voiceofsandiego.org: Cafesandiego... There Is No Water Shortage

San Diego has failed to articulate a set of general principles that lie behind how it prices water to households. As a consequence, the city has been unable to place its water supply situation on a long-term sustainable path. The nature of this failure lies in not recognizing the key features of San Diego's water supply situation.

The most important point is that there is not now nor will there be in the future a true water shortage situation in San Diego. Why? Water intensive, but low-value agriculture growing like alfalfa, cotton and rice in places like the San Joaquin and Imperial Valleys use most of California's water. Agricultural irrigation districts can sell water to urban water wholesalers like the Metropolitan Water District of Southern California (MWD). MWD in turns stands ready to sell San Diego as much water as it wants. The catch is that this "extra" water comes at a higher price. Longer-term desalination and various conservation measures are also important new additional (high-cost) water sources.

The availability of more water at a higher price establishes the first key principle: water rationing should never be any part of an intelligent water policy. The reasoning is simple. Some households whose yards would suffer under water rationing would rather pay more to obtain extra water. A responsible agency obtains this extra water and charges households more for it to ensure they are not being subsidized by households who cut back on water use.

The second key principle is that: San Diego once and for all needs to determine its stance toward entitlements to its low cost water. For instance, is this entitlement on a household basis, a per capita basis, lot-size basis, or a past-use basis?

Should developers seeking to build new homes have to pay the full cost of obtaining new sources of water or should these costs be largely passed on to existing residents in the form of higher water bills, as more and more high-cost water is averaged in with the old low-cost water? Until the entitlement issue is resolved, it is impossible to determine how to price water.

The third key principle is that San Diego needs: higher "marginal" water prices to encourage water conservation and to ensure that water demand is consistent with its supply situation.

San Diego needs an increasing block rate structure with more blocks and higher prices for those using the most water. The usual objection to increasing water prices is hurting low-income households. However, the reality is that implementing a pricing scheme designed to encourage conservation would reduce, not increase water bills of most low income households.

Much of the current water bill is a base fee, which should dramatically shrink under any pricing scheme aimed at reducing water use. Further, a generously sized first block of water should be priced fairly low because opportunities for reducing indoor water use, the dominate form of water use for low income households, are small. Reductions in water use need to come from those capable of cutting back and willing to do so rather than pay higher water bills.

-- RICHARD CARSON

You bring up an interesting point. Subsidizing water to CA's farmers creates a market distortion, preventing water from getting to San Diego. We might as well pay farmers to watch the clouds all day, but send their water to the city where people need it and are willing to pay reasonable prices for it. Their probably hasn't sufficient political in the past, but now that things are coming to a head for millions of urban dwellers, it seems like the public might be ready to address this issue. How would you suggest we proceed?

Posted by Dylan Mann | reply to this comment
October 26, 2009 9:45 am

Dr. Carlson is incorrect in so far as his assertion that there is no water shortage is concerned....There is, at lease up here in the Northern part of the state where so much water is drawn from....The Sacramento Delta and the eastern shore of the San Francisco bay deteriorating at an alarming rate, causing what maybe irreparable destruction to an ecco system that is extremely important to the health of this area. Agriculture, in the lower central valley also uses much more than its fair share of water, and shows no inclination toward changing.....and yet the cities of Merced,Bakersfield, Fresno, et.al. continue to expand each requiring more and more water. San Diego tech industries use enormous amounts of water which is sold them at sub-market rates....I have never seen data indicating how much is recycled.

Posted by QKruse | reply to this comment
October 26, 2009 11:10 am

The City of San Diego mandated that we conserve water, so we did. Next, we read in the paper that the conservation efforts reduced receipts, and soon after, we got a notice from the city that a rate increase was requested. We sent in our notice that we did not believe reduction in use should increase our rates.

Posted by C. Geyerman | reply to this comment
October 26, 2009 12:49 pm

Dr. Carson: I am having trouble with the first sentence of your final paragraph - "Much of the current water bill is a base fee, which should dramatically shrink under any pricing scheme aimed at reducing water use." The City's base fee is currently at 23% cost recovery for fixed costs. The CA Urban H20 Conservation Council BMP sets a 30% limit on base fees. If the base fee is reduced further, how will the City cover fixed costs that don't change when water use is reduced? This has been been a problem for local water jurisdictions that have experienced more than expected water conservation by their customers - and, as a result, they are increasing rates further! Irvine Ranch has 100% cost recovery on fixed costs - that's the other end of the spectrum - which has its own pitfalls.

Posted by Lani Lutar | reply to this comment
October 26, 2009 1:00 pm

Lani, I'm just a residential user with a small lot, not the type of commercial user you represent. I took the water shortage as a personal challenge and reduced my consumption to the minimum, so my billing falls entirely in the first tier of rates. I found it easy if you are willing to change both your plants and your consumption habits. What I discovered is that the base fee, applicable if I use ZERO water, is well over half my total bill. What kind of incentive is that? How can any jurisdiction expect success in water reduction if it exhibits such unimaginative thinking as you display? Time to look outside the box!

Posted by Bill Bradshaw | reply to this comment
October 26, 2009 4:50 pm

Bill, I'm more than willing to look outside the box and SDCTA does not represent just one class of ratepayer. However, you don't address my question. If a city reduces recovery rate for fixed costs and revenues go down beyond the reduction in cost of supply, how will they pay for cost of delivery and maintenance of the system? This is a serious question. One answer is that if pension costs weren't so high, they wouldn't have such high fixed costs. Another solution is to reduced fix costs over long-term through investment in technology. But both of my suggestions can't occur overnight which is why I asked Prof. Carson for clarification. He's a smart guy and I'm guessing he has thoughtful recommendations to offer.

Posted by Lani Lutar | reply to this comment
October 26, 2009 9:04 pm

Hear hear! Although you stole my title (http://tinyurl.com/6ah7dl), I am very pleased about it. (I'm kidding, it's basic economics that tells us that there is no shortage...) My only suggestion is that you pound home PER CAPITA increasing block rates. They are both easy to understand and equitable on a human scale. In other words, water for people, not lawns. David (aguanomics.com)

Posted by David Zetland | reply to this comment
October 26, 2009 1:44 pm

Mr. Carson's points are well taken, although I would have expected him to take a position on point No. 2, rather than just re-state the major choices. As to the inclining block rate structure, it would be informative to learn the relationship between specific prices in each block and the corresponding reductions in consumption. My guess is that it would take very large increases in rates to achieve significant savings. The San Diego County Water Authority has commissioned such studies, and those results should be on the table. As to whether there is a "true" shortage, we could quibble, although I am loathe to concede the common sense of the word to an economist without a struggle. The fact is that we now have less total water available for general use in San Diego than we did before the Delta troubles, hence this discussion.

Posted by Linden Burzell | reply to this comment
October 26, 2009 7:01 pm

Thanks to Prof. Carson for a very interesting perspective on this problem. I am very interested in the idea of making water expensive enough to create an incentive to conserve. But, I have been told that by (state?) law water utilities are not allowed to make any profit from water use charges (the part of the bill for actual water use, not the base fee). This leads to high base fees to cover fixed costs, the need to raise rates when customers conserve, and the lack of ability to create rate structures to encourage conservation as you suggest. Is this true, or was I misled? If this is true, do we not need a change to state law in order to implement a more aggressive pricing structure?

Posted by Dinesh | reply to this comment
October 28, 2009 6:23 pm

There Is No Water Shortage

By RICHARD CARSON

Published: Sunday, October 25, 2009 9:31 PM PDT

-- RICHARD CARSON