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Urban Water Pricing: a Historical Perspective and the Challenges for the Future

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Urban Water Pricing: a Historical Perspective and the Challenges for the Future Urban Water Pricing: A Historical Perspective and the Challenges for the Future NEW MEXICO WATER: PAST, PRESENT, AND FUTURE OR GUNS, LAWYERS, AND MONEY OCTOBER NEW MEXICO WATER RESOURCES RESEARCH INSTITUTE 2005 Janie M. Chermak is an Associate Professor in the Department of Economics at UNM as well as a member of the Water Resources Program Faculty. She received her Ph.D. in mineral economics from the Colorado School of Mines in 1991, her M.S. from Mines in 1988, and her bachelor’s in geology from Western State College in 1979. She specializes in applied microeconomics and natural resource economics with an emphasis in water and energy issues. Her current research in water covers a broad range of topics including consumer behavior, integrated modeling, markets for water, and the impacts of varying policy objectives on efficiency. Many of these efforts require collaborative, interdisciplinary research. Recent and forthcoming papers pertaining to water include publications in the Journal of Regulatory Economics, Journal of Environmental and Economic Management, the Natural Resource Journal, Water Resources Research, and Journal of Groundwater. URBAN WATER PRICING: A HISTORICAL PERSPECTIVE AND THE CHALLENGES FOR THE FUTURE Janie M. Chermak Department of Economics MSC 05 3060 University of New Mexico 1 University of New Mexico Albuquerque, NM 87131-0001 The work that I am going to talk about is really a There is a quote from Mellendorf in 1983, which combination of efforts, and I would be remiss if I did is still fairly germane to water. The part that is most not mention some of the people or groups who have important says that water seems to almost have these contributed to this work. Part of this is research that I sacred qualities that precludes it from economic have been doing on my own. Part of this work is with analysis. This is important because of the history of SAHRA, which is an NSF funded science and water and water pricing. Unfortunately, water becomes technology center housed at the University of Arizona. scarcer as the population grows, but there haven’t been Part of the work is by an intern sponsored by the Office drastic changes in the price of water. As can be seen of the State Engineer who is working with Anne from the previous talk by Jim Peach, population growth Watkins on an infrastructure initiative. There is a whole is going to occur and water issues are going to become consortium of people working on urban water pricing. more difficult. Perhaps economics can at least lend For any errors I, of course, take responsibility. some analysis and some tools that might help. If water 49 Janie M. Chermak is becoming scarcer, are pricing policies a viable tool adequate water supply in twenty years. That is a fairly to help manage water? significant statistic. What characterizes the Southwest? I am preaching How do water prices fit in here? We must consider to the choir, because you know that we have had the historical realities of where water prices have been, growing populations. If you look between 1990 and how they impact where we are right now, the current 2000, the South- trends in water prices, and what we might expect in west was part of the future. Are we going to have to change what we We must consider the the United States are doing, and how we are doing it in order to have historical realities of where that was the supply and demand be at a point where the demand water prices have been, fastest growing does not exceed the supply available? The conventional how they impact where we over that period wisdom has been that people do not respond very much of time. We have to price, in fact people are very unresponsive to water are right now, the current erratic precipi- price. Why do we say this is the case? Basically, it is trends in water prices, and tation. If we look because of the data. The empirical evidence from what we might expect in at the amount of studies done between about 1950 and 1995 found that the future. precipitation we in every case consumers were unresponsive or were get in the South- inelastic to price increases. west and in New Why is this the case? We have to look at historic Mexico specifically, it is very, very low. All of these pricing in the United States (Figure 2). Across the things are going to make this a difficult thing. If we United States from about 1955 to 2000, you see a price look at the increase in competing uses, we find that per gallon ranging from .0005 cents up to about .0043 not only do we have increases in demands, but we cents per gallon. It does not matter what part of the also have increases in non-market uses. We have United States we are in or what year we are in. There increases across the board. was very, very little difference in the price plotted If we look at the report Water 2025, which DOI across time and geographic area. What does that put out in 2003, we find some potential areas of conflict mean? It means that it was a statistically insignificant (Figure 1). You probably have all seen this, but if you difference between 1955 and 1995 in the prices we look at the map of the Four Corners Area and New were paying for urban water. What is the problem with Mexico specifically, red shows the highest potential that for where we are now and where we are going in for conflicts. I think something that might actually be the future? Historical data indicates little response to more frightening to me is a survey by the U.S. water price increases, but the historic prices may not conference of mayors, which surveyed 414 cities. They reflect current or future reality. looked at what the water Do prices matter concerns were. There was today? They are some- a top ten list. Included in the what higher than the top-ten list was the age and historical prices. Look at security of infrastructure. urban prices today (Table The water supply availa- 1) and the cost of six bility, unfunded federal thousand gallons of water mandates, drought man- for May 2004 from a agement, and regional survey done by the NM conflict over water use Environmental Depart- were also on the list. It ment. Alamogordo cost sounds like a shopping list for six thousand gallons for New Mexico. I think of water is about $16.61. what probably caught my Aztec has the lowest Unmet Rural Needs eye the most was that forty Conflict Potential - Moderate cost at $6.36. Albuquer- percent of the cities said Conflict Potential - Substantial que’s price was about that they did not have an Conflict Potential – Highly Likely $17.94. Las Cruces’ Figure 1. Potential Areas of Conflict (2003) price was $14.68. These 50 Urban Water Pricing: A Historical Perspective and the Challenges for the Future US Residential Water Prices 0.0045 $0.0043 Raliegh,NC Denton, TX 0.004 Raliegh, NC Raliegh, NC 0.0035 Moscow, ID Suburban New England 0.003 South Midwest Moscow, ID Urban 0.0025 South Southwest Tucson, AZ 0.002 Northwest $ per gallon Denton, TX Central Rocky Mtns. & California West 0.0015 Albuquerque, NM Miami, FL 0.001 Phoenix, AZ $0.0005 0.0005 Wisconsin 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Year Figure 2. Historical Pricing in US range anywhere from six dollars up to about sixty How important is this? For any of those of you dollars. The average is about nineteen dollars. Think who have read Freakonomics, which is one of the about what nineteen dollars buys. Nineteen dollars buys books on the best-seller list right now, there is an a family of four a meal at McDonald’s, or seven coffee anecdote about a couple of economists who did a study drinks at Starbucks. It does not buy very many bottles on daycare. They went to Israel and looked at nineteen of water. What are the prices reflecting today? What different daycares. The average cost per month of is the signal that is being given? If the prices reflect keeping your kid in daycare was about $360. On scarcity or true value, the incentive and the prices or average across these nineteen daycares, there were the information being given may not be the appropriate about eight late pickups per day. At that point, there information. was absolutely no penalty for being late to pick up your child. The economists got the daycares to implement an incentive for late pickups. Every time Table 1. Do Prices Play a Part Today in the SW? someone was late they were charged a three-dollar late fee. What happened to the number of late pickups? Cost for 6000 gallons of water (May 2004): It went up to twenty across the board. A wrong signal is perhaps worse than no signal. That is the wrong Alamogordo: $16.61 signal, because now it is said that the value of the Albuquerque: $17.94 daycare’s time for picking up a child late is three dollars. Aztec: $ 6.36 They removed the three dollars and went back to just Bernalillo: $20.48 $360 a month. What happened? They stayed at twenty Carlsbad: $ 9.91 late pickups per daycare. People take information from Las Cruces: $14.68 that incentive. They learn from it, and they use it. What are the incentives we are giving? Almost everyone has a base or fixed charge.
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