in which individuals are only concerned with improving their own situation -- even if others should suffer.

These models are used for two reasons: first, they fit into simple mathematical models that can be easily manipulated to produce "results." Second, they fit into a shallow reading of Adam Smith's notion of an Invisible Hand promoting the Wealth of Nations (1776), i.e., people looking out for themselves while trucking and bartering will increase the wealth of everyone by providing opportunities for trade.

Non-economists have had a hard time arguing with this asocial "methodological individualism" because the math seems to be logical and unassailable (the complexity of the math doesn't help), and it's hard to defeat "U_i = f(x_1, x_2)" with "that doesn't feel right."

Fortunately, other economists have been exploring the realities of these theories. "Good" economists know that individuals include the happiness of others within their version of "self interest." These economists have used experimental economics to show that predictions in the simple math models are just not right. (I think that my simple model makes WAY more sense.)

All of this text is a lead up to a simple short story: Last night [16 Sep], I left my gold ring on the gym key that I left hanging in the locker, right next to the men's room exit. (I took off the ring to work out.)

My mother gave me that ring in 1987, and it's worth a lot to me. It's also worth a lot for its gold content -- at least \$500+ at any gold dealer.

So there were three possible outcomes for when I went to the gym this morning:
1. The ring was still hanging (unlikely, given the dozens of guys who would walk by it after I left).
2. Someone took the ring, to sell it.
3. Someone handed it into the front desk.
Now ask yourself what you would do if you found that ring -- and also ask yourself WHY you would do that. Perhaps you would take the ring and sell it, because \$500 is handy and finder's keepers. Or perhaps you would ask yourself how you would feel if you lost a ring or how you would act if you were watching yourself as an outsider -- thought experiments that Adam Smith explored in his 1759 book, The Theory of Moral Sentiments (see this and this post).

In fact, the relevant question is not what you or I would do, but what would the average guy do who was leaving the locker room. It's clear that some would take the ring home, but also that others -- probably a majority -- would turn the ring in. The ratio between selfish guys and social guys was not really relevant last night -- the first guy to see the ring was the guy that mattered -- but it IS relevant when it comes to talking about repeated social interaction.

Put differently, we treat strangers according to the average mix of selfish/social values in the people around us. If most people are selfish (for cultural, economic or political reasons), then we tend to expect selfish and act selfish. If most are social -- treating each other as extensions of themselves -- then we tend to assume that we should also act that way.

The implications of these mixes are obvious, and have been deeply explored in experimental labs: a group of selfish people that fights over the spoils will end up poorer than a group of social people who cooperate to be fair to each other. (This discussion underlies Part 2 of my book.)

Those actions determine the Wealth of Nations in the long run; in the short run, they determine how safe, happy and generous we feel.

Bottom Line: I feel good this morning because someone turned in my ring :)

## 19 September 2011

### Monday funnies

Totally stolen from Reddit:

Q: What time does Sean Connery arrive at Wimbledon?
A: Tennish.

Q: How did the hipster burn his mouth?
A: He ate his dinner before it was cool.

Q: How many Vietnam veterans does it take to screw in a light-bulb?
A: YOU DON'T KNOW MAN! YOU WEREN'T THERE!!

Q: What do you call a Frenchman wearing sandals?
A: Philippe Philoppe.

And the winner(s)!

Q: What did the buddhist monk say to the hot dog vendor?
A: "Make me one with everything."

The monk then handed the hotdog vendor \$20 and after waiting for a moment, asked for his change.
The vendor looked at him and said, “Change comes from within.”

The monk then pulls a gun from his robe and demands his money.
The vendor says "Christ, whatever happened to inner peace?"
So the monk gestures at his gun and says "This is my inner piece."

### Agricultural water prices and markets in Europe

I recently gave a talk at an EU-sponsored session on agricultural water pricing in Warsaw. In my short (13 min) talk, I touched on the difference between the price and value of water and cautioned against setting prices in a bureaucratic manner that fails to reflect supply and demand.

Audio [6 MB MP3] and slides [PPSX]

For the rest of my talk, I described how an all-in-auction could be used to re-allocate water among farmers and find the right price for water. AiAs can, of course, be used to sell a limited amount of water to outside uses, e.g., urban or environment.

Here is a simple introduction to the AiA [pps]. I'd love to hear your comments (is it clear? add/subtract material? any applications in your area?)

