Ben Powell on drought and water pricing

Ben Powell at Texas Tech has an essay on water scarcity at Huffington Post in which he channels David Zetland:

But water shortages in Lubbock and elsewhere are not meteorological phenomena. The shortages are a man-made result of bad economic policy.

Droughts make water scarcer, but by themselves they cannot cause shortages. To have a shortage and a risk of depletion, a resource must be mispriced.

With the freedom to choose, consumers can demonstrate whether it’s worth the cost to them to water their lawn an extra day or hose dust off of their house. Realistic pricing also incentivizes them to take account of water’s scarcity when they consume it in ways that aren’t currently prohibited. Have your long shower if you want . . . but pay the real price of it instead of the current subsidized rate.

Of course Ben is correct in his analysis and his policy recommendation, although I would nuance it with David’s “some for free, pay for more” to address some of the income distribution/regressivity aspects of municipal water pricing. Water is almost universally mispriced and wasted, exacerbating the distress and economic costs of drought.

Perverse outcomes of water subsidies

I’m intruding on David Zetland’s turf, but in this 2012 Guardian article from 2012 Roger Cowe makes some compelling arguments about why agricultural water subsidies lead to perverse outcomes, do not help the poor, and waste a precious, scarce resource. Water is the only industry in which regulation more perversely stifles self-organizing processes for managing scarcity than electricity. His conclusion is apt:

Like most other perverse subsidies, the goal of improving access to water is not at issue. The perversity arises because making water cheap, especially to crop farmers, leads to excessive use and unintended, environmentally harmful consequences. And the poor, who are often the main targets of subsidies, typically don’t benefit. Irrigation benefits landowners rather than their tenant farmers. And surprisingly, consumption subsidies do few favours for poorer families.

Should governments raise the cost of water used in fracking?

Michael Giberson

In dry Texas, water use has been one of the bigger of the policy complaints tossed into the policy whirlwind surrounding hydraulic fracturing. A number of water quantity related bills are currently circulating in the Texas legislature and the Texas Railroad Commission (which regulated oil and gas drilling in the state) has considered a number of water related issues. At least a few of the bills aim at limiting disposal options for wastewater or promoting the use of wastewater recycling.  In effect, most of the bills would raise the cost of freshwater used in oil and gas drilling.

A general theme is much of Texas is still suffering the lingering effects of a drought, so we need to conserve freshwater. But if this is true, why focus so much attention on such a small slice of water use? Less than one percent of water in the state goes into oil and gas drilling. Recycling may be able to squeeze that one percent down a little, or at least keep usage under one percent as the number of wells drilled increases, at an estimated 50 percent increase in water costs.

Policies that selectively increase resource costs for some users and not others are almost certainly creating inefficiencies. Perhaps, to use an obvious example, irrigation could be reduced by 1.5 percent. Or maybe more cities should detect and repair leaks in their municipal supply systems. Or maybe more homeowners should xeroscape their yards. Or powerplants could buy water reclaimed and recycled from oil and gas drilling instead of requiring drillers to reuse it. I don’t know what the most efficient allocation of water uses is going to be, but I’m also sure that policymakers don’t know either.

So why not pursue policies that creates the wide-range of incentives and information needed to promote many low-cost conservation adjustments instead of policies that impose much higher costs on one particular kind of water use?

NOTE: The above prompted in part by Kate Galbraith’s article, “In Texas, Recycling Oilfield Water Has Far to Go,” part of a series on water and fracking in The Texas Tribune.

EPA backs off “imminent and substantial endangerment” claim in Texas hydraulic fracturing case

Michael Giberson

On December 7, 2010, the Environmental Protection Agency dropped a bomb on Range Resources Corporation. From the EPA news release:

(DALLAS – December 7, 2010) Today, the U.S. Environmental Protection Agency (EPA) has ordered a natural gas company in Forth Worth, Texas, to take immediate action to protect homeowners living near one of its drilling operations who have complained about flammable and bubbling drinking water coming out of their tap. EPA testing has confirmed that extremely high levels of methane in their water pose an imminent and substantial risk of explosion or fire. EPA has also found other contaminants including benzene, which can cause cancer, in their drinking water.

