Saturday, July 5, 2014

Excess water demand in California

Image source

WSJ reports:

About 60 California cities and agencies have imposed mandatory water-use cutbacks, some as high as 50%. In many cases, the rules are enforced by charging higher fees for excess usage. In others, inspectors are deployed to crack down on scofflaws. . . . 
Among the most aggressively monitored locales is the state capital, Sacramento. . . . 
This year, the city cut outdoor watering to two days a week from three. Because only about half its homes have water meters to measure use, Sacramento must rely on inspectors to help enforce the rules. 
A team of 40 inspectors working for the city's Department of Utilities investigate complaints. Sacramento, a city of 475,000, had received 7,604 water-use complaints as of June 18, said city spokeswoman Jessica Hess. 
The city and other water districts, meanwhile, are offering carrots along with sticks, paying residents to replace their turf lawns with drought-resistant vegetation.

The state of California does not have enough water to meet demand. One way they could eliminate excess demand is to raise water prices. If there are externality issues, stick a tax on it. This isn't so different from "charging higher fees for excess usage." But for the most part, municipalities have instead opted for the hodge podge of costly and overlapping remedies described above. Sometimes prices are actually raised, but the timing screws up the incentives. A lot of people seem pretty upset by the restrictions--one wonders if they'd be willing to pay more if they could have more water. The guy with the landscaping business is a pretty good example of Bastiat's "unseen" costs of policy.

A couple of water districts are actually letting prices do some work (from ABC):

Two water districts and a pair of landowners in the heart of the state's farmland are making millions of dollars by auctioning off their private caches. . . . 
In California, the sellers include those who hold claims on water that date back a century, private firms who are extracting groundwater and landowners who stored water when it was plentiful in underground caverns known as water banks.

This makes me wonder if the state is actually open to flexible prices, but cities aren't.* Or perhaps utilities are afraid of "price gouging" fights.** In any case, while cities are piling on unenforceable rules, asking neighbors to tattle, and hiring bureaucrats to drive around busting people, some landowners took steps to actually alleviate the drought by storing some water in hopes of selling it. It was a brave move. I wonder how many others throughout the state would have taken similar steps if they thought they could count on a price mechanism.

I don't mean to oversimplify. This is an epic public policy problem with a lot of complicated details. But it does seem likely that water is typically underpriced in the West.

I have several other water posts here.

*If I understand correctly, water prices are set by this organization. My assumption is that utilities request price changes and the Commission makes a decision. I would like to know more about this.
**I once asked about this in a comment section at California Water Blog. A commenter responded with the suggestion that for utilities to obtain approval of rate increases, they may have to open their books to regulators--so they are hesitant to do so. My prior is that their books are already fairly open to regulators, but this could be an interesting hang up.


  1. I can understand Californians being leery of a free market approach. Didn't California have a wild and wooly, and rather expensive, lesson on this with their electricity markets? If I remember correctly, there was all sorts of speculation and manipulation with plants shut down in the face of rising demand to spike prices and so on. Eventually, the biggest operators went broke, but their beneficiaries made off with billions.

    Sacramento is doing what it can. If everyone in Sacramento had meters, they'd probably rely on high marginal prices beyond some basic level. Since they don't they can't use high marginal prices, because people without meters would have no incentive to cut back and might even set up a black market selling water at lower than peak rates. It makes more sense to monitor what they can, and outdoor watering is highly visible. I suppose Sacramento is considering getting everyone metered, but you can imagine the roar of protest this would induce.

    Incumbent water rights are a big problem in California as so much of the water is reserved for agriculture, rather than available on any market. That's why farmers are growing rice in the desert which is like planting amber acres of grain in midtown Manhattan.

    1. I don't find the idea of a free market/non-free market dichotomy very useful, ever, and particularly in the case of the CA power crisis. My understanding is that the CA event was a failure of market design; see eg Peter Cramton: There was never a "free market" for power in CA, and there will never be one for water either. I'm not advocating such a thing.

      I agree that the legacy of water rights in CA (and the West generally) is a disaster. Couple it with layers of ag subsidies and you get a lot of misallocation and a general mess.

  2. I always find the lawn thing amusing. In areas like New England and the Pacific Northwest where one generally knows where one's next raindrop is coming from, people let their lawns go brown in the summer. Apparently this is not the case in drier areas. I've had visitors from Arizona and Utah marvel at our seasonally brown lawns, amazed that we aren't watering them an appropriate green through the summer.

  3. There is a dissertation to be written on the current political economy of water prices in California, following up on the Ostroms' work.

    Is the pressure really coming from voters?

    1. Great point.

      I know someone who will be looking for a dissertation topic within a couple years...

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