Written by a Know Your H2O volunteer:

Water conservation is often touted as a cheap and efficient solution to California’s water crisis. The city of Sydney in Australia, for example, uses about 80 gallons per person per day — a little more than half of what the average Angeleno is using. If we Californians could use less water and be more like Sydney, the logic goes, we wouldn’t have a problem.

True enough. Unfortunately, making it happen is a difficult problem. Public Relations campaigns to promote conservation are often preaching to the choir: the people who pay attention to water conservation ads are usually the conscientious folks. Other measures like rebates for water-efficient appliances and shower heads may be more effective but still do nothing to cut back on water use in agriculture, which accounts for 80% of California’s total consumption. 

What we really need is a way to encourage everyone to practice efficient use, whether they’re running a farm or a business or just watering their lawn. That’s where pricing comes in. If you set the price of water right, then you won’t have to run PR campaigns or offer rebates for low-flow showerheads. You won’t have to worry about who’s using more than their share and who isn’t. Effective pricing will drive conservation by itself.

One of the problems with our current pricing structure is the perverse set of incentives it creates for water utilities like the San Diego County Water Authority (SDCWA). The utilities have to make enough money to cover their expenses. Most of their costs are fixed costs like repayment on debt; these costs remain the same from year to year regardless of how much water consumers buy. If consumers cut back on their water use, the utility’s revenue drops sharply but their costs remain roughly the same, forcing the utility to raise the price so they can cover their costs. The end effect is that consumers are punished for conserving water, which makes everyone unhappy. 

One way to solve this problem is through tiered pricing, where consumers are charged a low per-unit rate for the first set number of units they use, then charged a higher rate for the next set number of units they use and so on. The advantage to this is that consumers who don’t use a lot of water are charged very little — they pay a nice low per-unit rate. Consumers who use a lot of water (e.g. golf courses) end up paying a higher per unit rate on most of it and thus shoulder the bulk of the costs. This system rewards consumers who already limit their water use by transferring costs to larger-volume users. It also solves the water utility’s dilemma by promoting conservation while bringing in enough revenue to cover their fixed costs.

Another option is so-called “scarcity pricing” where an additional “scarcity surcharge” automatically kicks in during a time of drought when the supply in the reservoirs is low. Since water use will drop due to the higher price, the “scarcity surcharge” ensures the water utility still has enough revenue to cover their costs while cutting water consumption until the level in the reservoirs is back to normal.

Each of these options has its own advantages and disadvantages. Either of them, however, is better than the way we’re doing things right now. Effective pricing can incentivize conservation and help us manage our water supply in a way that nothing else can. Choosing a better pricing structure would be a giant step towards solving our water problem.

Link to an excellent article in the LA Times.