By Jay Lund
During dry years, water becomes scarcer, and, economically, people should pay more for it. But most urban residents do not pay directly for water scarcity. We only pay the financial cost of providing water through pipes, pumping, treatment plants, and reservoirs. We do not pay for the lost value that water would have had for environmental or agricultural uses outside our communities or the value of that water to other water users in our community.
These scarcity costs are real and including scarcity costs in water rates would appropriately increase incentives for water conservation. But Proposition 218, enacted by the voters in 1996 as an amendment to California’s Constitution, bars retail water agencies from charging water rates that exceed their financial cost of providing water service to each parcel within their service area. Proposition 218 also makes it difficult for retail water agencies to adopt conservation or lifeline rate structures.
One idea to improve conservation incentives for urban water users, consistent with Proposition 218, is to have a two-part water bill. The first part of the bill would cover the financial cost of water service (pipes, pumping, treatment, water acquisition, and other utility operations), and the second part would include the scarcity value of water used.
The water scarcity (second) part of the bill could be set using an internal water market. Here, each customer could have a fixed share of the water available to the community or water utility, which could be sold or bought by each customer depending on their amount of water conservation. The share could be set by any of various methods. This approach can provide equity, incentives for conservation, and flexibility to accommodate the many different types of households and customers in urban areas. You are paid if you use less than your share and pay more if you use more than your share.
This is illustrated in an example monthly bill below.
Explaining your new water bill
With your new water bill, you pay more to use more, depending on the scarcity of water, and pay less when you use less.
Each billing period, each customer has a share of the community’s available water. If you use more than your share, you must purchase additional water conserved by others at a market rate. If you use less than your share, you can sell your water for a rebate on your bill or donate it to environmental or other charitable causes. (Some people conserve for money, and some conserve for the environment or could conserve for charity.)
Your bill has two parts. The first part of the bill is your share of the cost of water utility operations (piping, pumping, water treatment, and acquiring the community’s water supply). This utility financial cost must comply with the provisions of Proposition 218. The second part of the bill is for water you buy or sell from others’ shares of the community’s resource, including revenues you made from sharing your lower water use with others in the community.
Benefits and Challenges
This approach has some desirable features:
- Encourages water conservation. People receive direct credit for conservation. Conserving more than their share allows them to dedicate conserved use to environmental or other purposes, or this conserved water can be sold, perhaps to finance the customer’s water conservation activities, such as landscaping or plumbing improvements.
- Conservation incentives increase with greater water scarcity. In places and times when water is scarce, water prices rise automatically, without need for additional rate hearings.
- Flexibility to use more water if customers pay for it, and incentives to use less. If someone values water so much, probably we should allow them to buy additional water from willing sellers (conservers) from their shares. Given the diversity of urban users and uses, there is economic and social value in such flexibility.
- Pricing includes opportunity cost, and not just utility financial cost. The customer’s cost of water now includes its opportunity cost of the water to customers and can better include some of the opportunity cost of water use to the environmental.
- Proposition 218 compliance. Although it certainly would be challenged in court, inclusion of a water scarcity charge should comply with Proposition 218 for one of two reasons.
- First, if the purpose of Proposition 218 is to regulate both financial and economic charges for service, the scarcity part of the bill represents the economic (as opposed to financial) cost of serving water to a parcel arising from the additional cost that parcel’s water use imposes on other water users (in the form of additional scarcity costs). This scarcity cost would be appropriately set by the internal water market among customers.
- Second, if the purpose of Proposition 218 is to regulate only financial charges by the water utility, the scarcity charge is not a charge for the utility’s financial cost of retail water service to each parcel and is not paid to the utility, but to other customers – the utility is only the accountant and market steward for the scarcity charge. Rather, the scarcity charge assigns to each customer a share of the water available to the retail agency for distribution and use each year or billing period, which each customer may dispose of however the customer chooses. If the customer uses the water, he or she must pay the cost of that additional water service financially to the utility and to other customers in terms of scarcity. If the customer chooses to sell the water, then he or she is paid for the conservation and sale by other customers.
