Austin Contrarian

Shaming is a poor substitute for pricing

This morning's Statesman disclosed -- "outed" might be the better word -- Austin's 10 most profligate water users.  Lance Armstrong sits at the top of the list.

I imagine this public shaming will get them to cut down on their water use.  It may also discourage other big users to cut down, too, since they may worry about ending up on the list.  That's far from certain, though.

For someone with a valuable public image like Armstrong, the humiliation of topping the list is more costly than any increase in the price of water.  But I'm sure there are hundreds of people just below the top ten who collectively use 100 or 1000 times as much water as the top 10.  If we priced water properly -- if the top few hundred were paying $3,000-5,000 per month rather than $500 per month -- we could guarantee water reductions while bolstering the city's balance sheet. 

Moral sanctions work best in small communities where people know each other.  Austin is too big for the Scarlet Letter approach to work in the long run.

Update:  Shilli's post at Austinist is better.

Another water-pricing rant, but this time with a cite

Yale's Sheila Olmstead and Harvard's Robert Stavins have released their working paper "Comparing Price and Non-Price Approaches to Urban Water Conservation" (gated) just in time to fuel another of my water-pricing rants.   They find (surprise!) that pricing reduces water use more cost-effectively than a command-and-control system.

The abstract:

Urban water conservation is typically achieved through prescriptive regulations, including the rationing of water for particular uses and requirements for the installation of particular technologies. A significant shift has occurred in pollution control regulations toward market-based policies in recent decades. We offer an analysis of the relative merits of market-based and prescriptive approaches to water conservation, where prices have rarely been used to allocate scarce supplies. The analysis emphasizes the emerging theoretical and empirical evidence that using prices to manage water demand is more cost-effective than implementing non-price conservation programs, similar to results for pollution control in earlier decades. Price-based approaches also have advantages in terms of monitoring and enforcement. In terms of predictability and equity, neither policy instrument has an inherent advantage over the other. As in any policy context, political considerations are important.

Here's the money quote, if only because it matches precisely what I wrote just two days ago:

Non-price management techniques can create political liabilities in the form of water-utility budget deficits.  Non-price conservation programs are costly.  In addition, if these policies actually reduce demand, water utility revenues decline.  During prolonged droughts, these combined effects can result in the necessity for substantial price increases following “successful” non-price conservation programs, simply to prevent water utilities from unsustainable financial losses.  This occurred in 1991 in southern California.  During a prolonged drought, Los Angeles water consumers responded to the Department of Water and Power’s request for voluntary water use reductions.  Total use and total revenues fell by more than 20 percent.  As a result, the Department requested a rate increase to cover its growing losses (Hall 2000).  In contrast, given urban price elasticities common in the United States, price increases will increase water suppliers’ total revenues.  The extra per-unit revenues from a price increase outweighs lost revenue from the decreased demand.

In other words, a city can conserve water by raising prices, in which case it will have more water and more money.  Or a city can adopt water-conservation rules, in which case it will have more water but less money.  It's dumb enough for a cash-strapped city to choose the second option, but it's super-duper-fantastically dumb for it to spend $1 million on an advertising campaign just to guarantee that it loses  as much money as possible.

As a lawyer, I've been trained to look at both sides of any issue.  But I simply can't fathom the resistance to pricing water properly.  ("Resistance" isn't even the right word -- there's nothing to resist, because no one that matters is pushing it.)

Can anyone out there make a cogent case for top-down regulation?  Devil's advocates welcomed.

Another absurd consequence of the City's refusal to price water properly

The City is about to pony up $1 million for a "public service" campaign (starring Ray Benson) to educate us about the new water conservation regulations.

Austin, of course, is running a well-publicized budget deficit.  Library hours will be cut.  City departments will be left understaffed.  Our infrastructure will no doubt be starved of investment for yet another year.  (How many feet of sidewalk would $1 million buy?)  But the City intends to press ahead with its gold-plated advertising campaign.

Because our city leaders insist on conserving water by fiat rather than price, public service campaigns such as this one are an unfortunate necessity.  The city refuses to incentivize us to conserve water through rational pricing, so it has to tell us to conserve water.  It will cost $1 million to tell us the first time -- and hundreds of thousands per year more for dedicated staff to tell residents one at a time.

What makes the City's refusal to raise prices so idiotic is that if its advertising campaign succeeds, the City is guaranteed to see further declines in revenue.  It's simple:  If you sell less water at the same price, you get less money.  Spending $1 million on a campaign to slice City revenue is a dumb idea any year, but it's especially dumb when we are staring down a big budget deficit.

On the other hand, if the City adopted a rational pricing system -- if it simply raised prices for large water users -- total revenue would actually rise as the City met its conservation goals.  And the City could save $1 million on advertising to boot.  These silly top-down regulations regulations will cost the City millions of dollars in the end.

The water restrictions are Leffingwell's baby.  They are a terrible, wasteful mistake. Leffingwell should demonstrate some political leadership by pushing for a sensible pricing scheme.

And what do you think water rationing will be like in 20 years?

When Austin's metropolitan area has added another 1 million+ people?

That's a 40% increase.  A 40% increase in water use if individual rates of use remain constant.

They can't, of course.  Under our water rationing system, the City will have to resort to ever more draconian measures.  The more draconian the rationing rules, the greater the dead-weight losses:

1. The harsher the rules, the harder they will be to enforce.  This means the City will have to spend ever more money to ensure compliance.  That's waste.
2. The more stringent the rules, the more leakage, so to speak.  People will have a greater incentive to cheat.  There are diminishing returns to a command-and-control system.
3. The more stringent the rules, the greater the loss imposed on people who put a high value on that last gallon of water.  People don't value water equally.  Some people just don't have any need for more than the amount necessary to cook their food, shower, and flush their toilets.  Others really, really like to wash their cars once or week or keep their yards in tip-top shape.  The stringent rules impose losses on the people in the second category but not people in the first.  The more stringent the losses, the greater the economic inefficiency.  Let the people who put a high value on the water pay for it (and, incidentally, hand the City more money to spend on other things).

