Why don’t districts pass the marginal costs of water on to their constituents?
HAH! Do you see what I did there? Constituents? Not customers, constituents. That’s the first reason districts don’t want to raise rates and pass the marginal costs of supplying water to users.
Districts are public institutions.
Districts are not companies. They have no profit function. They do not, for themselves, want to capture the full willingness to pay for water. That is not what they are for. In fact, their mission is some variant on “cheaply and reliably deliver water”. Because that is why local citizens organized and incorporated a district. Charging any more for water than it costs to get, treat and deliver is failing their mission. It is often also violating their bylaws, charter or the state laws that give them authority.
From the district side of things, they don’t want to make water expensive. Once O&M is covered, they have no incentive. What would they do with the money? Gold plate their pumps? They don’t have shareholders to distribute it to.
This neglects the ‘price signal’ aspect to charging lots for water (show the public it is valuable! no wasting!). There’s a lot to be said for that, so why don’t districts raise rates for that purpose and, um, give any revenues above operations and maintenance to an orphanage?
Board members are publicly elected
The people who set rates for a district are the board members, who are publicly elected by people in the district. They are not strongly motivated to increase rates for abstract considerations like “send a price signal”. First, they’d be increasing rates on their very own water. Second, they are answerable to the people in the district at the very next election. If you go back to those stories on raising rates, did you notice the part about how people are pissed? And organizing? Those are the friends and neighbors of board members, and also the people who will yank them out of office at the next election if rates go up (long digression on the opposition to rate increases in a post below).
But maybe a district really does need to raise rates, to pass along higher costs of getting new water or in this drought year, to encourage conservation. A standard technique is to charge very little for some small amount of health and safety water, and then high prices for frivolous extra water like elaborate water fountains in your tropical rainforest garden, Richy Rich. Economists are all, this is SO OBVIOUS. Do this already. Yeah, well, until last October, it was illegal. This is why economists need to pay closer attention to the law side of things.
Motherfucking Howard Jarvis.
There is an elaborate legal backstory, but basically, one side effect of Proposition 218, put forth by the Howard Jarvis Taxpayers Association, was that it became illegal to charge any household more than the costs of conveyance to that parcel. It was illegal to charge punitive rates to send a price signal to wasteful users. The last year of drought made this such a problem that the legislature corrected it.
So you have all these economists telling districts they could solve their shortages by charging more for excessive use, and districts saying, we’ll get sued. It was illegal until six months ago. I went to a number of different agency meetings, where everyone talked about how conservation pricing was such a great tool, and I kept saying, it is illegal. I think we should stop recommending illegal measures to the public. (Or, if we don’t care about legality, I think we should get far more imaginative.) People didn’t believe me because it evolved over three court cases, but then I’d explain Prop 218 and the court cases, and they’d realize that was a huge problem. Fortunately, Assemblymember Wolk solved it.
So when people say, ‘why haven’t districts instituted conservation pricing already when it is the obvious solution’, one answer is, ‘because there have only been three board meetings since it became legal to do that?’ Then my question is, did you know that? Did you realize that there are legal and institutional barriers that slow districts down? Do you know what they are? It isn’t necessarily ignorance or backwardness on the part of the district. The world that districts operate in is far more complex than the world of economic theory.
3 responses to “Why districts are slow to charge market rates for water.”
Great series of posts. I really like the way you cut to the chase on these issues, and I almost always learn something new or see a new perspective on something from your take on it.
One comment I wanted to make about the rate-setting issue. Not sure about CA, but in AZ private water utilities have to petition our Corporation Commission to change rates (i.e. raise rates to cover the cost of new water supplies or encourage conservation). This is a lengthy and very costly process that may not be successful – they are only recently even beginning to consider price increases to fund conservation efforts. So most of those utilities wouldn’t dream of raising rates unless they absolutely have to and some just cut the level of their service (maintenance, water testing, etc.) to remain in the black. So the incentives to keep rates low are much stronger for private utilities than the political constraints on public utilities.
Wow, I didn’t know about AZ’s system. (As I think about it, I don’t know what private companies in CA have to do. For all I know they have to petition the Public Utilities Commission.)
It is not so simple, economists!
I’m a fan of economists, in general. Even thought about becoming one for a while. But they make things look simple by making many simplifying assumptions. My favorite is the assumption that people behave rationally – although the political economists do a good job of ignoring that one.