Many talks at the session provided details of the struggle to limit agricultural consumption of water (via, e.g., illegal wells/boreholes). There was a lot of rhetoric about "protecting a traditional way of life," but those thoughts are increasingly mismatched with reality.

This background information page gives many details on agricultural water prices and policies in the EU.

Since we're on the topic of agricultural water, I have two other links of interest:

WaterCanada just published my short essay -- "Irrigation: Not as wasteful as it seems" [PDF]

Here is a link to several presentations [in Spanish] on water markets in Spain WITH DATA.

Bottom Line: Farmers control most of the water in the world, but they will not for long if they ignore outside demands for water. They need to price water in line with scarcity, and the easiest way to find a price is with a robust market that can eventually integrate demand from other farmers, cities and/or the environment.

## 18 September 2011

### Flashback: 12 -- 18 Sept 2010

A year later and still worth a read...

How about those rights? A few comments on the US Constitution (now celebrating 224 year anniversary :)

Environmental goods vs natural resources -- a MAJOR contribution from economists to the debates on how to manage water (environment, etc.). Learn this and a lot of clarity follows.

Mutual self interest -- makes us ALL happy and wealthy.

Monday funnies -- watch it and laugh, and watch it again.

How bad projects get built -- voodoo Delta infrastructure accounting at a California water agency.

## 16 September 2011

### Friday party

Welcome to Zombo -- only on the interwebs :)

## 15 September 2011

### Bleg: Water utility supply curves

I am teaching basic microeconomics for water engineers. We use a standard micro book which has basically no reference to water issues. In your book I found several good ideas how to link standard micro economics to water issues. But do you know of any book which has its focus on explaining basic economics of water? Something which includes demand curves for water (for households, agriculture, etc.) and  production/cost curves for water utilities with different technologies?
In our subsequent email discussion, we clarified that it is quite hard to find good examples of water utility cost curves (individual and aggregate demand curves are never observed, and they are hard to discover via contingent valuation techniques, e.g., questionnaires).

So, does anyone have good data or resources on the fixed and variable costs of delivering water for one or more utilities? I am guessing that it's probably pretty easy to get an idea of the fixed costs of a utility (salaries, debt, etc.) but harder to separate out variable costs (O&M), let alone by customer class. Even worse, we'd want to include deferred costs and subsidies...

Any ideas?

### So where are those contest entries?

I've received three entries for the contest to win a copy of my book.

I'm not sure why there are so few entries, but I suppose it's either:
• Nobody wants my book :(
• Nobody has an example of "the end of abundance" in water and how people addressed the problem.
• Nobody has time to write 200 words.
I'll extend the deadline to 21 Sept, just in case you are all excited about entering.

So type something up!

## 14 September 2011

### To the People of Libya

Congratulations on your freedom from the rule of your Dear Brother. Every man has an ego, but no man's ego should rule a nation.

I have two suggestions for you:

First, I hope that you reform management of your fossil water (The Great Manmade River) so that it's used more efficiently and equitably. Call me -- or read my book -- if you need help on that.

Second, I suggest that you take the biggest problem -- money -- off the table immediately, by promising to distribute oil dividends to citizens. Iraq's problems with sectarian jealousies have been fueled by greed over its oil wealth. Read this post for more.

Best of luck!

### The dynamics of water pricing

I am revising a paper on global water tariffs (309 cities in 106 countries!) and sent it to some colleagues for comments. Reagan Wascom and Chris Goemans (Colorado State U.) offered these interesting insights on the relation between the price of water to customers and the costs of running a water system that tariffs are supposed to cover. (They claimed "no originality" but I appreciate their concise insights.