EPA has determined that natural gas drilling near the homes by Range Resources in Parker County, Texas, has caused or contributed to the contamination of at least two residential drinking water wells. Therefore, today, EPA has ordered the company to step in immediately to stop the contamination, provide drinking water and provide methane gas monitors to the homeowners. EPA has issued an imminent and substantial endangerment order under Section 1431 of the Safe Drinking Water Act.

The endangerment order threatened Range Resources with thousands of dollars a day in fines if they did not take immediate action in response to EPA’s administrative order. Range Resources denied responsibility for methane in complainants groundwater and objected to being subjected to either fines or expensive remediation efforts without a hearing on the evidence. Range Resources went to court to bar enforcement of the order.

Fast forward to last Thursday, some 15 months after EPA’s order to take immediate action, and EPA has decided to withdraw its endangerment order  in order to “shift the agency’s focus in this particular case away from litigation and toward a joint effort on the science and safety of energy extraction.” Range Resources agreed to collect quarterly groundwater samples from 20 wells for one year, have the samples analyzed, and share the analysis with the EPA. (See also the Bloomberg story and WSJ coverage.)

The industry-side spin is that this is vindication for Range Resources and another black eye for the EPA. From Energy in Depth, “a troubling trend for EPA: Every time EPA intervenes in a high-profile case – generating scads of maligning headlines about shale and hydraulic fracturing in the process – the agency ends up getting it wrong.”  Texas Railroad Commissioner David Porter takes the same position.

At least one fracking critic says “not so fast” with the pro-Range Resource conclusions, apparently inferring from Range’s willingness to conduct groundwater sampling some sort of tacit concession on the company’s part.

My guess is that Range was tacitly admitting they’d rather collect groundwater samples than continue to pay lawyers and operate under the cloud of uncertainty created by the EPA endangerment order. After all, the scientific analysis is probably cheaper than the lawyers, and if the samples turn out the way Range expects, then the data becomes more evidence for the industry and against the EPA in the battle for public opinion.

I’m on board with the industry-side spin: this is vindication for Range Resources and another black eye for the EPA.

RELATED: We first posted on Knowledge Problem about the Range Resources case soon after the initial endangerment order.

Legal action continues. The initial complainants, Steve and Shyla Lipsky have sued Range Resources in civil courts, seeking $6.5 million in damages. Range Resources have counter-sued the Lipskys and their environmental consultant Alisa Rich for $4.2 million plus additional damages. In February of this year a judge refused a motion by the Lipskys and Rich to dismiss the countersuit, with the judge ruling that Lipskys had worked with Rich to create a deceptive video intended to give the impression they could light their groundwater on fire. (Here is the video as annotated by blogger “Texas Sharon.”)


A Wal-Mart long-haul truck has more intelligence in it than a typical water system

Michael Giberson

At the Freakonomics blog, guest Charles Fishman explains “Why water will never be the next oil.” A sample:

If you leave aside the somewhat silly world of bottled water, there has been almost no innovation in the industry of water for decades. A water facility today uses the exact same technology it did in 1973. In what other industry is that the case? The typical Wal-Mart long-haul truck has more intelligence in it than the typical water system.

The technological revolution has completely bypassed the world of water, mostly because of the strange nature of the market for it. Water has almost no pricing signals. You can’t trade it. And while in the developed world you don’t typically run out, if serious scarcity develops, you can’t just buy more, no matter how much you’re willing to pay. The most liquid and plentiful natural resource on the planet is almost completely illiquid as an asset.

Actually, I’d be surprised if many water systems are not using microprocessors, for example, or other technologies in their systems. The “exact same technology [as] 1973″ sounds a little over dramatic. But “strange nature of the market for it” is right.

Fishman has a new book out on water supply, The Big Thirst. (More: A WSJ review of The Big Thirst, the book’s website: Fishman’s prior book was The Wal-Mart Effect, so perhaps he really knows something about how smart those long haul trucks are.

