6 Aug 2014

Santa Cruz sets prices the right way

DM sent this article on the impact of Santa Cruz's new tariff scheme, which charges a family of four $3/ccf for 10 ccf (28 m3) per month but raises that price to $25/ccf for a 10 percent overage (i.e., 11 ccf/mo) and $50/ccf for use beyond that volume.[1]

The city targeted a 25 percent reduction in water demand under this scheme, and use has fallen by 26 percent since it went into place in May.

So, higher prices reduce use,[2] but what about larger families and excess revenue?

Larger families complicate these schemes in the US, due to cultural (not legal) barriers to counting the number of people at a residence. The city gets around this by assuming all residences have four people. Larger families can ask for 2ccf per extra person. Households with fewer than four people do not have to use less, but they are encouraged to.*

The second concerns "excess revenue" from customers who are paying $50 for water that may cost $2 to deliver, resulting in "profits." In an email, a SC Water staffer wrote:
The goal of our penalties was to incentivize water rationing, not to raise revenues. Accordingly, we hope not to receive any penalty revenue and in actuality, haven’t received much. We do allow our customers to attend “water School” once and have their penalties forgiven but this is a one-time offer.
So it sounds like "we don't plan to sell water at that price" is a reasonable justification for setting a price to discourage use.

It's not the most logical way of setting rules, but this is Santa Cruz :)

Bottom Line: Santa Cruz has taken a major step to use prices to fairly and efficiently ration water among its citizens.[4] Other cities should pay attention, as they will face similar problems in the future.

  1. This program resembles the tariffs used in Santa Barbara in the early 1990s (read this post, which links to a paper) when higher prices (and other demand shifters) dropped total demand by 46 percent. Low prices for the first 8 ccf later dropped to the first 4 ccf, but there did not seem to be an adjustment for headcount.
  2. The city was already urging people to use less water. Higher prices -- as with Santa Barbara -- reinforce this message.[3] Years ago, I said that California could hit hit its "20 [percent reduction] by 2020" by raising prices. This is mostly because so much water is used for outdoor irrigation. SC's "basic needs allocation" works out to 230 liters/person/day, which is easily Amsterdam's double per capita consumption.
  3. NM sent this great piece on the arrival of water meters to Ireland, where the message is "don't let money run down the drain." The same message applies everywhere people are conscious of the volumetric price of water.
  4. I still think that a single volumetric charge is the best way to recover costs and price scarcity, but this two-step system is acceptable for taking headcount into consideration. It's better to have this system in place (headcount flaws and all) than see (uniform) higher prices defeated by people arguing that people are entitled to cheap water as a human right.

* The City of Santa Cruz website is down. I will add some links when it's live again.


Anonymous said...

I think the reason the city calls the $50 fee a "penalty" is to get around liability for potentially being in violation of Proposition 218, which as you may know was a measure passed by voters about 15 years ago to require votes on fees and taxes.

Naor Deleanu said...

Hmm doesn't this basically function as an (individual) cap on water use, not close to economically optimal Of course, people aren't exactly benefiting society much by soaking their lawns, but this isn't exactly a market-based way of encouraging conservation. It would be kind of like imposing a maximum wage by suddenly taxing wages over $10 million at 95%.

David Zetland said...

@Naor -- great point. I'll respond in a new blog post.

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