Reagan said:
What we are seeing here in Colorado is that the older utilities with established water portfolios and utility works have significantly lower rates, just because they got in the game early and developed their water supplies long ago. Now they worry about firming supplies and aging infrastructure, while the newer satellite communities struggle to develop much more costly water supplies.
We see rates as low as \$3/1000 gal upwards to \$20/1000gal here in CO. Almost everyone in the Front Range is going to inclining tiered rate structures, if not water budget approaches.
Interestingly, demographics are starting to catch up with us. By that I mean two things – many of the water utilities or districts were previously in a growth dominated model and much of their total revenue was generated by tap fees and plant investment fees for new development. This could previously mask or compensate for low rates. As service areas become built out, this business model doesn’t work, as there are not enough new taps to sell to sustain the utility capital needs. This puts pressure on elected City Council members to raise rates to compensate for lost fees. Obviously, almost all of the utility costs are fixed – treated water volume really is insignificant compared to fixed labor and infrastructure, so the inclining rate structure is a mechanism to capture more revenue, while at the same time it depresses consumption and thus revenue. Second, this collides with the demographics of an aging population, who are more likely to have fixed incomes and thus are “rate sensitive”. These same aging boomers are more likely to be politically active and monitor the activities of rate setting commissions and councils.
All of this is to say that the rate per volume of treated water sold is on an upward trend here in Colorado and this trend will continue, but of course the agricultural disconnect remains intact.
Chris said:
Not much to add beyond what Reagan has said. However, I would divide utilities on growth, not age. For example, I tend to think of Colorado Springs Utilities as an "older" utility, yet their prices are rising as fast as anyone's. Primarily because, as Reagan mentions, they are "struggling to develop much more costly water supplies."
Mark Pifher (Aurora) and John Fredell (Colorado Springs) gave very similar talks at this year's Colorado Water Congress. Both talked about their respective cities new water supply infrastructure and the price increases that have come along with it.
Somewhat related, and along the lines of future infrastructure costs, the Western Governors Association has a report out entitled: Water Resources Infrastructure Strategies: Identifying, Prioritizing and Financing Needs [PDF]
The future short-term infrastructure costs they estimate are pretty staggering (in the trillions). As Reagan says, the funding model which paid for this through growth is most likely going to need revisiting (not that this is a bad thing).
The utility managers and their financial officers know well what is needed to sustain their systems, but there is a political downside for the elected officials if rates rise too rapidly in order to get where they need to be to achieve sustainable operations. What I observe is that the elected are balancing many financial shortfalls in all categories of public services and that funding for schools, roads and prisons seem to carry the most political upside for them. The other side of this that would be interesting to investigate is the debt load that water utilities are carrying to pay for infrastructure investments that were not adequately captured in rates and fees.
[My] Bottom Line: Water prices based on the cost of past investments and changing infrastructure needs mean that customers in the same region can face very different prices for water service. Different prices may not seem fair, but they may not even be efficient if they do not reflect water scarcity.

## 13 September 2011

### Water markets in Europe

My short paper on this topic is now published [PDF].
Abstract: Water markets in Europe are underdeveloped because they are difficult to implement within existing institutional constraints or inefficient from a transaction cost perspective. This article describes Europe's nascent water markets, explores the factors affecting their development (or lack thereof), and speculates on where and how markets may emerge in the future.
I'd be VERY happy to receive your corrections or additions on this topic, as I am talking to many different EU policy makers on markets for water quality and quantity -- such as tomorrow's EU conference on agricultural water policy in Warsaw.

### Water policy in the Middle East

I started chatting with Prof. Waleed K Al Zubari (Water Resources Management, Arabian Gulf University) after he bought my book, and we had a lot of views in common as well as ideas to exchange.

Al Zubari sent me this paper [DOC] on different water "futures" for the Gulf Cooperation Countries (GCC) of Saudi Arabia, UAE, Bahrain, Qatar, Oman and Kuwait. The paper looks at four possible futures for the region and their implications on the water sector: "markets first" (aka, everything for sale/laissez faire), policy first (aka Kumbaya bureaucracy), security first (aka, deadly neighbors and crushed citizens) and sustainability first (aka, do this kumbaya).

The paper begins with useful context, i.e., agriculture consumes 85% of water and 91% of water comes from (mining) aquifers. Urban demand is thus only 14% of total demand. Desalination, likewise, supplies only 7% of total water.

Al Zubari makes a telling observation in the paper, i.e., agricultural policies do not consider limited water resources, and their impact on groundwater is not assessed (or known) -- which is why aquifers are rapidly depleting.

I didn't really agree with the characterizations in the scenarios (many examples of "people do the right thing"), but its list of important forces (corruption, security forces, power-structures, social learning, etc.) and description of the two big problems (groundwater overdrafting and increasing urban demand) is useful.

The solutions to these problems are well known. Groundwater withdrawals can be reduced by increasing the price of pumping and/or distributing rights to people who will demand more money for water. Urban water demand will fall from 300-750 liters/capita/day if prices go up. Those "solutions" will not take place, of course, without a political decision to implement them.

