20 Aug 2014

Urban water pricing in Israel

I admire most water policies in Israel,* and asked Yoav Kislev if water is "priced for scarcity, to discourage demand."

He replied:
I am not sure about discouraging demand. I think prices should reflect opportunity cost including scarcity rent. Indeed, water providers in Israel are charged extraction levy that is supposed to to be equal to opportunity cost in their locality.

However, Mekorot [the national grid operator] does not pay the levy. Mekorot purchases desal water and the price urban utilities pay Mekorot covers the full cost of desalination.

Consequently, the price urban consumers pay for water is close the the price they would have paid if Mekorot were charged the extraction levy. Urban prices are now $2.7 per cubic meter for the first block and $4.14 for the second.** These charges cover cost of water, local provision and sewage service.
I asked for further elaboration on the number of blocks and whether price covers "cost," to which he replied:
The first block is 3 cubic meters per person per month. Anything over this goes in the second block.

Payments cover cost; hence prices are average costs. Consequently first price is below cost and second price above it.

You may want to read my book, The Water Economy of Israel [PDF]
After noting that "cost" in Israel includes opportunity cost (i.e., running out of water or buying desalted water), I asked about the mix of fixed and variable costs. Yoav replied:
Approved costs include depreciation charges, labor, and other fixed items. There used to be a "connection charge" calculated to cover investment in network, but it is supposed to be absorbed into the per unit price. The issue has not settled yet.

The question of fixed vs. variable cost will come to the fore pretty soon; the desalination plants are operating this year in less than full capacity [due to rain]; they were promised coverage of fixed costs. We still have to see how the regulator will set the prices in this situation.
[DZ's] Bottom Line: Israel has a two tier system of prices that (1) recovers costs, (2) reflects "scarcity" in terms of getting more water from desalination and (3) sets a "human right" price for some water but charges more for use in excess of 98 liters (26 gallons) per person per day.**

* Israel's water relations with Palestine are not good. Read this, this, this, this or this

** That's $7.70/ccf. Water in Las Vegas is $0.87/ccf, which may explain why they are having a hard time reducing consumption to 199 gallons/person/day.  

Speaking of Vegas, I just listened to this interview with John Entsminger, Pat Mulroy's replacement at the Southern Nevada Water Authority. John is a lawyer who has worked his entire career at SNWA. He says "there's no water conservation that we haven't tried," which leads me to fear that (1) he hasn't heard of water prices and (2) Vegas will continue Mulroy's expensive and unsustainable pro-growth policies in the hope that other Colorado River diverters will "share the pain" in subsidizing Vegas's gluttony.

Fun fact: The Strip "only consumes" 3 percent of Vegas water because its wastewater is captured, cleaned, and reused. Where is the other 97 percent consumed? I'd guess that at least half evaporates from all those lawns in the desert. Why do people grow lawns in the desert? It only costs $0.87 for 748 gallons of water!


Anonymous said...

FYI, JC Davis replied your comment on http://thewatervalues.com/

David Zetland said...

@Anon -- I replied to Davis (a SNWA staffer) with this:

Hi JC -- thanks for your comment. I have one "topline" response: Vegas is in TROUBLE regarding water use AND per capita use is >200 gallons/day, so I would say that Las Vegas is perhaps incompetent, even if it's not complacent.

I agree with your statement of fact on tiered pricing, which gives a household 164gal/day at the cheapest rate (that's 235 liters/day for the average hh of 2.65 people). Water consumption in places like Sydney or Amsterdam are far below that rate -- more like 100-170lcd, so Vegans with power showers may bump up to that limit. The tiers, in other words, are too generous. (They were lowered to 4HCF -- 3000 gal -- in Santa Barbara during the 1989-92 drought and use dropped to about 100 gal/capita/day: http://www.aguanomics.com/2008/10/conservation-pricing.html)

Going further, I'll agree that price signals SHOULD be accompanied by other conservation programs, but the LACK of price signals (i.e., Vegas with some of the cheapest water in the West) means that conservation has a smaller impact.

Bottom Line: It's your problem (assuming you're from Vegas, or work for SNWA), not mine, but I'd be first in line to argue against any bailouts from others when Vegas doesn't even have its own house in order.

David Zetland said...

ps/I googled his/her name AFTER leaving the comment at WV

Stuart Shapiro said...

I think the formulas should be adopted in NV. A desert is a desert.

Mike D. Jr. in PA said...

Great post, I tell everyone over and over again, people respond to incentives and prices, yet when it comes to water these lessons and indeed the entire Demand and Supply curves are completely forgotten. I guess the current unsustainable policies will continue until they can't. (Herb Stein)

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