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.
A problem with water generally is that pricing treats all water as equal. To take an obvious example, I don’t need potable water in my toilet – but since pricing (and, to be sure, common distribution infrastructure) doesn’t differentiate, there’s no economic incentive to move to allocate resources accordingly. Frack-water, cooling-tower water, irrigation water are all part of this larger inefficiency. Result is not only suboptimal use of aquifers & riparian flows but also less incentive to recover & recycle gray water than might otherwise exist.
Sean, I wouldn’t say that pricing treats all water as equal, or that the problem here is a problem with pricing. The problem is that administrative, regulatory solutions usually fail to reflect the fact that water is a differentiated product, as you allude to.
With more explicit water ownership and concepts of property rights, the water owners would have incentives to come up with ways to monetize water as a differentiated product. And would face better incentives to recycle and reuse.
It is true that a problem with pricing is that it treats all uses as equal, but I think that it is mostly a problem along distributional lines. David Zetland (among others I’m sure) promotes a retail pricing scheme with low cost water up to a basic level, then full marginal cost pricing for additional retail purchases. Not an ideal policy scheme, but the inefficiencies would be small.
The problem you identify probably runs up against the economics of infrastructure where the additional value captured by having separate potable/non-potable water supply systems doesn’t justify the costs, at least in general use. On the other hand, a water user who can tolerate non-potable water that happens to be located (or chooses to be located) near a water treatment plant may be able to make a deal.
There is a lot of talk about using graywater, natural brackish water, and other non-potable streams for fracking, but fracking drillers are very particular about what they are putting down the well. They don’t need potable water per se, but they don’t want to inject material into the well that will create production issues down the road, either.
On behalf of David Zetland, who couldn’t get his comment to post:
@Michael — I now favor uniform volumetric rates in developed countries (and probably all countries, given the measurement/equity issues), i.e.,
http://www.aguanomics.com/2011/09/time-to-dump-increasing-block-rates.html
I also came here to say that it’s “fair” that frackers pay to discharge water as clean as they take. That’s a quality issue. On quantity, I favor markets, of course.
http://www.petroleum-economist.com/Article/2862730/Regulation-an-acceptable-cost-for-frackers.html
As it looks like the PUCT will be taking over water ratemaking in Texas from the TCEQ, the possibility does exist that things may change eventually.
Zetland’s approach to things is interesting, though it does guarantee cost (and, for IOUs, profit) recovery, thus eliminating any cost-control incentives that may be provided for under average cost rates (set using historical test year and with some regulatory lag). How strong those incentives are is, of course, questionable, and under drought conditions perhaps allocative efficiency outweighs technical efficiency, but it does not seem as cut-and-dried to me as he presents (based upon my admittedly cursory reading of his view). I will have to read more of his work.