I have very mixed thoughts on the Irvine Ranch Water District's household water budget scheme for pricing water that some have pointed to as a model for what San Diego should do.

First, the good points of this scheme:

• It is a major improvement on what San Diego is currently doing.
• It has the appearance of being fair and rational.
• The water budget concept gives households some idea of what is a reasonable amount of water for them to use is and the pricing structure is geared toward this concept.
• The first block of water is priced much lower at about 1/3 of what San Diego is currently charging. It is a much more sharply tiered system than San Diego has and hence encourages conservation.
• The scheme is not that hard to administratively implement in spite of comments to the contrary by San Diego officials.

Now the bad:

• The monthly base fixed fee ($7.75) per household is too high but is much better than San Diego's monthly current base fee of over $17.
• The tiered structure has five blocks which is still not quite enough.
• The price jumps of the last two blocks are too steep: The next to last block doubles the price and the final block doubles that one.
• The "labels" on these last two blocks (excessive and wasteful) are a bit Big Brotherish and you need some households to use more water at high prices to keep the cost down for the larger number of households who do conserve.
• By basing a large part of the allocation on yard size, the Irvine Ranch is effectively subsidizing fairly heavy water use by single family detached homes at the expense of apartment and condo dwellers.
• Long term, the Irvine Ranch Water District scheme will slow down a transition toward drought resistant landscaping relative to what a per what a per dwelling unit or per person (implemented via number of bedrooms) scheme would achieve.
• Larger water budgets are given to households in hotter areas which effectively subsidizes development in such areas. There is a variance procedure that is administratively complicated. It allows households to receive more water if (a) more people are documented in legally acceptable ways as living at the dwelling unit than the standard formula assumes, (b) it is documented that the house has larger amounts of vegetation than was assumed by the standard formula, (c) if medical conditions require more water (but I am not sure exactly how this would come into play), (d) being a licensed day care facility and (e) even for filling swimming pools.

— RICHARD CARSON

One thing that economics helps us understand is that the cost of information matters. Consumers, on the whole, balance the costs of collecting and processing data against the savings they can achieve by acting on information they obtain. When savings are relatively small (as even in the most aggressive of scenarios would be the result of water conservation) information costs better be low.

If not, then many will throw up their hands in frustration.

Thinking about information costs helps bring into focus just how far we will still need to go before to maximize the potential for pricing to drive greater conservation.

1) Water meters need to be easier to read and understand.

Most readers probably have, at best, a vague understanding about the location of their water meter. In most instances, if you want to read it get ready to hunt for a flathead screwdriver, open up a heavy covering, wipe off the mud and grime while kneeling on the ground.

Most will find that they need to do at least a couple of mathematical calculations to figure how much water they have used since they got their last bill. Given these costs, I would bet that only a small number of consumers are going to frequently try to obtain and process information about how their level of consumption is being impacted by changes in behavior. They might look at the meter to try to figure out if their sprinkler system is leaking but not to find out how much they are conserving by not shaving in the shower.

2) Bills are not easy to understand

Ideally consumers would get a bill that clearly lays out the incremental unit cost in water so they could clearly understand how much they are paying for each incremental unit of water.

Fat chance.

My bill is relatively simple (we live just outside the city of San Diego). We get useful information about how our water consumption has changed from the previous billing cycle and how it compares to our use a year ago. Yet my bill is chalk full of confusing information which doesn’t really help me understand how much I would (or would not) save if we cut back.

The city of San Diego’s water bill makes the cost of obtaining information of value much harder.

3) Most consumers don’t have good information/experience in how to cut back on use.

I did an experiment last night. It takes our family members, on average, about 2 minutes to brush our teeth and our bathroom faucet puts out about 1.25 gallons a minute.

So by turning off the faucet in the a.m. and p.m. while we brush, our family is saving 300 gallons a month. But if we cut back our landscape irrigation by just 15 seconds for each station we save nearly twice that amount.

But figuring this out took close to 25 minutes, a calculator, and reading little tiny print on my sprinkler heads. I am sure better minds than mine could have done it faster. For this landscape-engineered challenged homeowner, however, the "information cost" of such an exercise was missing a new episode of the Daily Show.

Call me a barbarian but that is a sacrifice I am not prepared to make on a regular basis.

Aligning meters and bills in a way that helps consumers (as opposed to plumbers and meter readers) will be expensive and take time.

It is going to be an incremental effort as new meters and updated bill systems are deployed. However, if we want to use price to drive down consumption that has to be the goal so that it is relatively costless for people to know how much money they can save by taking specific actions. Economics helps us understand that incentives matter … but also helps us understand that this is only true if consumers have access to relatively cheap information on which to act.

— ERIK BRUVOLD

Several readers have raised issues both pro and con concerning San Diego’s base water fee for households. It is good to get a few facts on the table. San Diego’s water rates table shows a base fee of $35.18 bi-monthly or $17.59 per month.

For a household using roughly 150 gallons of water a day, which is substantially more than many two-person households living in an apartment or condo would use, their water bill in San Diego would be $17.87 for the water used plus $17.59 for the base fee which is $35.46. Thus roughly half of the water bill is for the fixed base fee. For a single person living alone, the base fee can easily be 75 percent of the water bill.

Let’s compare this to the practice in Phoenix, another city in the desert roughly San Diego’s size. (Phoenix water rates can be found here.) Phoenix’s base charge is $4.64 per month and this charge also includes roughly 150 gallons a day. Ignoring the "base" amount of water included, San Diego’s base fee is almost four times higher than that charged by Phoenix. Including the base water allocation, the comparison is even less favorable; San Diego is charging households using reasonably low amounts of water almost eight times more than Phoenix.

