During dry years, water becomes scarcer, and, economically, people should pay more for it. But most urban residents do not pay directly for water scarcity. We only pay the financial cost of providing water through pipes, pumping, treatment plants and reservoirs. We do not pay for the lost value that water would have had for environmental or agricultural uses outside our communities or the value of that water to other water users in our community.

These scarcity costs are real and including scarcity costs in water rates would appropriately increase incentives for water conservation. But Proposition 218, enacted by the voters in 1996 as an amendment to California’s Constitution, bars retail water agencies from charging water rates that exceed their financial cost of providing water service to each parcel within their service area. Proposition 218 also makes it difficult for retail water agencies to adopt conservation or lifeline rate structures.

One idea to improve conservation incentives for urban water users, consistent with Proposition 218, is to have a two-part water bill. The first part of the bill would cover the financial cost of water service (pipes, pumping, treatment, water acquisition and other utility operations) and the second part would include the scarcity value of water used.

The water scarcity (second) part of the bill could be set using an internal water market. Here, each customer could have a fixed share of the water available to the community or water utility, which could be sold or bought by each customer depending on their amount of water conservation. The share could be set by any of various methods. This approach can provide equity, incentives for conservation and flexibility to accommodate the many different types of households and customers in urban areas. You are paid if you use less than your share and pay more if you use more than your share.

This is illustrated in an example monthly bill below.

Explaining your new water bill

With your new water bill, you pay more to use more, depending on the scarcity of water, and pay less when you use less.

Each billing period, each customer has a share of the community’s available water. If you use more than your share, you must purchase additional water conserved by others at a market rate. If you use less than your share, you can sell your water for a rebate on your bill or donate it to environmental or other charitable causes. (Some people conserve for money, and some conserve for the environment or could conserve for charity.)

Your bill has two parts. The first part of the bill is your share of the cost of water utility operations (piping, pumping, water treatment and acquiring the community’s water supply). This utility financial cost must comply with the provisions of Proposition 218. The second part of the bill is for water you buy or sell from others’ shares of the community’s resource, including revenues you made from sharing your lower water use with others in the community.

Benefits and Challenges

This approach has some desirable features:

• Encourages water conservation. People receive direct credit for conservation. Conserving more than their share allows them to dedicate conserved use to environmental or other purposes, or this conserved water can be sold, perhaps to finance the customer’s water conservation activities, such as landscaping or plumbing improvements.
• Conservation incentives increase with greater water scarcity. In places and times when water is scarce, water prices rise automatically, without need for additional rate hearings.
• Flexibility to use more water if customers pay for it, and incentives to use less. If someone values water so much, probably we should allow them to buy additional water from willing sellers (conservers) from their shares. Given the diversity of urban users and uses, there is economic and social value in such flexibility.
• Pricing includes opportunity cost, and not just utility financial cost. The customer’s cost of water now includes its opportunity cost of the water to customers and can better include some of the opportunity cost of water use to the environment.
• Proposition 218 compliance. Although it certainly would be challenged in court, inclusion of a water scarcity charge should comply with Proposition 218 for one of two reasons.
  1. First, if the purpose of Proposition 218 is to regulate both financial and economic charges for service, the scarcity part of the bill represents the economic (as opposed to financial) cost of serving water to a parcel arising from the additional cost that parcel’s water use imposes on other water users (in the form of additional scarcity costs). This scarcity cost would be appropriately set by the internal water market among customers.
  2. Second, if the purpose of Proposition 218 is to regulate only financial charges by the water utility, the scarcity charge is not a charge for the utility’s financial cost of retail water service to each parcel and is not paid to the utility, but to other customers – the utility is only the accountant and market steward for the scarcity charge. Rather, the scarcity charge assigns to each customer a share of the water available to the retail agency for distribution and use each year or billing period, which each customer may dispose of however the customer chooses. If the customer uses the water, he or she must pay the cost of that additional water service financially to the utility and to other customers in terms of scarcity. If the customer chooses to sell the water, then he or she is paid for the conservation and sale by other customers.
• Water utility and customers learn customers’ actual willingness to pay for additional water. If acquiring additional water costs more than customers are willing to pay, then perhaps expansion is less attractive than the remaining scarcity cost to customers. In a dry place like California, some scarcity is economical and good. The cost of eliminating all scarcity is likely to exceed its value. This value information supports better balance and integration across the portfolio of water supply and demand management actions.
• Social equity. Social equity is enhanced by this water billing system, as each household has a share of community water use, which it can sell if it conserves sufficiently. Also, larger water users who often drive water capacity expansions would pay more for any expansion costs. (Some care might be needed to discourage desperate residents from selling their shares of water availability in perpetuity for some small capitalized sum.)
• Ability to dedicate conserved water to the environment. Customers can directly dedicate their conserved water to the environment, rather than having this water become available for other purposes. This might require a formal contract whereby the utility water right or contract holder sells or transfers this water nominally to an environmental agent.

A main challenge is that this is a new approach, making it hard for many to understand. Another challenge would be selecting a method of allocating shares of a community’s available water. Allocations could be similar to the “water budget” rates common in some California districts, allocated equally among all service connections, by a proportion of previous water use, or any other means. Allocation of annual amounts across monthly or seasonal billing periods and among customer classes are some other community implementation decisions. Any means would bring similar conservation incentives, but perform differently in terms of social equity.

Allowing customers to “bank” some conserved water from month to month might be useful. Soliciting customers’ selling prices for conserved water also is a challenge, perhaps with a default pricing policy set by the utility. There would be many implementation issues, but the idea seems worth considering and some are already considering it.

Financial incentives to conserve water that provide market information to customers and utilities might be especially useful in moving beyond plumbing and building codes for urban conservation to making behavioral changes among diverse urban customers. Such incentives and willingness to pay information also would aid integration of supply and demand management decisions across sectors and uses.

Jay Lund is Director of the Center for Watershed Sciences and Professor of Civil and Environmental Engineering at the University of California – Davis.

This story first appeared on the California Water Blog, published by U.C. Davis’ Center for Watershed Sciences. The views expressed in this article belong to the author and do not necessarily reflect those of Water Deeply.

Top image: A decal on the dusty tail gate of a Orange County Water District truck asks people to conserve water at their recharge facility in Anaheim, Calif. Saving water through changes to billing can also help incentivize conservation says Jay Lund of UC Davis. (Chris Carlson, Associated Press)