No Good Citizen Goes Unpunished

Hats off to North Carolina residents, who, for almost a year now, have cut their water consumption by a third in response to a record drought.

Now, the residents of Charlotte-Mecklenburg County are getting a hefty reward for their sacrifice: they’ll be paying more for their water.

Perhaps ticked-off residents shouldn’t be surprised: less spending on water has left Charlotte with a projected $29 million shortfall over this year and next. Utilities officials say they must raise rates to make up for the losses.

Has Joe Citizen shot himself in the foot?

(Hat tip: Kip Robinson)


B.J.McNair

Whether prices are increased or not, someone has to pay - either consumers or shareholders in the water utility. This is a distributional issue only. The bigger issue is whether investment in water supply infrastructure has been efficient.

If the price regulator had announced, prior to the drought, that prices would not be raised to recover revenue losses resulting from supply shortages, would the firm have invested in more infrastructure and avoided such a severe shortage? Would the regulator have deemed this investment to be prudent or would it have been more worried about keeping prices low?

Eric

If the govt is handling the water, they there are enough incomes and expenses that the price paid for water services doesn't have to cover theier expenses.

If the people's reduction in consumption causes the utility to run at a loss, then the people are paying higher per-volume prices while the utility has higher fixed costs and lower per-volume costs.

If water is scarce enough to warrant high per-volume prices, the govt ought to charge the utility a per-volume rate. The country owns the water to begin with presumably. The utility shouldn't get the water for free if it is scarce.

Stephen M (Ethesis)

Already happened in California years ago.

Water system on fixed cost basis, drop amount of water used, have to change billing to cover flat costs.

Isn't this the same thing that happened in Southern California back in the late 80s early 90s? Voluntary reductions {worked somewhat, but revenue dropped} failed, so the utility raised rates. But it worked so well that income fell drastically, so rates were raised again?

Yep, that happened.

What eventually happened? Drought ended, rates went back to normal

Julianna

I'm from Raleigh (capital), not Charlotte. However, all the metropolitan areas are having the same cost increases apply.

The price increase is tiered--if you consume more water, you pay more per gallon. People who complain about it aren't received warmly.

Kristal L. Rosebrook

I agree with Steve:
"Unbelievable on an economics blog.
If NC government wanted people to save water, one would have hoped the way they would have done it was by raising the price. Demand curves slope down.
Rationing by price? Anyone?"

Good insight!

Kristal L. Rosebrook

severin

Denver did this a few years back. There had been a drought for several years and so that was the governments excuse for raising rates year after year and rationing was heavily enforced, the government insisted that it was a crises and desparate measures need to be taken. Then we had a rainy summer and everyone stopped watering their lawns, this prompted the government to say "we aren't selling enough water" and raise prices.

Lee

As a victim of the wildfires here in San Diego in 2003, I had a similar disgust when some residents in a wildfire-prone area proposed to clear brush near their homes and pay for the clearing. The city refused claiming that it is city property. When the wildfires hit again last year, the city preempted the idea that the fires were a result of negligence by the power company by making claims right away that the cause of the fires was lightning strikes. The same can be said about landslides in an upscale neighborhood which they claim to be unstable soil in public comments over and over without the input of the geologists. Similarly, garbage collection rates have gone up since they approved a lot of multi-unit dwellings which do not pay the fee as opposed to individual homes. In effect, homeowners are subsidizing the apartment and condo owners who generate a greater volume of trash. This throws the economics of supply and demand out of equilibrium.

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M. J. Duke

Having studied environmental science, I asked such questions of my professors when they pushed for conservation. If everyone cuts back, wont the price go up? I used to say simple economics. Now I have a real world example.

What also gets me is that for such a resource, buying in bulk means a cheaper price per unit. The article fails to mention the cost on businesses who may be the largest consumer of water. I would like to see how that is being handled.

T.C. Moore

I was going to say what #18 said: usually it's the other way around.

On the other hand, from the utilities perspective, I believe they got much better results by publicizing the very real drought conditions and appealing to people's sense of environmentalism and community responsibility. That would get much better results in reducing water usage than just raising the price, which I think would merely piss people off.

However, this appeal to our better nature will not produce results for long. Usage might creep up as the drought "gets old" and the sense of emergency wanes. So raising prices to reflect the new actual usage and prevent backsliding now makes sense (not to mention the budget shortfall).

As for all the other calculations mentioned above:

Water is different than most other goods, since it's provided by nature, and supply is the restricting factor, instead of demand (Will not most businesses raise supply to meet demand? In a drought how can the water company do that!)

In an ideal world, our Wild West style of allocating and pricing water resources would be revamped. We would look at the amount of water the environment can sustainable provide, the minimum needs of agriculture and urban areas, and (though hard to find) data on the response of consumers to particular prices for water. Then prices would be set for farms, business, and residents to meet the goals set for watershed management.

