Austin Contrarian

A UCLA economist tells us how to adapt to another hot, dry summer and it's what you would expect

There are credible predictions that the drought will persist through next summer.  That's scary.  Lake Travis, one of our two main reservoirs, is 47 feet below full.  We are in trouble if this trend line continues for another year:

Matthew Kahn, UCLA economist and author of Green Cities, offers helpful advice on how we should adapt:

If the people of Texas forecast that the summer of 2012 will resemble the summer of 2011 what actions can they take over the next year to reduce the impact on their economy and their quality of life?

I would hope that water prices are allowed to rise so that people with grass front lawns will think about replacing that beautiful stuff with plants that require less water. 

Electricity prices should also rise on hotter days.  As electricity demand rises due to rising air conditioner use,  I would hope that the region's grid has excess capacity to built in for peak days.  There should be more use of critical peak pricing for both residential, industrial and commercial consumers so that demand side responses (i.e people using less electricity on high demand days) help to minimize the probability of blackouts on those really hot days.  If people face higher electricity bills, then they will demand more energy efficient appliances and the world's firms will figure out how to make them.  Demand creates supply.

Water is the more pressing concern and the good news is that Austin Water Utility has adopted tiered, block pricing that charges hefty premiums to high water users.  And, wisely, AWU has proposed price increases to kick in in November.  It will raise the marginal price of 1,000 gallons of water for each residential tier by 4.7-5.4%.  AWU is tacking on a monthly $6 "water sustainability fee," which is regressive and superfluous as long as it's pricing the water properly.

More price increases will be necessary if this drought continues.  But we know that price is an effective way to ration water, more effective than mandatory conservation (and oodles more effective than voluntary conservation).  While demand for water is inelastic, it is not perfectly so:  estimates of the price elasticity of demand by residential water users fall between -.33 and -.64.  See this study at p. 23 (pdf).  A 1999 study of Texas cities (see here (pdf) at p. 19) estimated Austin's price elasticity at -.17, but this included commercial and industrial users, who are likely less sensitive to price.  Regardless, long-run elasticities will be higher if there is a credible commitment to high prices, as homeowners do what Kahn suggests and switch to more efficient appliances and replace grass with drought-resistant plants.  AWU has made a credible commitment to high prices.   

Because price is so effective at conserving water, I find it absolutely bizarre that many local environmentalists are opposing the new rate hikes.  But the rate hikes will raise revenue because the demand for water is inelastic, and the City intends to use the extra revenue to pay for the new water treatment plant.  Opponents of the plant are so determined to block the plant that they have been citing the rate hikes as a downside of the plant even though they know (or should know) that raising rates  is the most effective strategy for conserving water and will be necessary even if the plant is not built.   They should stick to arguing that WTP4 is a bad use of taxpayer money and not front arguments that undercut water conservation.

Water hogs subsidize the rest of us

The Statesman has published its annual list of Austin’s top ten water users.  Neil Webber, Vignette’s founder, tops the list.  He used 1.74 million gallons between February and July.

The Statesman’s annual outing predictably (and understandably) stokes outrage.  Many Austinites struggle to get by with 15,000 gallons per month.   That’s not that much water if you have a yard of any size.  And 15,000 gallons per month is a steep $48.59.   News that a single property owner is using more than 100 times as much makes people mad.

But Webber is paying a stiff premium thanks to the water utility’s progressive rate structure.  Webber used as much water as 117 households using 15,000 gallons per month.   These 117 households paid a total of $5,682.  Webber forked over more than $14,300, a 250% premium.  With another round of price hikes this fall, next year Webber will owe more than $17,000 for the same amount of water.

Rich people are naturally less sensitive to price than the rest of us.  But remember that a progressive rate structure ensures that they subsidize the rest of us.   We can debate whether our rate structure is as progressive as it ought to be — it’s actually quite progressive compared to the rate structures I’ve seen elsewhere — but the premium heavy water users pay can can be used for sidewalks, libraries or anything else we want to spend it on.  That’s a good thing.

