Reconsidering Conservation Water Rates: I (Learning from California)

“[California’s] Proposition 218 is doing the job the voters intended – namely, to ensure that fees charged for water are not simply a ‘revenue generator’ but are, in fact, necessary to cover the actual cost to provide the service. This is not the case for a majority of tiered water rates. Tiered water rates are intended to punish the water user for using more water than the water agency thinks they should, but are really geared towards obtaining a specific yearly revenue figure. Often the tiered rates are outrageously out of proportion. San Juan Capistrano’s top-to-bottom water rate increases … were 366 percent. When the city could not show how it calculated this rate or support the rate with cost of service evidence, [we] filed suit for violation of Prop. 218.” (emphasis added)

– John Perry, City of San Juan Capistrano Taxpayers Association, August 21, 2014

In the past decade, many so-called public goods have “marketized’ to bring about the same sort of price discrimination responses that are found in “free markets.” Today in the Regulation State of California we have:

• A Cap and Trade market for pollution permits in California.
• Price-competitive residential rooftop solar power systems that get deep upfront tax subsidies and hidden back-end incentives due to tiered electric rates of 25 to 35 cents per kilowatt hour.
• Re-selling water for wildlife refuges that farmers have already paid for once back to farmers during drought at drought-inflated market rates (per water economists)
• Tiered water rates in California water districts.

Both Libertarian and environmental economists have too often uncritically embraced these hybrid coercive market measures as solutions to drought, energy inefficiency, pollution, and bureaucratization. But do they work? Or are they sophisticated green marketing methods that provide a revenue generator water districts, provide a pseudo competitive market for way overpriced green power, hostage prices to farmers for drought water, and tax farming for air pollution permits?

Let’s take a look at one of these attempts to marketize public goods: tiered water rates to spur conservation in response to California’s drought. An exploratory study conducted of comparable water rates in coastal Orange County, California indicates that water rates do not clearly result in demonstrably lower water usage. In fact, flat water rates tend to generate lower water consumption per person than stepped up rates.

California Water Rates Can’t Exceed Cost-of-Service

An Orange County superior court has recently ruled that to comply with California’sProposition 218, the Right of Vote on Taxes Act, any water rate increase over the basic cost of service has to be approved by voters first.  Thus, this ruling bars “conservation water rates.”

The court’s ruling comes in response to a lawsuit Capistrano Tax Payers Association v. City of San Juan Capistrano (Orange County Superior Court, August 6, 2013) and is on appeal. In Capistrano newer tiered water rates resulted in the highest rates being 51 percent above the lowest rates (see table below).

Table 1. Residential Tiered Water Rates – City of San Juan Capistrano 2014

Capistrano water rates are a hybrid of allocated and tiered water rates.  Allocated rates are based on a budget of gallons of water used per day and per month. Tiered rates are obviously based on stepping up rates the more water is used. But the legal battles sidestep the question: do tiered water rates to spur conservation really work in the first place?

A 2013 study conducted by environmental economists Kenneth A. Baerenklau, Kurt A. Schwabe and Ariel Dinar at the Department of Environmental Services at the University of California at Riverside found that increasing block water rates reduced demand by 18 percent (see: “Do Increasing Block Rate Water Budgets Redice Residential Water Demand?: A Case Study in Southern California”). But this study only compared tiered water rates with flat rates based on a statistical model not by comparing actual water usage by water districts with flat rates and tiered water rates.  This is fraught with the same sort of problems as the statistical models found in the controversy over global warming.

And there was no way to know if the higher rates caused less water use or whether customers reduced water rates in response to being observed as to whether they reduced usage in a drought.  This is called the Hawthorne Effect in social science.   Moreover, the U.C. Riverside study reported that water use was reduced after 3 years.  This could hardly be called a price response. The U.C. Riverside study also relied on water rate data from 2003 to 2012, spanning both an economic boom and bust period transitioning from agricultural to urban land uses.

A pilot study of water rate methods in Orange County, California, summarized tomorrow in Part II, does not indicate that tiered water rates produce greater water conservation. In fact, they indicate that higher water rates result in greater water usage.

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