Monday, April 26, 2010

The Politics of Water Rates

In defending the highest water rate increase in the history of Houston, city officials have regularly made noises about the need to have citizens pay the full cost of delivering clean drinking water. As council member Sue Lovell said:
The core responsibility we have in this city ... is to make sure that when people turn on their faucets, we provide them with safe drinking water. It's a commodity you have to pay for. We never promised we would give it away. We've been doing that a while and we're not going to do it anymore.
I will, for now, delay commenting on the fact that the city's "core responsibility" is to protect our rights, not deliver drinking water.

From an economic perspective it certainly makes sense for the city's water rates to reflect its cost for delivering water. To do otherwise is to encourage waste and provide a subsidy to users. The city is telling us that this practice will stop. But apparently the city hasn't been entirely truthful.

The cost of producing a product or delivering a service is only a portion of the price. A business also has other costs that must be built into its price--in this context, the most significant is the cost of replacing aging equipment.

To use a simple example, Bob owns a hot dog cart. He sells 100 hot dogs a day for $3 each. All of his supplies cost him $1.50 per hot dog, so Bob is making a gross profit of $150 a day. He is able to pay his bills, enjoy an occasional treat, and save a little bit for the day when he will no longer be able to sell hot dogs. But what happens when Bob's equipment--his cart--goes off to hot dog cart heaven? He has to dip into his savings to replace his cart, or go out of business. Bob did not account for the depreciating value of his cart, nor did he build that into his price. If Bob had done so, he would have charged $3.25 per hot dog, and put aside 25 cents towards a new cart. In other words, while it costs Bob $1.50 to deliver a hot dog, his true cost of doing business is $1.75 per wiener--if he wishes to remain in business longer than his equipment lasts.

To return to the city's water system, the cost of manpower, chemicals, and operating treatment facilities might be the "cost of goods sold", but it isn't the city's only cost in regard to the water system. Replacing aging pipes and equipment must also be a part of its price. The city has been telling us that the rate increase is needed in order to update its equipment.

However, according to Brutus the city has adopted two sets of rates--one that reflects the true cost of "doing business" (including updating infrastructure) and one that reflects only "cost of goods sold". He quotes a city document:
After further review, the administration recommended adopting the Best Practices rates proposed to the committee with the exception of Multi- Family Residential and Commercial customers. Those rates would be set to equal 100% of cost of service. [emphasis added by Brutus]
In other words, single-family customers will pay a higher rate than multi-family and commercial customers. Single-family customers will foot the bill for infrastructure updates, while other customers will only pay for the "cost of goods sold". This is not what city officials have been telling us.

Brutus asserts that this deal was brokered by the politically powerful Houston Apartment Association (HAA), a claim that is very plausible.
To further address the rate burden on multi-family residences, the administration is working with the Houston Apartment Association to establish a rebate program to encourage water conservation in apartment complexes that currently use much higher than average amounts of water. The planned program would provide up to $14 million in rebates each year for two years to complexes that meet the to be determined qualifications. [emphasis added by Brutus]
In short, while city officials are telling us one thing, they are doing something quite different. And, whether or not HAA actually lobbied for lower rates and rebates, the fact remains that this politically connected group is receiving favorable treatment. Single-family customers will be forced to subsidize other customers.

Such political favoritism is the inevitable result when government expands beyond its legitimate purpose--the protection of individual rights. When government provides water, trash collection, libraries, parks, etc. political considerations will ultimately enter the discussion, and usually behind closed doors. Groups such as HAA will use their political power to influence city officials; city officials will use their coercive power to extract a pound of flesh from the unfortunate victims.

Many would argue that the solution is for city council to show some integrity and do what they claim they are doing. While this would certainly be better than the hypocrisy they are currently exhibiting, it fails to address the fundamental issue: Water and sanitation services are not a proper function of government. If we want to end the politics of water rates, then we must get government out of the water business.


Mr. Moderate said...

So, how will a private water business deliver water and sewer any more effectively than the City? The history of private systems in the area is far worse than any municipality or MUD, with customers not getting decent water, equipment failures going on for years, etc.

You've advocated for competition in the utilities, but haven't described a means to deliver water or power without duplicating the thousands of miles of pipes and power lines.

An additional issue you haven't discussed is the source for water. Ground water sources are no longer useful due to surface subsidence, so surface water is the only real source. Absent the power of government to condemn land to build storage facilities, there's no real way for private entities to source water. The existing private utility companies buy water from government sources.

Brian Phillips said...

Your questions are premised on the belief that the only way to deliver water and other utilities is through the means currently used. But when men are free, they come up with solutions that others don't see. When men are free to act on their own judgment and profit when they can offer a superior value, solutions that I can't even imagine are offered on the market.

I wouldn't even pretend to have all of the answers, but I don't need to. I have no plans to go into the water or utility business.

History provides an abundance of evidence that freedom is practical. An objective philosophy proves that it is moral.

As far as water sources, my article in the current issue of The Objective Standard addresses this issue.