- Water utility and customers learn customers’ actual willingness to pay for additional water. If acquiring additional water costs more than what customers are willing to pay, then perhaps expansion is a less attractive than the remaining scarcity cost to customers. In a dry place like California, some scarcity is economical and good. The cost of eliminating all scarcity is likely to exceed its value. This value information supports better balance and integration across the portfolio of water supply and demand management actions.
- Social equity. Social equity is enhanced by this water billing system, as each household has a share of community water use, which it can sell if it conserves sufficiently. Also, larger water users which often drive water capacity expansions would pay more for any expansion costs. (Some care might be needed to discourage desperate residents from selling their shares of water availability in perpetuity for some small capitalized sum.)
- Ability to dedicate conserved water to the environment. Customers can directly dedicate their conserved water to the environment, rather than having this water become available for other purposes. This might require a formal contract whereby the utility water right or contract holder sells or transfers this water nominally to an environmental agent.
A main challenge is that this is a new approach, making it hard for many to understand. Another challenge would be selecting a method of allocating shares of a community’s available water. Allocations could be similar to the “water budget” rates common in some California districts, allocated equally among all service connections, by a proportion of previous water use, or any other means. Allocation of annual amounts across monthly or seasonal billing periods and among customer classes are some other community implementation decisions. Any means would bring similar conservation incentives, but perform differently in terms of social equity. Allowing customers to “bank” some conserved water from month to month might be useful. Soliciting customers’ selling prices for conserved water also is a challenge, perhaps with a default pricing policy set by the utility. There would be many implementation issues, but the idea seems worth considering and some are already considering it.
Financial incentives to conserve water that provide market information to customers and utilities might be especially useful in moving beyond plumbing and building codes for urban conservation to making behavioral changes among diverse urban customers. Such incentives and willingness to pay information also would aid integration of supply and demand management decisions across sectors and uses.
Jay Lund is Director of the Center for Watershed Sciences and Professor of Civil and Environmental Engineering at the University of California – Davis.
Further readings
Baerenklau, K.A., K.A. Schwabe and A. Dinar. 2014. “Allocation-Based Water Pricing Promotes Conservation while Keeping User Costs Low.” Agricultural and Resource Economics Update 17(6): Jul/Aug. http://giannini.ucop.edu/media/are-update/files/issues/V17N6_1.pdf
Baerenklau, K.A., K.A. Schwabe, and A. Dinar. 2014. “Residential Water Demand Effect of Increasing Block Rate Water Budgets.” Land Economics 90(4): 683-699.
Gray, B., D. Misczynski, E. Hanak, A. Fahlund, J. Lund, D. Mitchell, and J. Nachbau, “Paying for Water in California: The Legal Framework,” Hastings Law Journal, Vol. 65, pp. 1603-1663, 2014.
Hanak, E., B. Gray, J. Lund, D. Mitchell, C. Chappelle, A. Fahland, K. Jessoe, J. Medellin-Azuara, D. Misczynski, J. Nachbaur, and R. Suddeth, Paying for Water in California, Public Policy Institute of California, San Francisco, CA, 78 pp., March 2014.
Lund, J.R. and R.U. Reed, “Drought Water Rationing and Transferable Rations,” Journal of Water Resources Planning and Management, ASCE, Vol. 31, No. 6, pp. 429-437, November 1995.
Lund J. “New environmentalism needed for California water“. CaliforniaWaterBlog. Dec. 9, 2014
Lund J. “Water conservation for the birds “. CaliforniaWaterBlog. October 6, 2015
Muelrath, D. (2015), “Enabling Customers to Buy and Sell Conserved Water”, Powerpoint presentation, Valley of the Moon Water District, Water Smart Innovations conference, October.
