11 Aug 2014

More thoughts on pricing water

There were too many questions from attendees at my AWRA webinar ("Pricing Drinking Water for Conservation & Fiscal Stability") last week, so here some extra questions and my answers:
  1. In the complex web of CA water regulation, and many water utilities, who actually makes the decisions on how water pricing is set? You mentioned LA, San Diego, Santa Cruz, and Metro Water District - who makes the decision? Is it the city council? Does it have to be voted on? or does it differ from municipality to municipality?

    Generally speaking, the municipal city council sets prices when they run a water utility and the public utilities commission sets prices for investor-owned operations. There are many variations that will depend on local laws, state regulations, and other governance factors. This book examines "special districts" in the US, which include utilities, flood control districts, etc. Remember that there are "countless" (~3,000) bodies managing water in California and over 50,000 in the US (drinking water only).

  2. What do you think about pricing water at long run marginal cost and using general funds derived from taxes to cope with the high fixed costs?

    So you're suggesting that taxpayers cover fixed costs and users pay long run marginal cost (LRMC). These ideas are mutually exclusive, I think.

    After outright grant funding, taxpayer funding is the oldest way of paying for water services (many places in England and Wales still pay for water via property taxes). Taxes were replaced by charges linked to house size or charges linked to metered use.* The system of charges often depends on politics (i.e., social funding versus user fees) that I discuss in a paper I need to revise.

    Pricing based on LRMC, on the other hand, really means charging for the cost of acquiring new water. Economists define LRMC to include fixed costs, since ALL costs are marginal if you make the long run long enough.

    So you're faced with backwards- or forwards-facing choices. Payment by taxes means users can use as much water as they want from expensive systems that others pay for. Payment linked to LRMC incentivizes conservation, since the charges reflect to (usually much higher) cost of getting more water. LRMC is better from that standpoint of efficiency (and it's done in Israel, as I will explain later this week), but it's politically unpalatable because revenues will be much greater than actual costs and -- more relevant -- it interferes with the "cheap water" rhetoric that politicians and real estate developers love.

    Addendum: This post explains why LRMC must also consider risk (variability), which implies higher prices now and a smaller chance of needing to spend $$ on new supplies sooner.

  3. Can a scarcity charge be assessed in periods of abundance so that scarcity is negated in the future. Coupled with weather, it seems that the lack of a scarcity charge, or low cost, can encourage overuse and contribute to scarcity.

    This is a little similar to the last question (i.e., charge LRMC so people don't stress the resource), but I'd modify it with a counter-cyclical charge. This means raising prices when water is scarce (drought) and lowering them when it's abundant. That depends on climate cycles, but it can also be used with seasonal pricing (higher prices in summer), which I support.

  4. What about public/private joint ventures?

    Most water utilities mix private and public business models. At a minimum, they may buy pumps from private manufactures, but municipal utilities also outsource everything from major construction projects to payroll. The key -- to me -- is to use competition where possible (tenders for treatment plants) while keeping a very close eye on the monopolistic dimensions (setting prices). Some people underestimate the benefits of private competition and dangers of ignored public monopolies (I discuss those topics at length in my books, but this paper covers related themes).

  5. Can't inclining block charge block sizes be based on family size?

    They can. As I mentioned in my talk, Santa Cruz is using a version of this while Los Angeles is entirely retarded in giving more cheap blocks to larger lots and increasing that allocation in summer People are less important than lawns in LA, it seems). I think that uniform pricing is better when headcount is unknown or people have enough money to afford water (most developed countries), since IBRs are so complex.

  6. If revenue drops due to rainfall, couldn't that be handled by a rate stabilization fund?

    Yes, but you need to remember that managers have an incentive to sell more water if most revenues are arriving from water sales. It's easier -- to me -- to free utilities from that uncertainty so they are agnostic on the weather :)

The next webinar, on 20 Aug, will be on "The Emergence of Wastewater as a New Supply". I'm hoping to do one on agricultural water (groundwater, irrigation, markets, environmental impacts, etc.) and another on social and global water flows (environmental flows, water pollution, virtual water, water grabs, etc.) in the future.

* AFAIK, water meters were introduced in the 1940s. I'd LOVE to get a brief history of their implementation. Anyone?