Texas water rampage

Michael Giberson

Clarity in the law is usually deemed a virtue. Groundwater planning processes implemented in Texas a few years ago have led to a few legal fights and the legislature has taken up groundwater law to help clear up some of the confusion. The conflict has arisen when groundwater management districts issue landowners permits in quantities less that the landowner desired, and perhaps in quantities less than the landowner has rights to claim.

Maybe we’ll get some clarity someday, but for now we just have a fight. From the Texas Tribune, “Texas Debates Who Owns Its Water“:

It sounds simple: Who owns the groundwater in Texas? But this issue, like others in the hot-button area of aquifer planning, is embroiled in an ongoing policy battle.

At a crowded hearing earlier this week, members of the state Senate’s Committee on Natural Resources heard testimony on a bill introduced by Sen. Troy Fraser, R-Horseshoe Bay and the committee’s chairman, that would declare that landowners have a “vested ownership interest” in the water beneath their land. A less-discussed second bill, filed by Sen. Robert Duncan, R-Lubbock, recognizes both landowner rights and the “compelling public interest” of effective groundwater management.

Generally, surface property owners have long enjoyed the right to drill for water and pump as much as they want under a “rule of capture” regime. It is a regime that has worked fine for a long time, but population growth and extensive irrigation has put increasing demands on groundwater in the more arid parts of the state. Add to that existing conflict plans of some to develop their water rights to capture water for resale in amounts far in excess of historical uses.

“Texas Water Rampage” was the name of a failed Lubbock-area water park. Let’s hope that the current water fight in Austin has a happier ending.



On Hoover Dam

Michael Giberson

From Michael Hiltzik, in the Los Angeles Times,  “The false promise of Hoover Dam.” Hiltzik provides a good summary of the political promises and pretenses that allowed the dam to be built in the first place.  He then examines the competing demands for the current and future use of the dam.  I liked this bit:

This year, as we celebrate the 75th anniversary of President Franklin D. Roosevelt’s dedication of “the greatest dam in the world” on September 30, 1935, we should also recognize the dam’s equivocal legacy to the West, and to the nation.

Connoisseurs of irony will note that on that day, under a blistering sun and before 10,000 spectators and 20 million radio listeners, FDR claimed as a symbol of the New Deal a public work conceived, designed and launched by his Republican predecessors.

Indeed, during the 1932 presidential campaign, candidate Roosevelt had savagely attacked Hoover, his GOP opponent, for excessive deficit spending on projects like the dam. Once ensconced in the White House, however, he quickly came to appreciate the totemic power of great public works and their effectiveness at representing the benefits that could be bestowed on the citizens by a visionary administration.

Near the end of the article Hiltzik concludes:

The truth is that conflict on the [Colorado] river will never be stilled, because there will always be more demand for the water than there is water.

Excess demand? The price must be too low.  Sounds like a job for the Aguanomist!

White House declares emergency in Massachusetts water main break. In related news, water main break is already repaired.

Michael Giberson

I don’t know the answer, so someone let me know if you do, but has the President of the United States ever declared a state of emergency over a local water main break before? According the the announcement, “The President’s action authorizes … Federal Emergency Management Agency (FEMA) to coordinate all disaster relief efforts….”

The water main break already had been repaired (though the boil water order was not lifted until today).

Meanwhile, the local media is all excited by reports by a woman that “her son was charged $23.76 for a 24-pack of bottled water. The … family has since contacted the Attorney General’s office.”

Let’s do the math: 99 cents/bottle? Is this a crime? Not in Massachusetts, despite what the Governor and Attorney General want people to believe.

Here’s more from the Boston Globe:

Boston police were sent to a Tedeschi Food Shop in Hyde Park at 8:57 a.m. after the mayor’s office reported the store was charging $16 for a case of water, according to police and a mayoral spokeswoman.

The store manager denied the allegation.  But really, the police were sent after a report from the mayor’s office?  Do the city police and mayor’s office really have absolutely nothing at all to do these days?

Boston Globe columnist Jeff Jacoby asks, “What’s wrong with price gouging?