Regression from the dais

"Regression" as in "linear regression."

Last Thursday's debate on Water Treatment Plant No. 4 got awfully technical, but I was still surprised to see a councilmember (Laura Morrison) discuss a linear regression from the dais.

The video is jerky but the audio is fine.

H/t Keep Austin Wonky.

Perhaps we're doing enough after all

Because I push water pricing so hard, I ought to acknowledge that Austin has had a sensible rate structure since November 2008.   Austin Water Utility uses an inclining, four-block rate structure for residential customers.  "Heavy" water users pay quite steep rates.  I put "heavy" in quotes because the top rate -- $8.50/1,000 gallons -- kicks in at 15,000 gallons/month, which isn't that much for a suburbanite trying to keep his lawn green during a month-long string of 100+ degree days.  And AWU just received approval to raise rates again on November 1, 2009.   Residential users who exceed 25,000 gallons/month will pay $10/1,000 gallons.

As this AWU chart illustrates, Austin charges its customers much more than peer cities:

(The choice of peer cities seemed random so I spot checked a couple of other cities just to make sure AWU isn't cherry-picking.  It doesn't seem to be:   Houston charges just $4.50 per 1,000 gallons beginning at 12,000 gallons/month.  Denver has a top rate of $7.63 that kicks in at 40,000 gallons/month.)

Austin's water rates are also progressive, as the next two AWU charts illustrate.   The blue lines represent the average historical monthly bills for residents who used an average of 8,500 gallons/per month or 30,000 gallons/month, respectively.   The red lines represent what the average bills would have been had AWU raised rates uniformly for all customers.

Thanks to the progressive rate structure, customers who use a relatively modest 8,500 gallons/month have seen much more modest rate increases; heavy water users have born the brunt of the increases.   Suburbanites pay for those 1/2-acre spreads of St. Augustine.

It is quite possible that we now are doing enough.   Peak-day rates have trended down the last couple of years.   I doubt the November 2008 rates have even had their their maximum impact yet; water customers are notoriously slow to react to new rate structures.   And, of course, customers will face another rate increase this November.   These rate increases, combined with the mandatory watering restrictions, might be enough to keep us below the peak-day threshold for a long time.

The case for mandatory watering restrictions

Having just bashed the city's active water conservation program, let me put in a good word for mandatory watering restrictions.

I’ve never had anything good to say about command-and-control watering restrictions.   Although they are much, much cheaper for the city than its active conservation program — and much more effective — they create dead-weight losses that don’t show up on the books.

There is a decent economic argument for watering schedule restrictions, though.  I don’t remember anyone raising it in the comments to my many entries on this subject (although see Scooby's comment to the last entry), so I’ll lay out the case myself.

Cost-effective?

I've been complaining about the inefficiency of water conservation programs for a long time.  My main target has been command-and-control measures; I've more or less ignored the city's active  conservation program, through which the city offers residents free, low-flow toilets, provides rebates for certain water-conservation measures, conducts irrigation audits and encourages water reclamation.  These programs do not produce the obvious dead weight losses that C&C measures do. 

But I'm now quite skeptical that Austin's water conservation program is cost-effective.  Heretical, I know.  But bear with me.

The root of my skepticism is this 28-page, single-spaced memorandum (and 40 pages of appendices) (8.8 MB pdf), which Austin Water Utility prepared at the request of Council members Spelman and Morrison before last Thursday's city council meeting.   The memorandum is chock full of interesting technical data.  But this chart, on page three, immediately caught my attention.  It depicts AWU's own estimate of the impact of its water conservation program:

Column three shows the total annual reduction in water use produced by Austin's conservation program.  Column four shows the city's cost (including staff cost) for reducing peak day demand by one gallon.  (Important note:  These are the usage reductions from the city's low-flow toilet replacement, rebate, irrigation audit and reclamation programs.  They do not include reductions from mandatory watering restrictions.)