And that's perhaps where I missed something in Al Zubari's discussion: The identities of and transfers between winners and losers. It's well known that residents of the GCC are not allowed to criticize the powerful (for fear of punishment), but it's also clear that the biggest beneficiaries of cheap water are the rich who own farms and the princes who use a lot of water for their palaces.

Imported laborers from Bangladesh and Pakistan do not get a big benefit from the 99% subsidy when they only use 50 liters of water per day. Landless peasants do not benefit from cheap irrigation water. The benefits go to those who use the water -- the rich and powerful.

The irony is that today's benefits to the rich and powerful make disaster more likely tomorrow -- either in terms of a destroyed environment, unhappy peasants, higher food prices, and so on.

Bottom Line: The rich and powerful of the GCC should start treating water like oil -- as something to conserve and price according to its scarcity and value. That's the way to maximize their wealth while keeping their poorer neighbors happy.

## 12 September 2011

### Monday Funnies

I saw Rango on the plane. It's not just artistically brilliant, but also a funny reprise of the plot (and characters) in Chinatown, the brilliant film exploring the political manipulation of water supplies from the weak (farmers) to the strong (real estate developers). In Rango, the weak are the creatures who lose their water to "progress," but they have personalities and talk. FIVE STARS. Here's a preview:

### Ten years of digging

Al Qaeda's 9/11 attacks were successful in bringing terror and disruption to the United States, mainly because Americans led by GW Bush et al. responded in the least appropriate way, i.e.,

As I said on Sept 12, 2001, the appropriate response would have taken US actions that precipitated the attack into consideration. No such reassessment of alliances, arms sales, covert interventions, etc. ever occurred.

If anything, the attack was wildly successful because it allowed Bush, Cheney, et al. to launch an extravagant campaign of righteousness without facing opposition (or even questioning) from the other branches of government, citizens, the media, etc. They went WAY too far -- and were supported by a number of people who confused their ignorance and righteousness with patriotism and thinking.

The results left the US economically, politically, and morally weaker; see. e.g., this, this, this, and THIS.

I reckon that the US has not just lost a decade (a la Vietnam war) but also its status as "the freest country on Earth" -- a blow from which we may never recover due to increasing competition from other places (a good thing) as well as escalating squabbles among our so-called leaders (a bad thing).

"The first law of holes is that if you are in one, stop digging."

It's no accident that I breathe with relief when returning from the US to the Netherlands, nor that I may live abroad far into the future. (I am still considering retuning to the US to work and perhaps enter politics, but there are costs and benefits to those choices...)

Bottom Line: Stop, sit down and consider why the terrorist attack happened, how we might have better responded, and what we should NOT have done. Hold onto those thoughts, compare your alternative reality to the world we see today and then drive yourself, your community and your leaders to where we SHOULD be.

## 10 September 2011

### Flashback: 5 -- 11 Sept 2010

A year later and still worth a read...

I'm back on Facebook ... until I quit again and then joined again (more annoyance-hate than love-hate).

Government failure in perspective -- I am sorry to day that we now have more examples (stimulus, debt fiasco, banker bailouts). That post required that I clarify my politics, which some people still confuse with Republican (not!) and their version of libertarian. Perhaps it's just easier to accept that people don't fit into neat boxes?

One million acre feet -- just a reminder that the Pacific Institute (and others) still put too much faith in technology and too little weight on economic incentives when discussing water use efficiency.

The origins of conflict over resources (such as water) was recently updated (wrt climate and war) in The Economist.

## 09 September 2011

### Friday party!

Hope your music player is smaller than this guy's!

### Monopolies don't negotiate

As you may know, I do not want to "participate" in Facebook, * but its monopoly power over parts of the internet means that I had to create a new account.

A few notes:

The SJ Mercury News and LA Times -- so far -- require that you have a FB account to comment. This monopoly on commenting is not good for consumers. First, because some people (50 percent of the US population!) do not have FB accounts. These people are excluded from debates. Second, FB's "real people leave better comments" marketing pitch to newspapers excludes trolls at the same time as it excludes people who'd prefer to leave thoughtful, but anonymous comments.