Schwabe, K.A., K.A. Baerenklau and A. Dinar. 2014. “Coping with Water Scarcity.” Policy Matters 6(1). http://policymatters.ucr.edu/wp-content/uploads/2014/10/pmatters-vol6-1-water-incentives.pdf
why talk only about urban users when agriculture uses far more water- up to 80%
You are thinking all backwards. A state wide policy of water catchment, on all domestic homes and municipal drains in urban areas, and much larger ones in rural areas seems more progressive. Freeing people from the control of water is a way safer strategy over the long run, which will allow an unsustainable agriculture industry to continue. Also lets face it, agriculture is a tiny part of the GNP of California and is unsustainable, so why continue to make the entire state suffer? The citizens if California are being made to blame for the unsustainable agriculture practices, as if its our lack of conservation that is the problem. Farming in semi arid regions, with water inefficient crops, on huge scale for export: This is the problem. Time to progressively step into the future, and that will come when we acknowledge that agriculture in California might need limits of production.
This is a great idea and it makes a lot more sense then the current billing systems most water districts implement. Most recently my local district added a surcharge to the monthly bill to make up for lost revenue because of conservation measures. I opposed this charge because I felt I was being penalized for conserving. Your two part billing idea wouldn’t punish people like myself that conserve water no matter if it’s a drought year or not. Is this type of billing being implemented anywhere in California or the west?
Charge by scarcity? Why don’t we force people to pay for air scarcity? Who gets to pocket the windfall? DUMB and unethical idea.
Windfall profits on selling air rights is a wonderful double entendre! But I don’t think it would work for air because air is not a scarce commodity that is diminished by use. You not breathing air does not make more air for someone else.
Jay:
An important idea which should be adopted. Your proposal promotes efficiency, encourages conservation and provides incentives to deal with droughts.
Hopefully, Sonoma can lead the way – water boards are extremely cautious when they consider changes to rate structures. They know they will soon be facing a roomful of people yelling at them – they angry folks tend to show up, the supporters not so much.
The key element is finding a way to increase the marginal (not overall or average) cost of water so that there are incentives to conserve. About 12 years ago, we suggested to EBMUD management that they eliminate the fixed cost and use a simple volumetric cost. The GM and his staff laughed us out of the room. I took a brief stab at organizing community support but did not have the resources to proceed.
Your bifurcation of the water bill is elegant and you have provided at least a colorful argument for circumventing Prop 218.
I would suggest that social equity might be maximized by affording every urban resident the same baseline consumption. But I know how much water districts like the Irvine Ranch model that allocates based on lot size, microclimate etc. Sorting this out would be a good discussion.
I am skeptical that a user could effectively save water and ensure it was dedicated to the environment. I am willing to be convinced otherwise.
Beyond Sonoma, are there agencies with brave board members who might run with this? Any public interest groups ready to take this on. (I’d love to if I had the right position, but I am busy with another task.)
Best,
-Spreck
Water districts already have environmental compliance costs (including costs associated with habitat protection during water shortages) built into their water rates. It is a cost that is fully allowable under Proposition 218 for inclusion in the cost of providing service that is recoverable through rates. Similarly recoverable are costs associated with diversifying water supply portfolios with additional conservation expenses (such as turf replacement rebates) or drought-resilient sources such as recycled water or desalination.
Some water districts also include drought pricing into their rates – as water deliveries are reduced, the price goes up. And typically, the price is allocated by volume of water used in a ratio of at least 70% of the total cost (to comport with the CUWCC guidelines). We adopted such a pricing scheme when I was the General Manager of the Marin Municipal Water District, and it works well whenever their is an actual water shortage. However, when arbitrary allocations of water usage reductions are imposed through state mandate (such as the 20×2020 requirement or the most recent 25% across-the-board Gubernatorial decree), the connection to actual hydrologic conditions is severed. In 2015, reservoirs along the north coast (including Marin) were not significantly below average levels – or in some cases were even full.
An interesting concept that has merit. There would have to be safeguards against out right sale of one’s allotment and a clearing house to achieve true market value for conserved water. This concept could also be applied to water project water to all customers with minimum amounts established for water quality and environmental standards coming off the top before allocation to users–agriculture as well as M & I.
I like the idea of donating unallocated water to other users in the community, but that “community “would need to be defined for each part of the state. Would we then need a state agency to “oversee” and “regulate” all this water trading? (If I save water in Marin, would I be donating water to fish in Redding?) But the bigger question, is: Might this scheme have the potential to become another regulatory bureaucratic morass, like that is the CA energy market? If Prop 218 is the problem, it would be better to the address that in legislation than to create a very complicated work-around. It would be easier to amend Prop 218 for a narrow purpose like saving water (especially during a drought when saving water is popular) than a wholesale revocation of the law.
