Category Archives: Water Markets!!!

Maybe a flamethrower would be better.

This is an analogy, so I am properly ashamed.  I’ll put it under the fold so innocents don’t have to see if they don’t want to.

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A market is just a tool. It isn’t a goal. It is a way to accomplish some things.

The Australian Markets Report (2008-2009)  is an example of everything wrong with water market enthusiasm.

The primary objective of the Commission’s Australian water markets reports is to inform market participants about market structure, trading activity, prices and key policy drivers. 

Providing this type of information to both direct and indirect participants in the market is an important step towards improving market performance.

Then it counts up the number and nature of water trades.  From everything I’ve seen, Australia is the best example of having a water market for the purpose of having a water market.  The metric of its success is whether it was a lot of water market or a little water market.  This is all ridiculous.  An assessment of a water market for the purpose of improving its performance should look at whether it does the things it was designed to accomplish.  In towns with more trades, are farm mortgages more secure?  In towns with more trades, do farmworkers have better working conditions? Do schoolchildren skip more?  Do people choose to use smart irrigation timers?  Do couples make love more often?   There should be some policy goal, chosen for some purpose (secure the Delta, support east side farming, make food affordable, make meat expensive, some goal).  And then we look at all the ways we could get to that goal, and perhaps a market is the least cost way to achieve that.  If so, we choose a market as the way to accomplish the goal.  Here, watch this applied to Cap and Trade.

In Cap and Trade, we want to reduce carbon emissions.  Reducing carbon emissions is the goal.  We do that because of conditions in the physical world.  We set a cap on carbon emissions because we have science about how much the atmosphere can absorb this year without the oceans boiling over and the continents exploding.  Right?  A policy goal, set by real world conditions.  Then, after science and people have agreed on that goal and set a cap, we look around for ways to do it.  We could regulate emissions.  We could tax emissions.  We could create a market in emissions.  Some people think creating a market in emissions would be the lowest cost way to get to our policy goal of reducing emissions.  In that case, they like Cap and Trade.  But we don’t want a cap and trade system because we LOOOOOOOVVEE trades.  We haven’t won if there are more faster trades than ever before.  We win if we hit the cap. 

That’s the problem with all the talk about water markets.  I never hear it paired with a goal.  “I want a water market that gets me a smaller, robust farming system.”  “I want a water market that gets me the cheapest possible water for urban users.”  “I want a water market that gets me the most expensive possible water for urban users, because then they’ll conserve.”  So far as I can tell, Australia wanted a water market because it wanted a water market, and we want a water market because Australia has one.  If Australia wanted a water market because it would make farming easier, because it would move water to cities, because of something, you can’t tell from the Water Markets Report.  It doesn’t measure anything but their market’s marketiness, which should only be of interest to the technicians tweaking it to accomplish some goal better.  But they don’t even have a goal. 

If you don’t have a goal for a water market, it will do ONE THING.  It will seek out economic efficiency.  Was that the goal in the first place?  Who the fuck knows, we never talk about actual goals.  Economists like to get rid of economic inefficiency, but some people call economic inefficiency their “jobs” and “towns” and “lifestyles”.  (I was impressed to see Dr. Michael discuss this issue a while back.)

I’m not even opposed to water markets on principle.  Once we have an actual goal, a market that was designed to support that goal could be the fastest cheapest way to get it.  Or not.  It almost certainly won’t be the fairest way to get that (because we aren’t starting with wealth spread evenly throughout society, so poor people will not be able to use the market to express their full preferences), so we should decide up front whether fairness is one of our design criteria.  But all of that is a secondary, technical conversation.  The first conversation should be to choose the goal.

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Doubt about making 20% per capita water reduction mandatory.

One big complaint about last week’s water legislation is that it is pricey; a second complaint is that the 20% water use reduction is voluntary. Those are linked. A fair bit of the $11B bond measure goes to grants to districts for conservation and infrastructure improvements. If you don’t meet the 20% by 2020 goal, you can’t get state grants. The legislature is essentially offering bribes that are too good to turn down. This is sortof fine, if you don’t mind that the taxpayers as a whole are supplying the money for those bribes*. But some object to the bribery method at all. Make the conservation target mandatory, they say.

As a bureaucrat, I have an insatiable demand for power and I love to meddle in people’s daily business, so I’m not emotionally opposed to making 20 by 2020 mandatory. But as I think more about it, I can’t figure out how I would make water conservation mandatory in urban California.  Who would I enforce against?  What is the remedy?

