- Most of its costs are fixed, e.g., Met must pay DWR for 100% of its contracted water rights in the SWP — even when DWR is only delivering 40% of its “obligations.”
- Met is buying more supply from other areas (e.g., the PVID deal @ $340/af), which raises its average cost of water.
- With less quantity at higher costs, Met is forced to raise prices on the reduced amount of water it is selling (rather, rationing among its member agencies).
Metropolitan Water Pricing FAIL
Submitted by Aguanomics Blog
There have been many stories in the press about the 40-50 percent price increases that the Metropolitan Water District of Southern California (Met) is imposing on its wholesale customers (e.g., LADWP, SDCWA, West Basin Water District, Long Beach and 22 other agencies). These price increases are coming with (related) decreases in delivery quantities.
Here’s why Met is making these announcements:
Does Met have any alternative to this “system”? Yes.
First, let me point out two things that I learned while I was writing my dissertation on Met:
- Met’s rationing relies on formulas, and these formulas are subjective and flawed.
- Even worse, Met’s use of average cost pricing does NOTHING to ensure that supply and demand is equal. Instead, Met threatens member agencies with massive (100% surcharge) price penalties if they exceed their quota.
These facts, taken together, lead me to conclude that Met’s price increase/water rationing “solution” is neither equitable nor efficient.
Of course, there is another way (as outlined in Section 7.2 of my dissertation):
- Met can set aside a “human right” allocation for each member agency (say, 75 gallons/cap/day) based on its population. Met can sell this water at cost.
- Remaining water can then be sold — in an auction — to member agencies. Agencies that “need” the water more can bid more for it. Since auctions prices are likely to exceed the cost of provision, auction revenue will also cover costs.
- The results is that Met will allocate all of its water with equity AND efficiency, cover its costs, and avoid all of the wangling, complaining and lawsuits that it now faces.
Why doesn’t Met use this method (very similar to my all-in-auctions idea)? Because the “old way” is the way it has done things since the 1977 drought — when Travolta was but a young dancing fool…
Bottom Line: When times change and/or tools break, it’s time to try something different. The citizens of Southern California deserve better than this.
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