A good concept. The market size however appears to be customers within a single water purveyor with the expectation that the purveyor will translate those internal market forces into increased or decreased future supply works. Increasing the market size by linking customers between purveyors through some creative mechanism would be worth exploring. The obvious way to do this is through water transfers. I wonder whether other less obvious mechanisms might not also exist to make the connection, e.g., sales of water “futures” or other financial instruments. My gut feeling is that there may be even better ways that aren’t coming to me right now.
Robc – you are certainly right that urban districts should employ similar incentives between one another as well as within their service territories.
Trading with ag water makes sense as well, but also raises issues.
For a market to function, existing conditions need to be defined.
Water economists Dr. Rod Smith and Dr. Vernon Smith (Emeritus) of Chapman University have devised a software tool that would be better than monkeying around with water rates to achieve socially engineered social water equity. Their software tool would allow those who want to sell excess water from conservation at the retail (household) level to sell it to those large lot property owners, nurseries, golf courses, etc. who would want to buy it. In other words the software tool would handle the problem via a market mechanism instead of social engineering of water rates (which the courts and voters do not like). This software tool is called Aquafair. Instead of letting government or policy elites decide who gets a lawn and who doesn’t a voluntary market mechanism is established. Moreover, Smith and Smith have devised a way so that bids and offers are matched in a way that balances the volume of water. See aquafairexchange.com
This is very late to the game here, so I don’t expect a response, but just in case…
The idea seems good, but I wonder how much of a motivation “conservation” will be for those who have money to pay for more. If those who don’t have to worry about their income don’t care if they have to pay more for water, then couldn’t that mean they may end up using more than what is really necessary?
My other question is, how do we ensure or how do we know that this idea if it were to come about, won’t impact low-income or disadvantaged (the two not being the same) communities and families? I’m not saying that the idea would do that, I’m just wondering how it won’t.
Currently, my city is going to implement an almost 20% water rate tax hike because, as a previous commenter said, we’ve been overall saving and conserving so much that the city has lost that revenue, and can’t afford to pay water treatment plant bills; that’s why I like this idea because it seems more fair than this tax hike, which punishes us for conserving. I just have those two questions though.
Thanks.
My two cents:
It is important to distinguish between “public” and “business” uses of water. Public included basic human needs as well as environmental uses. These warrant regulation or subsidy etc.
For business uses, a business model should apply, A few more thoughts from 6 years ago:
Balancing the Water Business and the Public Trust
Aristotle was right. Water, along with earth, air and fire, is a one of the primary elements upon which life depends. Water is essential for our homes, our businesses, and especially for our farms. Water also is the great elixir that sustains fish, wildlife and the natural world.
Across the globe, as a result of increases in population, depletion of groundwater basins and the uncertainty of future precipitation, shortages of this precious fluid continue to become more commonplace. Providing reliable water supplies requires both cost-effective investments in infrastructure as well as policies and incentives to ensure that existing supplies are used fairly and efficiently.
There is a fundamental public interest or trust in water which requires that the environment and local communities be provided sufficient supplies and protected from more powerful and often remote economic interests. As water supplies decline, citizens in the 21st century should plan to monitor governmental management of water closely and to ensure that these indispensable public values are protected.
However, the private sector has an important role to play as well. Improvements in efficiency as well as evolving human and environmental needs will inevitably bring about changes in water use patterns. A business model — with appropriate constraints — should be employed that allows and encourages innovation. In many cases, water should be marketed to those who can use it most efficiently and productively. More opportunity for appropriate water marketing will bring out the best ideas that resourceful water users, urban and agricultural alike, can implement.
By improving efficiency in cities and on farms, economic incentives will help maximize food production and meet business needs while optimizing the use of limited water supplies. As a result, it will be easier to meet basic human needs and to reduce the pressure to extract ever increasing amounts of water from our rivers and streams.