It is hard to justify San Diego’s large base charge on equity grounds, as the policy is highly regressive from an income perspective. It is also hard to justify in terms of encouraging water conservation as the larger the base fee the smaller the variable cost associated with using more water.

The reason for the large base fee is that the city of San Diego has large fixed costs associated with running the water system and any industry with large fixed costs would like to be able to effortlessly recover those costs. But this is true of many industries.

Can you imagine oil companies charging a large fixed fee before you filled your tank with the first gallon of gasoline? The answer of course is no, even though they have lots of pumping stations and pipelines that have to be paid for before that first gallon of gasoline reaches an automobile. Oil companies charge a high enough price for their product to be able to cover both their fixed and variable costs. To be able to do this effectively, a water agency needs to know a lot more about how sensitive water demand is to the pricing scheme used and this is something that many water agencies, including San Diego, have made little effort to learn. Part of this is understandable, the political process gets involved in setting water rates and any thought of running the water system like a business goes out the window.

San Diego, though, will never successfully make the transition onto a long term sustainable path with respect to making sure its water supply and water demand balance without a wholesale restructuring of its current system of water rates. In the long run, San Diego’s economic prospects will be enhanced by the City being known as a reliable supplier of water with the cost structure aimed at encouraging conservation, particularly since the cost of obtaining additional water is high. It would also be desirable for the city to be known for having an equitable distribution of those costs across different types of households and businesses.

— RICHARD CARSON

Professor Carson made quite a statement in his opening remarks with the point that there is no water shortage in San Diego — it’s just that we will have to pay more to get water and we’ll have to plan and collect for that.

So let’s delve into the moderator's question, which Carson's post provoked:

Are we dealing with an ever-more scarce resource that we’ll have to conserve to ensure there is enough for vital business and health needs? Or are we dealing with an ever more valuable resource that we’ll simply have to pay more to import or create?

This question asks: Is the supply of water fixed from the point of view of San Diego businesses and residents? Our willingness to pay a higher price might allow us to import or capture a larger portion of water from Northern California or the Colorado River, but that will depend on the decision makers in charge of their sources.

Higher water prices might also encourage new sources of water (e.g., desalinization or enhanced usage of "gray water.") A reduction in water usage, involving conservation, greater efficiencies, and adaptation of living styles and business models, will have to be a large part of the solution.

Now for some other questions from voiceofsandiego.org users:

Stephen Waits wrote

"All three of your panelists are spot on. Economics solves this problem. Forget regulation, which is expensive (and near impossible!) to enforce. Raise the price of water and less is consumed. That is just plain common sense. One thing is clear, any sort of "base charge" should be eliminated. Water users should pay for what they use, nothing more, nothing less. The real question is how to raise prices. I prefer a flat rate; however, I understand the draw of a tiered rate. A flat rate that's too high may make water seem expensive for low-income people. One that's too low won't discourage conservation from the biggest users. A tiered structure attempts to solve this dichotomy by artificially lowering the rate for the smallest users (i.e. low-income) and artificially raising the rate for the biggest users (hotels, office buildings, etc.). It sounds great, but is unfair!!!"

Your point about preferring a flat rate is well taken. The problem of low-income households could be addressed by granting them special subsidies. The bigger problem relates to individuals or businesses who had originally invested with the belief that water would continue to be priced at low rates. Granting them an amount of "base water usage" qualifying for a standard price with higher rates applying to large usages would ease some of the potential economic hardship and support adjustments over time.

Ian Trowbridge wrote:

"No-one has addressed the issue of commercial users versus household use and the politicization of water rates. The hospitality issue, hotels and restaurants, are major water users and use their political heft to ensure they have the cheapest water available even at the expense of individual water users. The biotechnology industry needs access to high quality water in substantial amounts. Finally, the companies producing purified products from seaweed use obscene amounts of water and certainly in the past have used their political power to obtain equally obscene cheap water. Maybe I am wrong about this and if so please set me straight."

Lobbying efforts should definitely not be a factor in determining water rates. Commercial usage actually accounts for a relatively small amount of total water consumption in San Diego County. In 2008, commercial businesses accounted for 17 percent of the county’s total water usage. Households accounted for 59% of the total, with residential landscaping consuming nearly a third of the County’s water supply last year.

George wrote:

When water agency operating expenses are drawn from water used fees, the agency has an inherent conflict-of-interest as a consequence. That's why some water districts face operating expense problems when people conserve their water use. A base charge that goes towards operating expenses provides more transparency for the consumer—they know exactly what the cost of the water itself is, and they see the operating costs separately. That's how the city of San Diego operates.

Many companies have faced this problem. The first approach should be a major effort to improve productivity and lower costs at the water agency.

Joel Price wrote:

As a residential 2 person household who has made a point to conserve, I'm frustrated. When I look back on my bill and it says I used 20 percent less than last year and my payment is 100% higher than that previous year. I can't help to think the system is flawed. Using the same reasoning that "economics solves this problem" why can't people who conserve receive breaks, credits or incentives? Should it go both ways?

This same problem has affected other commodities. For example, although many people cut back on energy (use of air conditioning, heating, and driving), many still saw their total spending on energy rise when the price of oil skyrocketed. Clearly, though, individuals who conserved more and adapted their energy consumption saw smaller increases in their total energy bills than others. To minimize the adverse impact on households, a phasing-in of higher water rates would be preferable.

— LYNN REASER