Economics, Equity & Water
Written by: Robin Gilthorpe

"Whiskey is for drinking - water is for fighting over."

As you can tell from the breathless headlines and mutual recriminations in the air, this famous saying (often attributed to Mark Twain) has never been more apt here in the West. The drought in California is, in fact, just one point on a continuum of water stress that will afflict 40 states over the next decade, according to the US Government Accountability Office. And that is based on "average" water conditions for 2013; it is probably fair to say that this year we are gaining an even deeper understanding of likely future water conditions.

When we aren't berating nut farmers, some of our favorite targets are the lawns of the rich and famous. And for all of the hyperventilation about agricultural water use, at least that end product is consumed (mostly by urban populations) and creates economic value. Agriculture may only account for 2% of economic activity in California, but without food we don't have much of an economy anywhere. Lawn, on the other hand, is America's largest crop by acres planted and is a huge sink of precious potable water.

Entrepreneurs don't always have total latitude of action. But when confronted with a challenging problem we often start tackling immediate opportunities while working in parallel on a longer-term, strategic solution. It is in this context that we all have to focus on what we can do now about rebalancing our water equation.

The cost, price and value of water are disconnected from each other. As a result, financial signals to influence water use are undeniably broken: When your water bill is a third of your cellphone bill, price isn't the leverage point. And water pricing hasn't been covering the full cost of delivery for decades. We are all for rebalancing the economics of the water utility industry, but we also have to recognize the chilling effect of the recent Prop. 218 challenge of San Juan Capistrano's rate structure. It is likely that progress towards increasing block rates or budget-based rate systems will be slowed for a while, and the timing is terrible.

When utilities aren't trying to price people out of water profligacy, they often try to incent changes that result in lower, long-term water use. The array of rebates for fixture replacements and turf replacements grows weekly, it seems. But these, too, are more problematic than they first appear. "Cash for grass" schemes are a great example of the issues:

  • Changing attitudes towards emerald green lawns and the reality that these may no longer be sustainable might mean homeowners were already considering lawn replacements. This is known as "free-rider" loss, and it results in taxpayer dollars diminishing the incremental effect of conservation programs.
  • Prices offered for these programs are often higher than they need to be, because of "information asymmetry" - that is to say that great candidates for rebates, who would still have been motivated to change by a lower rebate, do not find out about programs until funds are exhausted by a large number of suboptimal rebate takers.
  • Certain types of rebates skew heavily towards the higher end of the socioeconomic spectrum. It is a politically tough sell to be writing checks to "millionaires and billionaires" for turf removal when some citizens aren't bathing every day.

The net effect of all these issues is that the limited funds that can be set aside for these programs invariably generate a lower yield than they should, and much of that yield is in the "out years", after the end of the current emergency.

If price isn't the lever, then behavioral science provides an interesting complement to price alone. Behavioral programs are proven to work, and to work fast. Platforms can be implemented in 45 days - before the summer season, and yield results within months, not years. Credible programs also offer verification of results, so that you can measure the impact of the behavioral element either alone or in combination with other utility programs, including rebates.

This means utilities and policymakers can allocate resources away from ineffective programs towards the ones that work. They include sophisticated multi-channel communications capabilities to ensure all consumers are aware of programs that are relevant to them, as well as how their own water usage is changing over time and what actions might make most sense for their personal situation. And because best-in-class programs are able to use big-data approaches, there is the opportunity to mitigate socioeconomic skews in program uptake.

None of these problems are easy to deal with, but we can do a better job of balancing the trade-offs with a big data approach that puts information and power in the hands of both citizens and utility staff. Silicon Valley does care, and is working hard to help.

Editorial prop 218 social equity price signals turf replacement water conservation water rebate programs lawn water economics