Cliches always fill a vacuum of knowledge about how the water system actually works. Farmers have already invested $2 billion of their own money in the past few years in more efficient drip irrigation systems. So a business model has already been adopted by the business sector. But where does that lead us but to water perdition where the solution becomes a greater problem. Once drip irrigation systems are installed groundwater basins are no longer recharged. During dry spells called droughts farmers shift from imported water to groundwater. In other words, during drought Big Agribusiness, not government, is what saves large coastal cities that are dependent on huge amounts of imported water from reservoirs. The City of Los Angeles alone depends on imported water for more than 80% of their needs. Silicon Valley 60%. San Diego 90%. Oakland 70%. San Francisco is almost entirely dependent on imported water although it is from its own Hetch Hetchy Reservoir not from the state or federal water systems. During Dry Years, the Environment, not BigAgribusiness, uses 60% of all system water on average. If a business model was to be applied where it would help, it would be with how Environmental Water is managed. A UC Berkeley study concluded that it is environmental water that needs to be managed more efficiently. Right now water for fish runs is just flushed to the ocean where it doesn’t end up in groundwater basins. As recently pointed out, the US Fish and Wildlife Service has just proposed sending enormous amounts of water this year to the ocean to protect the tiny numbers of minnow fish in the Sacramento Delta river system. This would cost $500 million in water. How business-like is that? Especially when environmentalists claims that minnow fish will become extinct with global warming anyway? The Delta Tunnels plan would manage the Delta more efficiently and would lessen evaporation losses and segregate fish and farm water into separate conveyance systems. But it could be accomplished way cheaper if a peripheral canal was just built or if the existing system were just managed so that a tiny number of fish get to trump everything else resulting in water management becoming nothing but profligacy. But those tiny number of fish give the state legislators power over farmers. So water and fish becomes a political football, not your business model. It’s about power, not business. So there’s my 1 cent added to your 2 cents out of the billions of dollars spent on water each year (water is free, but capturing, storing, treating and conveying it is its “price”).
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Spreck Rosekrans commented: “My two cents:It is important to distinguish between “public” and “business” uses of water. Public included basic human needs as well as environmental uses. These warrant regulation or subsidy etc.For business uses, a business model should apply, A” | | Respond to this comment by replying above this line |
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| | | Spreck Rosekrans commented on Let people pay what water is worth – Sell your conserved water. in response to Y. Park: This is very late to the game here, so I don’t expect a response, but just in case… The idea seems good, but I wonder how much of a motivation “conservation” will be for those who have money to pay for more. If those who don’t have to worry about their income don’t care if […] My two cents:It is important to distinguish between “public” and “business” uses of water. Public included basic human needs as well as environmental uses. These warrant regulation or subsidy etc.For business uses, a business model should apply, A few more thoughts from 6 years ago:Balancing the Water Business and the Public TrustAristotle was right. Water, along with earth, air and fire, is a one of the primary elements upon which life depends. Water is essential for our homes, our businesses, and especially for our farms. Water also is the great elixir that sustains fish, wildlife and the natural world. Across the globe, as a result of increases in population, depletion of groundwater basins and the uncertainty of future precipitation, shortages of this precious fluid continue to become more commonplace. Providing reliable water supplies requires both cost-effective investments in infrastructure as well as policies and incentives to ensure that existing supplies are used fairly and efficiently. There is a fundamental public interest or trust in water which requires that the environment and local communities be provided sufficient supplies and protected from more powerful and often remote economic interests. As water supplies decline, citizens in the 21st century should plan to monitor governmental management of water closely and to ensure that these indispensable public values are protected. However, the private sector has an important role to play as well. Improvements in efficiency as well as evolving human and environmental needs will inevitably bring about changes in water use patterns. A business model — with appropriate constraints — should be employed that allows and encourages innovation. In many cases, water should be marketed to those who can use it most efficiently and productively. More opportunity for appropriate water marketing will bring out the best ideas that resourceful water users, urban and agricultural alike, can implement. By improving efficiency in cities and on farms, economic incentives will help maximize food production and meet business needs while optimizing the use of limited water supplies. As a result, it will be easier to meet basic human needs and to reduce the pressure to extract ever increasing amounts of water from our rivers and streams. | Reply | Comments |
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