What would be the target unit of enforcement?  People?  Households?  Districts?  Cities, in places that aren’t served by a district?  Those all get hairy really fast.  I don’t know of any ways to track the 35 million individual water users, nor how to break them out from within a household, and how would you divvy up the household landscaping water use?  Households?  Every household should have a meter, and I’d like to see multi-unit places have meters too.  So that doesn’t bother me theoretically.  But how would the state receive and track and enforce against individual households, if their water consumption dropped 18% but not 20% by 2020?  What’s the reporting mechanism?  How is it validated?  The state could require that districts or cities do this, or simply that districts show an aggregate water level use that’s down by 20% on a per capita basis.  But that starts pooling crime in a way that we don’t generally do.  Punishing a water district (how?  fines?  And then the district raises rates to recoup funds (which I don’t think it can do under Prop 218)?) for not meeting a goal punishes the people in the district who did meet the goal along with the people who don’t.  Besides, we hold employers responsible for the criminal acts of their employees, but isn’t it a little strange to hold public municipal or administrative body responsible for the acts of its constituents?  I mean, a water district doesn’t have that much power over the people inside it.  If a bad actor inside a water district wanted to use 84% of her 2009 water use, the district can’t do more than levy fines.

If urban water conservation is legally mandatory, choosing the level to prosecute against gets complicated fast.  But assuming we worked that out, there are other stange aspects to it.  Using water isn’t a crime, and it is a little strange to think that it would become one in the next gallon after 80% of your 2009 water use.  Wasting water is currently a(n almost entirely unenforced) crime under the California Constitution, but most people don’t have a strong emotional sense that letting the shower run until the water gets hot, or neglecting a running toilet is a matter that is appropriately prosecuted.  Further, people are extremely attached to however it was when they were kids; we’re going to tell them that what they’ve done their whole lives is suddenly illegal?  I guess we’ve done that with smoking bans, but there you could point to the harms of secondhand smoke.  Any incremental water use, even a wasteful one, seems like a pretty benign thing to criminalize.

Then, what is the remedy?  Throw those wasteful fuckers in jail and throw away the key?  Naw.  I can’t imagine anyone is talking about criminal remedies.  I assume we’re talking about civil prosecutions, and a thought of an administrative system for that (district water courts?  Traffic courts handle water tickets on the side?) is also boggling.  I suppose the water cops could issue tickets and the household could either pay it or make improvements.  Or something.

Yeah.  I’m not emotionally opposed to making water conservation mandatory, but as a practical legal matter, I don’t how to do it.

 

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It was better before.

I was all fired up to write a series of posts about this article in the Hanford Sentinel, mostly about this part:

That’s why the Kings County Water Commission spent a good chunk of a Monday night meeting talking about a Westside landowner who plans to sell 14,000 acre-feet of water a year to the Mojave Water Agency in San Bernardino County for $5,500 per acre-foot.

That’s $77 million of the wet stuff headed out of the county for likely urban development (an acre-foot is enough water to supply a typical home for a year, according to Wikipedia).

$5,500 per acrefoot is an outrageous price, so I figured there was an outrageous story behind it.  I figured it was money laundering, and then my friend speculated it was probably connected to intended solar projects in the Mojave.  This was plausible because the sellers are masters of milking the public subsidy.  I figured that like any good corporation, they’d created a shadow entity to be the purchasers, Mojave Water Agency was a pass-through, and Sandridge Partners would now be farming subsidized solar energy (which requires cooling water) instead of subsidized cotton.

It was a good conspiracy fantasy, which is why I’m still telling you, even though the thing that caught my eye was wrong.  Mojave Water Agency isn’t paying $5,500 per af-year (twice the cost of desal).  I couldn’t find a citation for that, so I called the reporter.  MWA is paying a lump sum up front for the water right.  They’ll own all the future flows that water right can command for $77M, which might well be a decent price for water.  I suppose it might actually be water for the stated purpose (subdivisions).

I only have a couple points to make, instead of the scandalous series of muckraking posts I’d hoped to do.

1.  This tells me that farming corporations are pulling out of the west side of the San Joaquin Valley.  Assuming corporations are making cold, hard business decisions and not emotional decisions about “being a farmer”, they think the era is over.  They are cashing out.  I don’t know what factors they weight (Subsidy reform? Climate change predictions about less precip? Maybe they don’t think Obama will build them the West Side Drain? ) but they’ll trade their future on the west side for $77M.   Can’t come a day too soon, says I, except for the cashing out part.

