How to Meet Waukesha’s Water Needs

Water is increasingly scarce in America.  A recent study by the Cooperative Institute for Research in Environmental Science offers a detailed description of the nation’s water shortage problems, with the outlook for 20 states being described as especially serious.

In the past, water supplies seemed limitless for most of the country. If a community needed more water, arrangements were made to simply pipe in greater supply. Given the increasing shortages, this practice can no longer dominate water policy; we must shift increasingly to ways to reduce our demand for water.

If water were produced and distributed in a market (the way most of our goods and services are), its price would simply rise as it became more scarce, increasing the incentive to conserve. The price of water, however, is not determined by competition in markets, but rather by regulation of public water utilities.  These regulations typically keep the price of water just high enough to pay for the infrastructure needed to supply it.  This is typically called “cost-recovery pricing,” which keeps prices too low and encourages overuse.

While the underpricing of water is a national problem, we have an opportunity locally to show the way forward. The City of Waukesha is seeking approval to get more water the old-fashioned way: construct a pipeline to divert millions of gallons per day from Lake Michigan.  They should first implement more aggressive pricing strategies — with true market prices — to make sure they really need that much water.

This application by Waukesha will be precedent-setting: its the first diversion application under the Great Lakes Compact (an agreement among the eight states bordering the lakes plus the provinces of Ontario and Quebec to protect the quality and quantity of this world class resource).  A pre-requisite for approval is a demonstration of a real “need” for the water. In a market system like ours, need is determined by willingness to pay proper prices that reflect both current and future scarcity.

In March 2011, Waukesha developed a Water Utility Conservation Report that outlined their efforts at conserving water:  different prices for different water uses, efforts to encourage the use of low-flow appliances, lawn irrigation restrictions, and public service announcements. In spite of some initially promising results from their pricing experiments, their more recent conservation efforts are voluntary in nature.

Given the precedent that the proposed diversion would set, the Wisconsin DNR and the Great Lakes states should require professional estimates of quantity reductions achievable through various pricing strategies. They should not rely on demonstrations of voluntary programs that could be abandoned once a diversion pipeline is built. There are many nationally prominent economists with expertise in water economics who could assist with such estimates, among them the authors of this paper and references they cite.

Unlike voluntary measures, price strategies create an on-going incentive for all users to treat water as the increasingly scarce resource that it is. When faced with higher water prices, consumers substantially reduce the quantity of water they buy. For example, residents respond by taking shorter showers, washing cars less often, and watering lawns less frequently. Those re-modeling or building new homes are encouraged by higher prices to invest in more water-conserving equipment and construction, such as “lo-flo” shower heads and water-saving appliances, to build on smaller lots, and to forego water-intensive features such as hot tubs and large thirsty lawns. With efficient pricing, home builders and home sellers would advertise “water efficient” homes just as they promote “energy efficient” homes today. To be acceptable, any water diversion application should demonstrate that water will be allocated according to the proven forces of the price system.

The pricing of water is often hard to sell politically because some of its uses are essential while others are more discretionary. Recognizing this, economists often recommend “Increasing Block Pricing (IBP).”  Under IBP, water is purchased in blocks, and each succeeding block has a higher price. The first low-priced block is a quantity that approximates essential daily use. Beyond that first quantity, additional higher-priced blocks approximate usage levels that are regarded as more optional. Waukesha has been experimenting with IBP, and their early results have prompted them to reduce their estimated “need” from 10.5  to 10.1 million gallons per day.

By design, IBP enables the city to raise the price on discretionary uses while keeping it low for essential uses.  During a drought, the city could achieve demand reductions by raising the price on the higher-usage blocks without raising the price on the lower-usage blocks. Further, by increasing the number of usage blocks, IBP can reduce the capacity requirements of the system and may even permit the municipality to avoid the enormous expense for Waukesha taxpayers of the  pipeline to Lake Michigan. In that case, Waukesha’s “needs” might be met by more innovative local solutions such as those suggested by Dean David Garman of the UWM School of Freshwater Sciences. As Garman notes, Singapore turned its water scarcity into a global strength. At a time when this metro area is pushing to brand itself as a water-technology hub, Waukesha might provide a way to showcase innovative ways to meet a community’s water needs.

William L. Holahan is Professor Emeritus of Economics at UWM, and Charles O. Kroncke is retired Dean of the UWM College of Business