December 2, 2007
RALEIGH – Flexible water prices would help North Carolina communities do a better job dealing with the state’s drought, according to a new John Locke Foundation Spotlight report.
Click here to view and here to listen to Joseph Coletti discussing this Spotlight report.
“Prices offer the most efficient, effective, and welfare-enhancing way of matching the supply of and demand for water,” said report author Joseph Coletti, JLF Fiscal Policy Analyst. “Flexible pricing is much more effective than forced conservation schemes.”
Most local water systems have relied on forced conservation during the state’s worst drought in more than a century, Coletti said. “These systems have adopted mandatory — or at least voluntary — restrictions on visible uses of water for landscaping and car washes,” he said. “These methods do not address less visible forms of water use.”
Forced conservation can lead to unintended consequences, Coletti said. “If you’ve already saved water by turning off your sprinkler system and skipping the weekend car wash, you might not worry about taking a longer shower,” he said. “If you can water your lawn only on alternating days, you might use more total water by watering more regularly on those days and for longer periods of time.”
More flexible prices would help water systems avoid those problems, Coletti said. “Most North Carolina water prices are set once a year by municipal governments finalizing their annual budgets, even if they have variable rates based on usage,” he said. “Private water systems also have to wait — sometimes for months — to get state approval to change rates in response to water supply. These prices cannot adjust to changes in supply or demand.”
Variable prices already help some of the state’s largest communities cope with changes in water demand, Coletti said. “Greensboro, Charlotte, Cary, and some other water systems charge higher rates to customers who use more water,” he said. “One effective method is called ‘increasing block pricing.’ Water rates go up in steps based on higher water usage. This is an effective way to encourage water conservation without sacrificing much revenue.”
North Carolina could do more to adjust water prices based on supply constraints, Coletti said. “State law already allows for adjustments in electrical and natural gas rates to promote conservation or to offset higher costs of fuel and gas,” he said. “The General Assembly should make similar allowances for private and municipal water utilities facing supply constraints. Municipalities with staged water-use restrictions could use the same mechanism to increase prices.”
There’s no reason to fear that higher prices would hurt the poor, Coletti said. “Price fluctuations need not be regressive,” he said. “A water supplier that uses higher prices to encourage conservation has more revenue available than a supplier who relies on forced conservation. That increased revenue can be used to subsidize poorer households that have fewer opportunities to cut back water use.”
The increased revenue has other benefits, Coletti said. “More money means more likelihood of investment in reservoirs, water treatment plants, and other innovative ideas to increase future water capacity,” he said. “This flexibility is especially important to communities dealing with growth.”
Joseph Coletti’s Spotlight report, “Drought-Resistant Water: Variable prices can work better than mandatory restrictions,” is available at the JLF web site. For more information, please contact Coletti at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].