The first thing that jumped out at me is that the city's conservation program (again, ignoring mandatory watering restrictions) is a horribly expensive way to reduce peak-day demand.  The city spent $1.09 per gallon in FY 2008 to reduce peak day demand by one gallon.  (I initially thought this was a typo -- surely, AWU meant $1.09/1,000 gallons -- but on further reflection, I think AWU meant what it said.   I've e-mailed AWU for confirmation.)  If you want a benchmark, AWU's peak charge for residential customers is $8.50/1,000 gallons, or 0.85 cents/gallon.  The city is spending 120 times as much to reduce peak-day demand by one gallon.  At that price, it would be cheaper to have Ozarka on emergency stand-by with a few hundred thousand water-cooler bottles.

The city is getting a better deal on annual water reduction.  In fiscal year 2007, the city spent $5.2 million on conservation programs that reduced total water use by 363 million gallons -- a cost of 1.42 cents/gallon.  In FY 2008, it spent $6.3 million to save 766 million gallons -- a cost of 0.8 cents/gallon.  That's slightly less than the highest rate it charges residential users (0.85 cents/gallon).

This would be a pretty good deal if the city's marginal cost for treating and delivering one gallon were 0.8 cents/ gallon.    This may be counter-intuitive, but it doesn't matter whether the city sells one gallon at cost or spends an equal amount to avoid producing that gallon.   If it costs the city 0.8 cents to supply one gallon of water, then it earns zero profit by selling that gallon for 0.8 cents.  If the city pays someone 0.8 cents not to buy a gallon, then the city is in exactly the same position -- it's out the 0.8 cents it paid the would-be customer, but it's  saved 0.8 cents in production and distribution costs.      

The problem is that AWU's marginal cost of supplying one gallon of water is nowhere near 0.8 cents.  AWU hasn't published its marginal cost (at least not that I've seen).  But AWU does estimate its average variable cost -- a decent proxy for marginal cost -- at $275.20/million gallons.  That works out to just 0.03 cents (three one-hundredths of a cent) per gallon.  This means the city is spending 26 times its (approximate) marginal cost to save each gallon of water.  That's a lot better than its cost of saving a peak-day gallon, but it's still pretty bad.  We'd all be better off if the city sold that water and spent the savings on sidewalks or firefighters or the hike-and-bike trail.

The active conservation program looks like a bad deal.  

Again, let me emphasize, these conservation estimates do not include the savings from mandatory watering restrictions.  AWU estimates the watering restrictions reduce peak-day demand by 5-9 million gallons or approximately 2-4%.  Since the watering restrictions cost the city virtually nothing (unless it's hired water police), they are, literally, millions of times more cost-effective than the city's active conservation program.

Environmentalists should advocate water pricing, not conservation campaigns

Environment Texas is lobbying City Council to increase its water conservation budget by one-third.  We're in a severe drought, you know.  Just like we were last year.

We're also in a recession.  The city has no spare change lying around.  Why, it's even offering an on-line budget "simulator" so ordinary citizens can see first-hand the hard trade-offs the city must make.

If only there were a way to encourage deeper conservation during this parching drought while simultaneously protecting our city budget.  If only there were some way to make our good residents understand just how precious water is right now without another million-dollar advertising campaign by the city.

There is, of course.  Just raise the price.  I assure you -- no, I swear to you -- that there is a price that will bring water use down to the necessary level.  As a bonus, the city will garner more revenue that it can use to plug its budget gap.  As a bonus on the bonus, the city can dispense with its costly conservation and rebate programs and use that money to plug the budget gap.  And as a triple bonus, Austin's residents can get out from under the stringent water restrictions.  They will be able to water their yards when they want -- but they will use a lot less water, if they choose to water at all.

I understand the political opposition to raising prices, even if I despise it.  The suburban lawn-watering lobby is a powerful player in this town.  But I don't understand why environmentalists refuse to get on board.

