Governomics 101: Decreased demand means … higher prices?
posted at 10:01 am on August 4, 2014 by Ed Morrissey
Over the last couple of decades, Americans have had to replace plumbing in their homes to conserve water as environmental awareness rose about the costs of fresh water. Traditional high-volume fixtures like toilets and shower heads gave way to low-flow devices that often didn’t quite seem to, er, do the trick. Activists badgered regulators into eliminating the traditional fixtures, and then badgered consumers into reducing their use of water even more. Even in areas without any drought concerns, odd-even lawn watering days are in effect — in my neighborhood, for instance, where floods are more of a worry than drought. All of this came with the promise not just of better resource management, but also lower water bills reflecting the conservation these changes would provide.
Well, the conservation has certainly occurred. Water use has been flat for the last two decades despite population and construction expansion. That means lower prices, right? Er … wrong. In fact, water prices will shortly go up in order to cover the revenue shortfall that conservation created. Consider this Governomics 101:
Federally mandated low-flow toilets, shower heads and faucets are taking a financial toll on the nation’s water utilities, leaving customers to make up the shortfall with higher water rates and new fees that have left many paying more for less.
Utility officials say they understand that charging more for water because demand has dropped might seem to violate a basic premise of Economics 101. But utilities that generally charge by the number of gallons used are beginning to feel the financial pinch of 20 years of environmentally friendly fixtures and appliances, as older bathrooms and kitchens have been remodeled, utility experts say. …
Adding to the problem, Washington-area utilities say, is the fact that consumption is falling as costs are mounting to upgrade sewer systems and repair and replace aging water pipes, some more than a century old, that are bursting after decades of decay and neglect. Meanwhile, utilities’ costs — electricity, chemicals and labor — have continued to rise.
Why raise rates, though, for infrastructure work? The utilities have other options, such as bond issues, or an infrastructure surcharge. The latter would be applied as a flat fee per property, or perhaps per household in multi-resident structures, which would have the effect of negating the idea that this is a penalty for conservation. The Washington Suburban Sanitation Commission plans to apply the surcharge — and the higher rates.
And guess who gets hardest hit? The people who use the least amount of water, of course:
Bills for households that use the least amount of water, such as people living alone, would feel the biggest impact, WSSC officials said.
The fees would come on top of annual rate increases, which have reached as high as 9 percent in recent years. Since 2002, WSSC customers have seen their rates almost double, jumping by 95 percent.
While WSSC’s rate increases have far outpaced inflation, they haven’t been as large as those of many other major U.S. water agencies, a consultant found.
In normal market-based economics, decreased demand would mean decreased prices. Government regulation forcing conservation should have produced lower prices, especially from a resource that for the most of the country can be found in abundance. The people who pay the most would be the ones who make the most utilization of the resource. And private-sector providers in a competitive market would have maintained and improved their own delivery infrastructure as a matter of course, rather than wait twenty years and then hope that price hikes wouldn’t hand an advantage to competitors.
Perhaps water cannot be managed by the private sector in a multi-provider market. But this does give us a very interesting lesson in why government (or government-protected monopolies) shouldn’t manage anything except what it absolutely must.