Water rationing is not a stable, long-term solution.  Start pricing it right now; the longer we wait, the harder it will be to start later.

Sprinkler snitches.

Reason No. 73 to hate Austin's water rationing program:  It turns people into tattletales. 

Just raise the damned price already.  The pricing system doesn't have to be regressive.  Put the extra revenue and the money saved by eliminating the command-and-control system into something else.  (Anyone think we're spending enough on sidewalks?)

I really, honestly don't get this

Austin's new water conservation laws are a good illustration of the wastefulness of command-and-control regulations:

The new watering laws -- which limit watering of commercial and multifamily landscapes to twice a week year-round beginning on Oct. 1 -- are part of the city's broad new water-conservation policy approved in August. In addition to being limited to watering twice a week -- Tuesdays and Fridays -- owners will only be able to water before 10 a.m. and after 7 p.m. on those days.

City leaders say the new policy will save 33 million gallons of water a day in the coming years and reduce greenhouse gas emissions from carbon dioxide -- used to generate the electric power for water treatment -- by about 40 million pounds. Austin is the first city in the country without a water supply problem to adopt such a far-reaching conservation policy, says City Council Member Lee Leffingwell, who led the effort.

The new ordinance also limits irrigation at "residential facilities" (colloquially, "homes") to designated watering days between May 1 and September 30.  The restrictions apply regardless of how full the lakes are.

I don't quarrel with the City's desire to conserve water.  I don't think global warming is the real rationale, though.  The City wants to knock a percentage point or two off the annual growth in demand, which could delay costly capital investments in new water treatment plants.  That's reasonable, depending on the cost of conserving water versus the cost of building new treatment plants. 

But why this ridiculous command-and-control system?  Why this self-destructive antipathy to using prices to ration scarce resources?  I was gearing up for a sermon on the benefits of prices, but M1EK has already covered this fairly well. 

Command-and-control systems may get you the same savings, but they cause a lot more pain and cost a lot more to enforce, as the Statesman article shows:

People who repeatedly violate the rules could receive Class C misdemeanor citations and fines of up to $500, but inspectors will work with property owners first to seek compliance, said Dan Strub, the city's acting division manager of water conservation. The city is hiring three full-time water conservation inspectors, at a cost of $180,000, to join two full-time inspectors.

Deborah Cole, who has owned the Austin business Greater Texas Landscapes for 26 years, said the new watering rules are simple to understand but impractical to follow. "The premise they are based on is that two days a week will be adequate for landscapes that have good soil depths and the right plants. But many commercial sites and residential sites in Austin do not naturally have much soil," she said.

There are solutions, such as adding soil or mulch or upgrading sprinkler systems, but businesses need time to phase those expenses into their budgets, said Kyle Gillman, vice president of the building owners group.

City Council Member Lee Leffingwell said that a city committee spent more than a year writing the rules and that property groups had ample time to offer feedback and then figure out how to comply with the rules, which the City Council passed in May.

Property owners can seek a variance from the watering schedule if they have newly installed landscapes (which require more water) or have very large properties, Strub said.

Carl Tepper of Kucera Management, which manages 20 office buildings in North and Northwest Austin, said the city should allow variances for evapotranspiration controllers, devices that can save water by prompting sprinklers to run only when a lawn needs water, based on soil and weather conditions.

Beginning next year, the city will require the controllers on newly installed sprinkler systems, Strub said. But they will have to be programmed to run only twice a week.

"If we gave variances to everyone (with "ETs") just because of the potential to use less water, that would make the ordinance much less enforceable. There would be exceptions all over town," Strub said.

Wow.  What a nice illustration of the lunacy of top-down regulations.  Let's count the costs.  First, there are the unnecessary direct enforcement costs.  We will spend $300,000 years on inspectors to snoop for profligate water use when we could get the same savings for free just by fiddling with the price.

Second, there are the secondary enforcement costs -- the unnecessary extra water use caused because our enforcement scheme must be simple enough to enforce.  Thus, we have good Mr. Strub arguing that we can't encourage businesses to use efficient evapotranspiration controllers "just because of the potential to use less water."  Right.  Let's require businesses to waste water so we can easily monitor whether they are wasting water.

Third, there are the losses to businesses caused by the one-size-fits-all approach.  The twice-a-week schedule may not be enough for some; the cost to them will be dead landscapes.  But even when the twice-a-week schedule is adequate, some businesses might be able to cut their water use in a different, less painful way.  The extra costs they must incur to do it the City's way is a dead-weight loss.   

Fourth, the top-down approach misses a lot of potential savings.  The City's regulations focus solely on lawn watering.  That may account for most water use, but I guarantee that there are plenty of easy savings to be found in restaurants, car washes and office buildings.  Raising the price would encourage all commercial water users to watch their water use.  We would save more water at a lower average cost.

Using prices would have two other collateral benefits to the City.  First, it would permit us to calculate the cost of water conservation.  That's a good thing when we'd like to know whether it would be cheaper to add new water treatment plants.  Second, raising the price would bring in extra revenue that could be spent on improving water infrastructure -- old, leaking pipes, for example.

This turned into a sermon after all.  But I really don't get this fetish for top-down regulation.  Just raise the damned price.