I know that some of them do support price increases and some of them helped push through price increases last year.  But those price increases were not nearly high enough and, anyway, prices need to be flexible.  We should charge high prices during a drought and lower prices when water is plentiful.  I haven't seen any environmentalists pushing that pricing scheme.

But the real problem with the environmentalists' approach is their willingness to buy both boots belts and suspenders.  Even those who want to raise prices also want to impose watering restrictions and pay gobs of money for conservation programs.  If we price water right, these last two are unnecessary.  In fact, they are a dead-weight loss.  They make us collectively poorer without providing any corresponding cost-justified gain.

So why don't environmentalists support pure water pricing?  I think it is the kumbaya spirit that animates many environmental groups.  A kind of "we're all in this together" mentality.  And a tinge of moralizing, which makes them more comfortable with imposing a code of conduct like the city's watering restrictions and issuing solemn commandments such as, "Thou shalt not waste water."

I'm not mocking them.  Well, I sort of am, but I don't mean to be mean-spirited.   Environmentalists' collective action and earnest commitment are valuable commodities in a society that often seems determined to squander its natural resources as quickly as possible.  But communitarianism is very, very expensive.

(Cross-posted at Urban Returns.)

We're number six

Smarter Cities (NRDC) has released its ranking of the most sustainable cities.  Austin is sixth!

Of course, like most city rankings, this one is based on an arbitrary weighting of an arbitrary list of factors. For example, they include "standard of living" as a category. What does this have to do with sustainability?.   Unless the goal is to jack up the ranking of wealthy California cities.

They omit a variable for land-use patterns. If you're worried about open space -- and I'm sure NRDC is -- this omission is inexplicable. I'm more sanguine about suburban development than many, but even I am surprised by this omission.

But mostly the problem is how they weight the factors. If climate change is the most pressing problem facing us today, then shouldn't energy consumption get the most weight?  I think it should.  And Austin fares very poorly on energy consumption.  It's 100+ degrees here in the summer.   My air conditioner runs virtually non-stop, and will until late September.  Adding a relative handful of low-energy buildings to the existing housing stock won't budge our average energy consumption.

Ditto with transportation. TTI just yesterday released a report identifying Austin as one of the most congested cities its size. I don't know what NRDC means by "sustainable" (I think the word has essentially lost all meaning through overuse), but does NRDC really believe that spending an inordinate amount of time in traffic, burning extra fuel, is a sustainable transportation pattern?

I could go on. Water. Yes, we've got pretty stringent water controls. But then we live in an area that is frequently parched. Each Austin resident puts a greater strain on local water resources than each resident of, say, Cleveland.

This will piss a lot of Austinites off, but probably the greenest Austinite is the one who moves to a city with a milder climate, more water, and less congestion.

Longhorn loos

The City of Austin will pay the University of Texas $126,475 to install 718 water-efficient toilets, pending Council's approval today:

The replacement of these toilets is expected to save 25,024 gallons per day, reducing demands on Utility’s treatment capacity and decreasing greenhouse gas emissions created by energy used to treat and pump the water by 21 metric tons of CO2 emissions/yr.

The University of Texas at Austin is contracting with Water Management, Inc., to improve water efficiency at its facilities here in Austin. Under this performance contract, Water Management is identifying opportunities for water savings, purchasing and installing water saving equipment. As such, Water Management is the agent that is determining which fixtures to install, and without the Water Conservation rebate would not find it cost effective to replace these old large capacity toilets. As the agency that is deciding which fixtures to purchase and install, Water Management is eligible under the program guidelines to receive the rebate. Water Management, the University of Texas, and Water Conservation have been working together on this effort from its inception to help the University reduce its water usage.

This is how things work in the bizarro world of underpriced water.  We have to pay people to cut their use of subsidized water because the price does not give them the right incentive.   We get screwed twice -- once when we sell them the water and again when we pay them to buy less.

Perhaps the City could donate the rebate to the University's archaeology department and kill two birds with one stone.

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.