ALSO NOTED: Eight Venezuela Butchers Arrested For Price Gouging. That’s rockin’ it to price gouging merchants Hugo Chavez style. I bet Massachusetts AG Martha Coakley is envious.

Is price gouging on bottled water against the law in Massachusetts?

Michael Giberson

A significant water main break affecting over 2 million people in the suburban Boston area has lead the Massachusetts Governor Patrick Duval to declare a state of emergency.  A boil water order is also in effect.  Subsequently, the Governor directed the state’s Division of Standards “to closely monitor bottled water prices in areas affected by the weekend’s water emergency, including inspecting stores in the region and responding to potential consumer complaints of price gouging.”

Massachusetts Attorney General Martha Coakley said her office “will be sending out inspectors to review reports of price gouging and also conduct spot-checks of local businesses …. If we discover that businesses are engaging in price gouging, we will take appropriate legal action.”

This is odd, because, so far as I can tell* no law in Massachusetts prohibits price gouging on bottled water. The state’s price gouging law only applies to petroleum-related businesses selling petroleum products at an unconscionably high price in limited circumstances. (Text of the state’s price gouging law; see also a state-by-state description of price gouging limits and the discussion of Massachusetts in Cale Davis, “An analysis of the enactment of price gouging laws,” pp. 46-47.)

So my conclusion is that the Governor and the Attorney General are intentionally deceiving retailers about the state’s price gouging law as a kind of underhanded moral suasion intended to deter price increases on bottled water.

ALSO NOTED: The Boston Globe story which includes the AG’s statement (linked above) also details the extensive extra efforts some local water bottling companies are going to in order to increase production and distribution efforts over the weekend.

In related action, just last week residents in Concord, Massachusetts voted to ban all sales of bottled water.

*I am not an attorney nor expert on Massachusetts law, I’m just an economist that studies price gouging.  If I’ve overlooked some relevant portion of the state’s price gouging authority, please let me know.

Technology + dynamic pricing conserves water too (duh)

Lynne Kiesling

I love this story; it’s like Knowledge Problem + Aguanomics = individual choice, efficiency, conservation, and elegance. Water conservation is a large and growing concern, in large part because our public policy does such an abominable job of creating a framework/market design to send good scarcity signals to diverse individual users, and to enable them to trade rights among those uses. But in many places, water use also means electricity use, because of the large pumping demand associated with it.

That combination of water use and electricity use provided the impetus for a recent pilot study in California:

A pilot study conducted last summer in Palm Desert, Calif., suggests that they can.

The study, financed by the California Energy Commission, asked participants — who were paid $25 a month — to reduce their water use at “peak” times. A peak time refers to the hours when electricity use is at or near its daily high, and therefore especially expensive.

For Palm Desert, those hours are noon to 6 p.m.

The participants were given so-called “smart water meters” that recorded their water use at 15-minute intervals. Crucially, the meters also enabled participants to see how much water they were using — information that is unavailable to most households.

The results were striking: at peak times, participating homeowners used less than half the amount of water as those in the control group. The homeowners’ total use also ended up being 17 percent lower than the control group’s.

There are a few interesting aspects of this study. Note first that the payment to the homeowner was a lump sum. There is not a dynamic price per unit of water consumed, nor is there even a time-of-use peak-off-peak price structure, so the main driver of the observed conservation is the improvement in information visibility to the homeowner. The $25 lump sum payment probably contributed to raising their awareness too. A dynamic price or a TOU price is also likely to reinforce this result.

Second, note that the peak time denoted here was the peak electricity price time. The article indicates that the 50% reduction in peak water use did not lead to a commensurate reduction in electricity demand, although there was some reduction. So the relationship between water use and electricity use is quite nonlinear. One thing to consider is that in the desert a lot of people use evaporative cooling, so there is some margin of substitution between cooling using water and cooling using air conditioning.

Finally, the article points out that by making homeowners more informed and aware of their water consumption, the smart water meters helped them and the water authority to identify unknown leaks. This result was an unanticipated outcome, and identifying those unanticipated relationships is something that decentralized, individual incentive systems do best.