24 Mar 2014

Water tariffs and consumption in California

I asked my students to look up water prices, consumption and temperatures in California [google form]. After removing duplicate cities, I got information from 53 cities [xlsx].*

I then calculated an average price per 1,000 gallons for a household using 7,500 gallons/month (that's about 250 gallons/day or 930 liters/day), which works out to about 100 gallons/day for a household of 2.5 people -- roughly the same consumption of San Francisco residents.

A simple statistical analysis shows that consumption is positively correlated with fixed costs and temperature and negatively correlated with variable costs and precipitation.

The rationale behind temperature and precipitation is simple: people use more water (on lawns) when they live in arid places.

I cannot think of a good reason for the consumption-fixed cost relationship, except that wealthier cities may spend more on infrastructure for people who use more water.

The negative relationship between price and consumption is obvious (to an economist): people use less water when it's expensive.**

All of these variables impact consumption in different ways, but their weighted impact can be estimated by running a multivariate regression. When I do this,*** I find that consumption and price effects persist, but temperature and precipitation effects do not.

These results are easy to interpret when you add a little common sense. An increase in fixed charges is associated with an increase in consumption, but it's unlikely that raising them will cause consumption to increase. There's an underlying, omitted variable that's driving both results.

The effect of price is more straightforward: higher volumetric prices are associated with lower consumption. Indeed, they probably reduce it.

For more on this, check out American Water's 2012 survey of prices. There, you will see that Las Vegas prices are half San Francisco prices. Where's the most expensive water in the US (in that survey)? Seattle and Portland. That's because the price of water service reflects the price of infrastructure, not water scarcity.

Bottom Line: The law of demand holds. The easiest way to lower water consumption is raise prices.

* Hey, Daly City! Chill out! You don't need 11-step increasing block rates [pdf]. Try two, like San francisco or -- better -- one. Then customers can understand what's going on. Speaking of that, I dropped two cities with budget-based prices, because it's impossible to know the price of water for an average customer. I hope managers are setting them right (and fairly) because no outsider will even know!

** It's more accurate to compare the cost of water service in terms of fixed costs plus variable costs for 7,500 gallons of monthly use, but I just looked at variable charges at that consumption. See the XLSX for service costs per 1,000 gallons.

*** Results:

reg pcc fc volume temp precip, ro
Number of obs 53
F(4,48) 7.16
Prob > F 0.0001
R-squared 0.23
Root MSE 89.5
Per capita consumption Coef t P>t [95% Conf. Interval]
Fixed charges 4.2 2.33 0.024 0.5 7.8
Volumetric charges -18.2 -2.96 0.0 -30.5 -5.8
Average temp 3.9 0.62 0.539 -8.7 16.4
Annual precip -0.08 -0.81 0.423 -.28 .12
_constant 165 1.19 0.238 -112 442


Wayne Lusvardi said...

Let's see if we can help students with interpreting results of survey. With an r2 of 0.23, 77% of the variation in prices remains unexplained. So survey doesn't tell us much (yet). Those cities at the bottom of the price array on the Excel spreadsheet have high proportions of cheap groundwater resources. For example, Downey is 100% on its own groundwater. Groundwater is much, much cheaper than imported water, imported water cheaper than recycled water, and recycled water cheaper than desalinated water or water treated to remove contaminants.

Study done for Jurupa Community Services District in Riverside County by Webb Engineering showed the economy and recession had most to do with change in water price and use.

A confounding variable is how much water is imported and how much local, how much from recycling (expensive).

Santa Monica has plan to be totally water self sufficient mainly based on recycling, but it is a very wealthy city in a cooler climate location.

Some cities (Pasadena for example but not on list) have tiered water rates where those with homes on small lot subsidize those with homes on large lots. So that would also be a confounding variable.

The pilot study found what the researcher wanted the data to find: higher water prices lead to less usage. Researcher bias is the norm, however, in most studies of anything. This doesn't tell us much however because water is based on cost of infrastructure not on market prices.

Water in California is perceived as zero sum game where if I win water I gain wealth and you lose wealth. To correct this, water policy is slowly shifting to mandatory water conservation for everyone no matter if you have abundant water or not and no matter if your groundwater can not be used by anyone else. Mandatory conservation policy is unnecessarily used in such water abundant countries as Germany because it solves the zero sum game conflicts and water wars. Of course, such mandatory conservation inflates water rates because the cost of infrastructure is spread over less consumption. So, measuring high water costs and consumption does not factor in the intervening variable of regulation.

David Zetland said...

@Wayne -- you're right that regulation matters. Supply source usually shows up in price (g/w is cheaper than imported water). Sustainability is NOT factored in here (as you note). My point is that price and consumption are negatively correlated (perhaps causally), which is fairly obvious. Better micro data would increase r2, but we don't have income, lot size, head count, etc., so we're doing pretty well here.

Glad that you agree :)

Matt K said...

David, I just came across your article, which I found very interesting. I'm wondering if an alternative approach to assessing the correlation between water prices and water consumption would be instead to look at the effect on water consumption by the introduction of higher water rates. Do you know of any source that might compile (i) water tariff increases in the U.S. or perhaps in particular states, and (ii) average consumption in these same cities? If we could calculate correlation between the average price increase (in dollars) and the average water use (in gallons), the correlation might be higher than 0.23 and might provide a measure of price sensitivity. Perhaps it would have to be adjusted for other factors like local income.


David Zetland said...

@Matt -- there's a LOT of lit on price elasticity of demand for residential water. In general, it's about -(0.1-0.2) for indoor use and -(0.5-1.2) for outdoor use (short to long run). Use *rises* with income.

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