Please do NOT friend me on FB; I'm not adding "friends" there. You can connect to me via LinkedIn. I use Google+ for some social communications, but it's best to email me if you want to REALLY talk :)

Making the best of it, I set up a FB page for The End of Abundance. I will read and reply to comments left on that page. Please "like" the book (see box on right sidebar or click here).

Bottom Line: Ya gotta do what ya gotta do.

* If the website is free, then the product is you.

## 08 September 2011

### Food and water for the poor -- not political lies

via MD, GG and MS, I read an interesting interview with the Chairman of Nestle in which he says:
There is no market for how that water is allocated and used. The result is waste, overuse and misuse of the water we have. If we don't do something about that, Mr. Brabeck-Letmathe fears, we will soon run ourselves dry.

[snip]

"If oil becomes scarce," he notes, "the oil price goes up. But if water does, well, we still pump the same amount. It doesn't matter because it doesn't cost. It has no value." He drives this point home by connecting it back to biofuels: "We would never have had a biofuel policy—never," he contends, "if we would have given water any value." It takes, Mr. Brabeck-Letmathe says, "9,100 liters of water to produce one liter of biodiesel. You can only do that because water has no price."

He cites Spain as an example of an agricultural sector in need of adjustment. "The total [output] of the Spanish agricultural system," he says, "is less in value than the subsidies they receive between the Common Agricultural Policy, the subsidies for tax relief, the subsidies for water."
He makes two important points (that I have made many times on this blog and in my book).

First, political interference has distorted food markets (via artificial stimulation of demand for biofuels and artificial blockages on GMOs), which is bad for farmers and the poor but good for food companies with political connections.

Second, we need better markets for water, to ensure that it goes to highest and best use instead of political cronies with little need to be efficient (let alone care for the environment, human rights, etc.)

Bottom Line: Many politicians in developed and developing countries are hastening our "progress" towards an end of abundance by interfering with market signals that can improve our use of water and extend scarce resources to those who can barely afford food and water. Unfortunately, less political interference implies less theft for cronies, so we need to tackle corruption (= political lobbying) as the root cause of much human suffering.

## 07 September 2011

### Upcoming food and water talks

TheWaterChannel is pleased to announce the next two in its 2011 series of webinars:

September 14: Smart Tech: Linking Innovative, Affordable WASH Solutions to Food Security -- by Henk Holtslag, Connect International

September 28: Water and Food: Agricultural Flows and Water Markets -- by David Zetland, Wageningen University

Information on how to register and participate here.

### Where are those entries for the free book?

Maybe nobody has a good story of coping with the end of abundant water? Gee, then I guess there's either nothing to worry about (no scarcity) or LOTS to worry about (no good solutions).

Here are the rules -- deadline 15 Sept!

## 06 September 2011

### I'll be speaking in San Diego on Oct 3

"National Association of Water Companies (NAWC) today announced renowned authors and water industry experts Robert Glennon, David Zetland, Steve Maxwell and Brian Fagan will join moderator and Global Water Intelligence publisher Christopher Gasson at the 2011 NAWC Water Summit in a discussion highlighting the challenges and solutions of ensuring global water security both now and in the future." More

### Concrete failure

This interesting story of path bridge dependency shows how a squabble over money resulted in a decision that continues to reek fail.

That story holds a useful lesson for the people contemplating a pipeline to bring water from rural areas to Las Vegas that "could double" water bills.

It would be better to just raise prices and cut demand down to current supply instead of spending more on supply (that others do not want to give!) and raising prices to pay for pipes.

Why? First, raising prices to cover costs doesn't mean that they will be high enough to keep demand in check. Shortage can still result. Second, not all price increases are equal: conservation prices will result in excess revenues that can be rebated to customers. Prices that cover the cost of infrastructure send money from customers to engineering firms. (I cover all this in chapter one of my book.)

Bottom Line: Pat Mulroy and the engineers of Las Vegas should stop using customers' money for their concrete fantasies.

## 03 September 2011

### Flashback: 29 Aug -- 4 Sept 2010

A year later and still worth a read...

Poll Results -- Tradeoffs -- people do not often understand the magnitude of what they are "willing to pay" (in terms of programs they may pay to support) to get the programs they want.

Monday funnies -- Ten water laws that everyone should know if they don't want to get surprised and buried.

## 02 September 2011

### Friday party!

via Grinzo:

Go watch EAT and MOVE too. Very cool!