2.  I enjoyed reading the Negative Declaration quite a bit, for a rare look at a shy water district.  Dudley Ridge Water District covers 37,000 acres completely owned by eight farming corporations.  There are no towns, and the district has no staff.  There is no public for this water district.  Perhaps the district directors fly in  for the annual meeting on the several private airstrips the Neg Dec mentions.  Or maybe they just meet at home in San Jose.  The article says:

Dudley Ridge Water District, where Sandridge’s land is located, has adopted a policy divvying its water among member property owners. That gives each the right to sell their share.

No representatives from Sandridge Partners or Dudley Ridge Water District spoke at Monday’s meeting.

Yeah, I bet they didn’t. They aren’t answerable to the likes of some county water commission.

3.  I despise the injustice behind permanently vesting water rights in whomever filed for them two generations ago, and making those rights marketable.  Mojave Water Agency serves a relatively poor community.  It infuriates me that they had to give some of the richest people in the world $77M for unreliable water.  They made the trade, so maybe they think it was worth it.  But it is incredibly unjust and as a society, we could choose fairer ways to make sure towns get the water they need.

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Filed under Agriculture, Districts, Water Markets!!!

Of course, that would require a functional state government.

The Pacific Institute has released another report on conserving ag water (or perhaps a final draft of the report I critiqued for ages in December) which I haven’t yet read. Some of the reported themes are maddening (furrow irrigation is not of itself inefficient, nor drip irrigation necessarily efficient; management is everything), but I can’t yet source that directly to the report. I want to highlight a different point:

“If we want to have a healthy agriculture economy, the only real option is to figure out how to produce more food with less water,” said Peter Gleick, president of the Pacific Institute and co-author of “Sustaining California Agriculture in an Uncertain Future.”

Naw. Dr. Gleick’s quote is only accurate if you assume a market-based or capitalist model of the farming economy. We could have a healthy agricultural economy that produced sufficient food for California by capping farming production to something scaled to sustainable practices, buying that food, plus subsidizing farmers for farming the way we want them to. It would make food more expensive, partly because that would internalize some of costs that farmworkers and the environment are paying now. It would be a subsidy, which isn’t itself a sin. I don’t want to extend indirect subsidies like cheap water, but I’m game to pay some piece of taxes to make the towns along Highway 99 be pleasant places full of stable farmers and farmworkers, and also to make farms be all eco-like. I’d be even more game to pay my share of those subsidies if I thought they were designed well to achieve goals I want.

I no longer want to export California’s environmental quality, its water, sun and salmon, bundled into almonds and apricots.  I don’t want to do that even if a market supports it, even if people on the East Coast would like to eat what we grow*.  I don’t want to depend on a growth economy when I think we’re approaching the physical limits of our stocks and flows.  I’m fine with mining inefficiencies while we make a transition to a different type of economy, but those will run out and unless bioengineering pulls out miracles I don’t expect, I don’t see big increases, or even constant small yield increases  for decades to come.  I think we’re going to see step disconuities like this drought racheting us down for a while (yields, in the short term, standard of living in the long term, as much as standard of living is captured by eating meat, for example).  Which means I want us to think about getting to an attractive end point for Californians.  I don’t think the growth-economy model is going to get us there, so it makes me sad to see our well-known progressive thinkers internalizing it.  I would like us to make the harder case for paying, as consumers and citizens, for the farming sector we want to have**.

[Edited and second footnote added the next day.]

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Long digression on the opposition to rate increases.

It is fairly common, if you follow a story for a few years to see a cycle of necessary rate increases followed by recall or ousting at the next election. Diehards get elected, swearing on their newborns that they’ll never raise rates like the last assholes. Then, the realities of the district beat them down. Two or three years later, they’re reluctantly admitting the need for rate increases. You would think that people would remember that they used to oppose rate increases and that would give their calls for higher rates some credibility. But I’ve seen vicious cycles where their previous supporters turn on them and yank them out next. The aversion to higher rates starts anew. I always wonder if anyone in the process gains self-awareness or enlightenment.

