25.7.14

PRICES FUNCTION TO ALLOCATE DEMAND.

Some months ago, Cold Spring Shops linkbuddy John Palmer noted that water is not exempt from that proposition.
Oh, some people will be hurt when the price of water is raised? Yes, that happens. They have been benefiting from a price that has been held too low for far too long. Time to face reality.
He was referring to California, but his argument holds equal force in Detroit. Detroit's rates are high, particularly to the naive view that sees nothing but Great Lakes all around Michigan. The city has been cracking down on residents who are behind in their bills, which creates a political economy problem when governmental and business deadbeats owe a lot.
Over the past decade, sales have decreased by 20 to 30 percent, while the water department’s fixed costs and debt have remained high. Nonpayment of bills is also common. The increasing strain on the department’s resources is then passed on to customers.

But residents aren’t the only ones with delinquent accounts. Darryl Latimer, the department’s deputy director, told me that the State of Michigan holds its biggest bill: $5 million for water at state fairgrounds. (The state disputes the bill, arguing that it’s not responsible for the costs of infrastructure leaks.)
Detroit's water utility faces a stranded cost problem. In the presence of falling average costs, decreasing usage means a greater divergence between average cost and incremental cost, and piecemeal scrappage of water mains on abandoned blocks is unlikely to raise enough cash to cover the costs, nor is it likely to produce a more efficient water network.  But the editorial writers of the New York Times don't get it.
But cutting water to homes risks a public health crisis.

Instead, the water department should more aggressively target delinquent commercial customers who carry a large share of the unpaid bills. It should enact a comprehensive plan to fix leaking pipes; flooded streets are common here, and water customers — whether the state or ordinary residents — must pay for sewerage, not just running water, and often are billed erroneously for these leaks.

The department must also ensure that water is shut off to abandoned buildings, and eliminate errors in address transfers.
There's a public utilities research project here, identifying the death spiral that ensues as residents leave, revenues fall, maintenance is deferred, mains break, and more residents become disgruntled and leave.

Here's Detroit News columnist Daniel Howes summarizing the discontent.
Blame the water department, partly. Blame a political culture steeped in favoritism and victimization. Blame mismanagement that perpetuated a system in which half of the city’s property owners don’t pay their taxes and thousands ignore their water bills because, well, they can and elected officials willingly wield influence to keep it that way.

“There was no rigid enforcement policy or practice at the water department for years,” Bill Johnson, a department spokesman, said in an interview Thursday. “Some of it was under pressure from the mayor’s office, some of it from City Council.

“You allow the situation to languish and some people think you don’t care,” or that the department won’t pursue those who aren’t paying their bills.

Now they are, sparking the kind of backlash that is predictable in the ossified ways of Old Detroit. Thursday, protests continued over the water shut-offs; one radio report quoted a guy explaining, rightly, that Detroit has a high poverty rate even while complaining that council just agreed to hike water rates nearly another 9 percent.

Why is that? In large part, Johnson explained, the increase is driven by the disproportionately high number of water customers in Detroit who consume water they do not pay for.
As Doc Palmer puts it, "Raise the friggn price and watch the quantity demanded drop."

Meanwhile, in California, long the poster child for easy living made possible by subsidized water, when drought comes, the authorities try everything but the price system.
Mostly, we use prices to match supply and demand. When supplies of some item are short, rising prices provide incentives for conservation and substitution, as well as the creation of creative new sources of supply.

When we abandon prices, often out of some sort of political opportunism, chaos usually results.

California, for example, has never had the political will to allow water prices to rise when water is short. They cite all kinds of awful things that would happen to people if water prices were higher, but then proceed instead with all sorts of authoritarian rationing initiatives that strike me as far worse than any downsides of higher prices.
Yes, even NBC's "water police" segment has trouble sugar-coating the authoritarian impulse.
At the East Bay Municipal Utilities District, we met someone trying a new approach. Rachel Garza is a water conservation technician who is going door to door, responding to complaints about water violations. With her calm and maternal demeanor, Garza talks to people about the drought, suggests ways they can cut back on water use, and helps homeowners to make their lawns more drought-friendly.
The ve haff unpleazant methodz to ensure your compliansss comes later.

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