### Information, markets and bureaucracy

Mike Pease writes:
I just finished creating a user-friendly Geo-spatial Water Rights database for a small portion of the Yakima River Basin (as you probably know, the basin is finishing a long adjudication).

I thought you might find the project interesting. One of the questions I'm trying to evaluate is whether such tools can lead to more efficient water usage by reducing information asymmetries. I'd love to hear what you think.

Here's what I've been emailing out:

Kittitas Valley Water Resource Decision Support System Stakeholder Survey

Hello, my name is Michael Pease and I am an Assistant Professor in the Department of Geography at Central Washington University. As part of a Department of Agriculture grant, I have created a water resource decision support system (WRDSS) for the Kittitas Valley. I am now seeking participation in a survey to elicit feedback on the DSS to assess its utility for individual stakeholders and water management institutions.

This survey consists of two sections and will take roughly ten minutes to complete. First, you will be asked a short series of questions concerning the current state of water use in the Kittitas Valley. In the second section, you will be asked to evaluate the draft WRDSS.

[privacy disclaimer deleted]
I am impressed by this project and the data it captures. I'd like to see some representation of relations between different water users (e.g., highlight all devices using the same water source), historic trends (are recent diversions higher or lower than historic averages?), and probably a number of other items.

More importantly, these data are only useful in context. I couldn't do the survey because I lack a contextual understanding of the relations between actual and potential water use (let alone the drivers of decisions to use water).

That's not necessarily an issue when total water demand is constrained within supply (sustainable) and people are free to negotiate re-allocations to improve efficiency (markets), but it is a HUGE issue if some bureaucracy is trying to find the "right" allocation per device, i.e., the Knowledge Problem.

Bottom Line: More information is useful if it allows individuals to improve their decision-making, but probably not when bureaucrats are trying to manage everything.

## 01 September 2011

### Anything but water

• A review of Fixing the Sky: The Checkered History of Weather and Climate Control:
This often bizarre and sometimes fascinating story proves to be, in the author’s words, “a tragicomedy of overreaching, hubris, and self-delusion"
• Cool/weird: Split family faces.

• Apple lies to try to stop competition from Samsung.

• How central planners destroy forests (and Indians enhance them).

• Top 10 online scams -- with cool illustrations -- from the Better Business Bureau.

### Water: Asia's New Battleground -- The non-review

This book by Brahma Chellaney comes out this month. In it, "Chellaney paints a larger picture of water across Asia, highlights the security implications of resource-linked territorial disputes, and proposes real strategies to avoid conflict and more equitably share Asia's water resources."

I tried to read my review copy but failed (hence the "non-review"). The prose is strangely formal and empty. For example [p. 238]:
To stop profligate use, water, however, must come with a reasonable price, even if it is not market based. The social impact of pricing can be cushioned by keeping water subsidies specifically for the poor. Rational pricing has long been held as a key element in water management and conservation.

Actually, at the heart of the Asian challenge is the need to raise water efficiency and productivity. To ease intrastate water shortages and disputes, Asian countries have little choice but to increase water productivity, especially in agriculture and industry...
I found that passage in the index of this 385pp book (looking for something of interest to me), but those anodyne statements are not even linked together. What about the connection between price and efficiency?

I am obviously interested in this book as a water economist, but let's just pick a random passage [opens book on random page and stabs with finger]... on page 85:
China, though largely-self-sufficient in grains at present, is the world's largest importer of soybeans, which are oilseeds, not a grain, and mainly serve as animal feed for the fast growing Chinese meat industry. Since 2008, it has started importing increasing quantities of wheat, although its imports remain small compared with world output. But given that China accounts for one-sixth of global wheat production, a serious drought in some of its wheat growing provinces can trigger major imports.
So what?

It seems that Chellaney (a professor of strategic studies at the independent Center for Policy Research in New Delhi) likes to see his thoughts (all of them!) on paper. That's a problem for people like me who favor insights over pedantic exposition.

As I skimmed back and forth in this book, I got the feeling that Chellaney is much more comfortable with state-to-state discussions of water issues based on technocratic minutes, agendas and memoranda of understanding. In my limited experience, those documents read much like this book. I'd prefer to see the executive summary.

Bottom Line: I give this book TWO STARS and recommend it ONLY to researchers interested in trans-boundary water disputes in Asia.