The story for opposing rate increases is always the same. People storm district meetings, afraid and angry and dogged, saying they can’t afford the increases. I never know what to make of that. In the first place, there are efficiency gains and cutting back. After that, though, what should I make of stories about forcing little old ladies on fixed incomes to eat cat food? Do I believe that increasing water rates are the last straw? Maybe that’s plausible, and I certainly believe that we’re in the beginning of a period when most environmental fees will go up. Gas prices, food prices, firefighting costs, development fees, water, sewage, waste collection. I fully believe those are all about to go up. I suppose any one of them could be perceived as the last straw.

But then, I think two things. I suspect that for lots of people, the reason they can’t pay those fees are that they transformed their income into illiquid extra square feet on their house. That is a huge bind, but I never respected their choice of a big house, so it leaves me a little unsympathetic that their mortgage puts them so close to the edge. Second, the truth is, most of those new fees are different forms of internalizing environmental costs. Someone who can’t afford to pay those cannot afford their standard of living. They’ve grown used to that standard of living under artificially low prices subsidized by the environment, but that is a false expectation.

So, on the one hand, I really do feel bad for any particular nice old lady eating cat food. When those stories get personalized, they really hurt. On the other hand, their fight is to impose the costs of their lifestyle, of which water is just one example, on anything else. The environment, most likely, or the collective as a second choice. Then I am not so sure that that lifestyle is such a valuable one that I care if they get to continue it. I am even less sure that I care enough to spend money supporting their lifestyles.

(Please note that I would make the decision to support some forms of farming, because it can have positive externalities that I want. So it isn’t like I’m absolutist on this stuff.)

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Why it isn’t simple to charge market rates for water. Background.

I see this stuff all the time (sometimes, I see double!): an oversimplistic assessment that raising rates for water would end shortages. I am, actually, in favor of charging by unit of water (so you pay more when you buy more, a concept so straightforward that it is embarrassing to have to say it explicitly, but not always the norm for water pricing). I am also in favor of charging a rough marginal rate for water. These days the cheap chunks of water are thoroughly exploited and the next source costs more to collect, treat and deliver. I’m fine with water users seeing that cost for what it is. So it isn’t that I’m opposed to the concept of raising rates on water. But I do get frustrated when people act as if that is straightforward and obvious and the full solution. Districts aren’t dumb. There are reasons they have the pricing structures they do.

Some things to get out of the way:
1. No utility sells water. Water is free. What they sell is capacity and distribution. You are renting a length of pipe as water moves through it. The way to tell how much you bought is by measuring the amount of water, and that’s how they charge you. For your billing and behavior, this is just like charging you for water, so this is a minor technicality that makes no difference. It just bugs me to hear people saying to charge more for water, because I am hopelessly pedantic and literal minded.

2. It isn’t coincidence that the people you hear saying that pricing water is the bulk of the solution are all economists. A lot of the reasons pricing structures change slowly are over on the legal and institutional side; economists dismiss those as trivial, malleable impediments, but lawyers understand that they give districts a different set of incentives.

3. Rates ARE going up. Fast and hard this year.

4. The word “shortage” is doing some work that gets skipped over a lot. When everyone says “drought” and “shortage”, what we basically mean is “less then we’re used to”. We don’t mean, and won’t in the foreseeable future, “not enough to drink and bathe”. So far we’re not even close to that range. What we do mean is “not enough to use it like we’ve always been able to”, on lawns and embedded in our meat supply and on wasteful appliances and by deferring maintenance on leaky pipes.

Now here’s the thing. When laypeople hear No More Shortages, they think, ‘there’s plenty, I can continue hosing down my driveway just like I always have.’ When economists say No More Shortages, they mean charging so much for water that people cut out the uses they don’t want to pay for. Then supply curve intersects demand curve, and the economic definition of No Shortage is met! Yay! In real life, high price signals that cut out less-intensely-wanted uses means no lawns, fewer burgers, switching out appliances and replacing leaky pipes. That is what laypeople thought was a shortage! It is not the careless plenty they grew up with.

I am personally fine with this. I don’t have any emotional attachment to careless water management or lawns. I do want to point out, however, that when economists say No More Shortage, they are talking about what the broad public considers a shortage (less than I’m used to and I have to pay attention).

5. One of the standard critiques of markets is that since wealth is distributed unevenly, the marginal value of a dollar is different between rich and poor people. The rich will be able to afford their swampy lawns while the poor scrimp to drink. You can create pricing structures to alleviate this (a very low rate for the initial chunk of water, or refunds to low-income users), if environmental and social justice are important to you. Those are worth explicit consideration and decision.

All that out of the way, lets get to the good part. Why don’t districts pass the marginal costs of water on to their constituents?

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