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A powerful tool for pricing water is not being given a fair chance

By   /   Friday, April 24th, 2015  /   Comments Off on A powerful tool for pricing water is not being given a fair chance

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A California appellate court ruling that has stalled tiered pricing for water as a way of navigating through the drought is a stunning reminder of how diminished a role markets play in managing this precious commodity.

But that was a point hammered home by David Sunding, a UC Berkeley professor of agricultural economics, during a recent talk in Oxnard. When it comes to water,  “pricing is a political choice,” he told about 200 people who attended the annual meeting of the Association of Water Agencies of Ventura County on April 16.

The Sunding scenario played out perfectly less than a week later when the 4th District Court of Appeal ruled against a tiered-pricing plan for San Juan Capistrano.

The argument was that it violated Proposition 218, which stipulates that government agencies can’t charge more for a service than it costs to provide it. That puts the tiered pricing schemes of most of the state’s water providers at risk.

Immediately, Gov. Jerry Brown weighed in, telling newspapers the ruling “puts a straitjacket on local government at a time when maximum flexibility is needed.” He vowed to continue to fight for using price as a tool for modifying citizen behavior, saying he will fight to “employ every method possible to ensure water is conserved across California.”

In Sunding’s view, water in some ways is no different from any other product. “Consumers respond to prices and we can predict their behavior whether it’s oranges, tennis shoes or automobiles.”

He also said that pricing methods that reduce demand and reward conservation are more likely to work than “command and control” regimes that might achieve temporary reductions rather than permanent changes in behavior.

He also said that those of us in the media may have more clout than we think we have. “Moral suasion,” whether it is via editorial messages or political rhetoric, can have an impact, especially in the short term, because it makes people feel good about changing their behavior to support society as a whole.

But at the end of the day, Sunding said, the laws of the marketplace will win, if they are given a chance by politicians. “To achieve a 20 percent reduction in demand, double the price,” he told the group.

Whether water agencies will have pricing as a tool to affect supply and demand in the short run is probably a better question for the governor and the state Legislature at the moment.

But after listening to Sunding, and others on a panel that I moderated later that day, it’s obvious that this drought will bring big changes in the long run to how we think about water.

With the state water project not delivering on promises made decades ago, water agencies will have to think about supply in terms of probabilities, not the certainty that has been the rule of thumb for the past century. And pricing — one way or another — will become more variable.

Finally, there’s this. The process of unshackling prices from government regulation is difficult and it takes a long time.

Back in the 1970s, the U.S. experienced a shortage of natural gas that was caused in large part because heavily regulated pricing regimes discouraged exploration and limited demand.

Beginning with Gerald Ford, through Jimmy Carter, Ronald Reagan, George H.W. Bush and Bill Clinton, the natural gas markets were deregulated. Today the U.S. is a world leader in gas production and prices are unthinkably low.

If California has the courage to allow markets to set the price for water, and sets the rules of the road that prevent gouging from taking place in an orderly transition, we probably will learn that innovators will discover new supplies and ways to reduce demand.

But, as Professor Sunding made clear in his talk, we’ve got a long journey ahead.

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