Monday, June 4, 2012

Water as a mispriced asset

The American Society of Civil Engineers (ASCE) provides our nation with a periodic infrastructure report card.  The report provides a comprehensive overview of our declining public infrastructure.  One area of concern is drinking water - - a 2009 infrastructure fact sheet provides a glimpse of the what associated with the problem and recommendation of how the problem might be solved.

The opening paragraph of the fact sheet for drinking water stakes out the ground for the problem - -

"The nation's drinking water systems face staggering public investment needs over the next 20 years.  Although America spends billions on infrastructure each year, drinking water systems face an annual shortfall of at least $11 billion in funding needed to replace aging facilities that are near the end of their useful life and to comply with existing and future federal water requirements.  The shortfall does not account for any growth in demand for drinking water over the next 20 years."

The document provides numerous confusing estimates on the dollars actually needed.  For this analyze, I have elected to utilize ASCE's estimated 5-year funding for water and wastewater and assumed the total requirement for drinking water to be as follows:

Total Investment Needs - $255 billion
Estimated Spending - $146.4 billion
Projected Shortfall - $108.6 billion

Assume roughly $100 billion a year - - a trillion dollars over 10-years.  In some form or fashion, what is needed in another $100 billion per year.  What if we just charge users (versus taxing Warren Buffett)?  The price of water moves closer to its "true value" and full-cost considerations and farther away from free (and the good nature of Mr. Buffett).

The ASCE document also provides a 2000 estimate regarding usage - - 43 billion gallons per day of water is consumed in the United States (on the residential side of the ledger sheet).  Approximately 16,000 billion gallons of water per year for watering the lawn, showering, and washing the dishes.

Calculating the average unit unit cost of our drinking water problem you arrive at a value of $0.0063 per gallon.  Granted that averages are misleading and the unequal geographical distribution of the problem should be a concern - - but let's look at the $0.0063 per gallon per year in the context of Texas water rates.  The Texas Municipal League has an online database of 659 cities.  The average residential rate of consumption is 7,018 gallons per month.  The average water bill for 5,000 gallons is $27.45.  A family in Texas would have an annual average water bill of $462.34 for 84,216 gallons (roughly $1.25 per day - - most people spend twice that per day on their broadband activities).  The burden of an additional $0.0063 per gallon would yield an additional annual cost of $530.56 (your water bill would be $2.72 per day - - still less than the trip to Starbucks).  The ASCE document is correct with the term "staggering" - - but only partially so.

This type of increase would probably generate a revolt.  Residents act as if increasing the water bill bill from $27 a month to $31 a month will force them to choose between their hear medicine and their water.  Yet they would think nothing of dropping the extra $4 for a half-liter of water at 7-11.  The trip to 7-11 is an important point.  In the U.S., we spend $21 billion a year on bottled water (like for-profit schools and private military contractors - - this is a form of privatization of the public sphere).  We spend only $29 billion maintaining our entire water system - - water systems, the pipes, treatment plants, and pumps.   

The Texas Rangers offer fans two alternatives at their home baseball games  - - free water from the fountain or $3.00 water from the concession stand.  On the way home from the ballgame, you can stop for water at the convenience store - - you can get a half-liter of bottled water for 99 cents.  This is 17 ounces for a dollar.  Be sure and take the bottle home with you.  Then fill up the empty bottle with tap water.  You could refill it every day with your tap water until 2017 before you'd spent 99 cents.  Even the cheapest water at Costco is 2,000 times more expensive than the water we've got on tap at home.

We have arrived at a point in our economic history where $0.0063 is termed "staggering" and 2,000 times greater than free is triumph of free-market capitalism.  The ultimate source of this paradox has many paths - - but one of them is the collective public mispricing of water as an asset.  Anytime you misprice an asset, people will be looking for arbitrage opportunities.  When you price water basically for free and you can turn around and sell the same basic stuff for multiplies of 2,000 - - you are just asking for arbitrageurs  like Aquafina and Dassani to step in with almost risk-free investments.

If you truly want to deal with the "staggering" nature of our water problems - - deal first with the water pricing issues.  In the case of bottled water, deal with the expansion of the water market, and of market values.  Public water utilities need to get much better at understanding the reach of markets, and market-oriented thinking, into aspects of life traditionally governed by nonmarket norms.  We can learn a get deal from arbitrage prising theory and the bottle water industry.  They understand investment theory and what the public is willing to pay for a public asset.

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