Unfortunately, this reminds me of the way Europeans price oil. It may sound like a heavy handed way of "managing the outcome". But our water usage, collectively, is one thing that strongly affects the health of our surrounding environment. And it's much more of a balancing act, than say with gasoline ("emmisions and arabs bad. Ride bike! use linux!")

Isn't it better to use economic incentives in a backhanded way, like above, than to descend into demagoguery and water wars, as seems to be happening with private and public water projects all over the world?

Water is different. But economics still applies.

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Steve

Unbelievable on an economics blog.

If NC government wanted people to save water, one would have hoped the way they would have done it was by raising the price. Demand curves slope down.

Rationing by price? Anyone?

I'm guessing since people are complaining that the price is going up AFTER a decrease in usage, the decrease was caused by bans on watering lawns, pleas to converve for the common good, etc., etc.

whoanellie

#3 - Wonder? Of course it's undervalued. Water, similar to air, soil, and other shared natural resources are always undervalued until demand exceeds availablilty. If people step back and think about how valuable clean, safe water is, then hopefully they will be able to accept a higher charge for it.
I work for a municipality that supplies water to residents from Lake Michigan. Seems like a bottomless source - but in all reality the lake levels keep dropping, water pollution is increasing, and the costs to treat it and transport it are also rising.
I know it's hard to fathom paying more for something that falls "for free" from the sky. But, as other's have noted, you're paying for treatment and delivery. (Not to mention the convenience!)
Bravo to the North Carolina residents that have reduced their water consumption. Their public officials should seriously consider a phasing schedule to the proposed increases so the pain of a higher bill isn't felt all at once. Our electric company here has recently increased rates to the point where a phased hike was necessary.
And if it came down to it, I'm sure we would all give up our "premium" cable channels for clean water.

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Bakedblog

Perhaps they should have some sort of saved water credit. I would be furious if I did a good thing and then got punished for it, but sometimes that is what happens. I think the citizens should appeal this issue to their local politican's.

Thanks
Rachel Duncan
The Baked Blogger
http://bakedblog.com

Jean Naimard

This sounds a bit startling to us... Up here, in Montréal, water is ?free». We don't pay a dime no matter what we use.

We also have a mile-wide river which drains a quarter of North America passing by us, which may explain things...

RTP

This is just a money grab by the city. The same "hike" was proposed by Mayor Meeker in Raleigh as well. He cited the same reasons. Everyone saw right through the smoke an mirrors.

Adam S

Similar thing has been discussed around Atlanta. Many of these water boards have been required to undertake very expensive upgrades either for conservation, or because there is less water so it is more expensive to process, etc, so they have a bunch of bonds that need to be paid off. No matter how little water we use, the bonds are still there. So they have to raise the rates if they don't want to go bankrupt.

tarhoosier

I live in Charlotte. The three tier water rate is being stepped to lower levels so those who paid the minimum rate, may well now pay a higher rate. Those who will now pay the minimum will be those who clearly use the least water

some accountant

Seems like a accounting / billing failure rather than a market development.

In my neck of the woods, utility bills are tabulated as the sum of fixed costs and metered costs. Even if I don't consume I still pay what amounts to a hookup cost.

htb

For ThirstyDude in #5: Nearly all of the costs of delivering water are fixed.

No matter how much water flows through the pipes, you have to have functional pipes throughout your service area. A certain number of them are going to break each year and have to be replaced -- no matter what you do.

Meter reading costs the same for a dial that hasn't moved vs. one that's spinning like a top. Mailing bills costs the same for 1 CCF as it does for 1,000 CCFs.

There are some tests that have to be run daily or weekly. Sell a miniscule amount of water? Run one test. Sell an enormous amount of water? Run one test.

Have a big pumping station? You need a guy to take care of it, whether it's running flat out or at less than half capacity. Reservoir? Got to check that dirtwork regularly, whether it's empty or full.

Some of the costs are flexible -- the amount of chlorine you use depends on the amount of water you serve -- but most of them are not.

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htb

It's complicated. If you treat, test and deliver X amount of water, your costs are X: however, processing 2X water does not cost 2X. It probably costs 1.1X. So when you cut water use dramatically, your costs-per-unit go up -- often dramatically.

I looked at my water bill (not sewer, not garbage) recently. About 5% ($3) of the bill was for water. The rest was for having the service at all. I conserve water because it's environmentally helpful, not because I can't afford to spend $3 every month.

It's hard to hit the right balance here. Do you charge a lot per unit to give people an incentive to conserve? Or do you charge a fixed cost for the essentially inflexible costs, and leave people thinking that water costs mere pennies each day, which means that they can "afford" to waste it?

Residents of Charlotte are seeing the downside to the first approach. Residents in many other places are seeing the downside (shortages) to the other approach. There's no one-size-fits-all solution here.

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Davey

I'm inclined to agree with Paul @3. And it was just announced that we can use grey water on our plants. Now we'll all smell like Dove soap.