AWRA Water Blog

More thoughts on pricing water

AWRA webinar Pricing Drinking Water for Conservation & Fiscal StabilityIn response to the large volume of questions following the AWRA webinar “Pricing Drinking Water for Conservation & Fiscal Stability,” presenter David Zetland agreed to answer several additional questions.

The questions and his answers follow:

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).

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.

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. For an answer to this question and two others, see David’s blog post at: http://www.aguanomics.com/2014/08/more-thoughts-on-pricing-water.html

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