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03/02/92

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Money talks to water wasters, economist says

STANFORD -- After five years of drought in California, Mary sneaks out after dark to wash her car; Joe hides his rose garden with a high fence.

If they lived in Santa Barbara, however, Mary might shorten her daily showers so she could wash her car, and Joe might replace his water- loving roses with native rose mallows.

The reason: Santa Barbara's water utility uses economic self- interest, rather than voluntary conservation, to reduce use. The utility's per-unit price is cheapest for a household's subsistence level of water and multiplies for additional units.

As a result, Santa Barbara prices more closely reflect the actual costs of supplying water than do those of most Western water utilities, says Stanford University economist Frank Wolak.

Voluntary conservation programs, the most common strategy of local utilities during a drought, rely on "social ostracism and conservation believers," Wolak said. Such programs have succeeded in crisis situations but may not work as well as price changes in solving the West's long-term water shortage, he said.

"A sustained period of higher prices will provide the necessary signals to households to invest in water-saving capital equipment," Wolak said. "Conservation campaigns, because they are associated with droughts, encourage more temporary conservation measures, which may be abandoned once the emergency drought situation ends."

Consumers lose interest as the crisis passes and as more people figure out that "if the other guy saves water, I don't have to, and I reap the benefits," he said.

Policymakers sometimes argue that consumers are not responsive to price because water costs are a small portion of a household's budget.

"That's true in those cases where the base price is very small," Wolak said, "but if the base price is large or the price increase is large, consumers should become price responsive."

Most water utilities charge a set rate per unit of water or a flat rate per address, regardless of water usage. A few even discount the unit price for high-volume users. Wolak foresees the time when water, like electricity in many places, will cost substantially more during peak- use times to cover the high energy and capital costs of providing the extra capacity.

"Water use rises in the hot summer months, so prices for water should be higher in the summer than in the winter," he said.

In the Los Angeles basin, the largest water wholesaler, the Metropolitan Water District, already charges local water companies for the added costs of deliveries in peak-demand months. So far, however, the local utilities have not passed on those costs, which means that consumers who aren't intensive peak users subsidize those who are, Wolak said.

Wolak foresees the courts establishing a more open market for water in which California agriculture, which pays $2 to $20 per acre-foot (300,000 gallons), could sell to urban users, who pay more than $200 per acre-foot.

"The technology for this type of market exists in most of California," he said. "Although additional water transportation facilities may need to be constructed, the major barriers are legal ones."

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