Trickle-down Economics: Pricing H2O What's the best way to price water in a drought, to ensure people get what they need without breaking the bank?
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Trickle-down Economics: Pricing H2O

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STACEY VANEK SMITH, HOST:

This summer, many parts of the world have seen extreme water shortages, including Iran, India, Australia and South Africa.

JAY FAMIGLIETTI: All over the world. We can pick spots on every continent.

CARDIFF GARCIA, HOST:

Jay Famiglietti is the director of the Global Institute for Water Security at the University of Saskatchewan. But before he moved to Canada, he spent more than a decade in California, where he helped the state deal with its six-year drought.

VANEK SMITH: And Jay says water is this funny thing. In some ways, it's a commodity, like oil. We pay for water. Businesses pay for it. They need it to operate. There's real demand for water. And when a commodity is scarce, when demand is high and supply is low, you just raise the price of the commodity. When you raise the price, people use less of it.

GARCIA: But this gets a little bit tricky with water because, obviously, people need it to survive. So you can't always just jack up the price whenever supply gets low. In some cases, communities just have to make sure that water is affordable for regular folks.

So there's this question that more and more places around the world are facing, which is how do you get people to conserve water without raising the price beyond what pretty much everyone can afford? This is THE INDICATOR from Planet Money. I'm Cardiff Garcia.

VANEK SMITH: And I'm Stacey Vanek Smith. Today on the show, water shortages. Obviously, this is a big and growing problem facing many parts of the world. And today on the show, we look at the day-to-day solutions from two people from two different parts of the California economy.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

GARCIA: When the drought in California hit in 2011, a lot of the focus and the blame went to farmers. Agriculture uses about 80 percent of the water in California.

VANEK SMITH: At the time, Jay Famiglietti had been studying satellite images for NASA, looking at water tables and aquifers. And he was brought into communities that were facing shortages to explain his findings and try to offer solutions.

FAMIGLIETTI: There's not a lot of love. Even though I was just the messenger and I'm not a water manager, it was just not a lot of love for the work that I was presenting, and for the message, which was one of the need to conserve and better manage. But that...

VANEK SMITH: Were people, like, throwing tomatoes at you and stuff? Like, what...

FAMIGLIETTI: Almost. Almost.

VANEK SMITH: Almost tomatoes.

FAMIGLIETTI: Yeah.

GARCIA: Not a huge exaggeration, as you can see in this documentary about the California drought called "Last Call At The Oasis," in which there's footage of community board meetings in California, where Jay is presenting his findings.

(SOUNDBITE OF DOCUMENTARY, "LAST CALL AT THE OASIS")

UNIDENTIFIED PERSON #1: Your arguments just don't make any sense. You have to live in the Valley. You have to understand the management of water here.

UNIDENTIFIED PERSON #2: Well, that's bad management. And you're one of the managers. I'm sorry.

VANEK SMITH: So the emotion from these farmers makes sense. I mean, less water means less livelihood for them.

CANNON MICHAEL: It was tough.

VANEK SMITH: Cannon Michael is a sixth-generation California farmer based in Los Banos, Calif. He grows tomatoes, garlic, onions, carrots, wheat. When the 2011 drought hit, he really felt it.

MICHAEL: Our supply was not cut entirely, but it was cut back dramatically. And then we had neighbors and friends in different areas nearby that had, you know, zero surface water supply.

GARCIA: Cannon says that for farmers, water is a raw material for their business. Kind of the way steel is to a car, water is to a tomato.

MICHAEL: Kind of consider it transforming water into something that people want. Ultimately, I'm returning water back in a different form to people. So I think that sometimes gets overlooked, and agriculture gets kind of label of being this heavy water use. But ultimately, for me to put a tomato on the table for somebody to enjoy, it just takes water, and it shouldn't be something that we're ashamed of.

VANEK SMITH: But there was just less water starting in 2011. So Cannon did a few things to save his business. First, he just grew way less - about a third less than in a normal year. And this was hard because leaving those fields empty meant he was growing less stuff, bringing in a lot less money. But also, it meant he needed less water.

GARCIA: Yeah. Second, Cannon switched out his crops. So he went from a lot of alfalfa, which is used for cattle feed, to crops like tomatoes, which use just a lot less water.

VANEK SMITH: He also drilled more wells to try and ensure a steady water supply and installed drip irrigation, which is very expensive to install, but which concentrates water to the roots of plants so they only use what they need.

MICHAEL: That was a, you know, multimillion-dollar investment. There's a lot of additional costs that come along with some of the conservation evens.

GARCIA: The drip irrigation involves a lot of expensive equipment that has to be replaced. And it also uses a lot of energy. So Cannon's power bills went way up.

VANEK SMITH: Cannon says now water accounts for about 20 percent of his total expenses. How much of your time is spent dealing with water issues?

MICHAEL: For me, personally, and I'm probably more active than others, I would say it's about 30 to 40 percent of my time.

VANEK SMITH: Wow.

MICHAEL: Yeah. It's quite a bit. But again, I'm also involved in our local water district board. And then I've been pulled in to speak on the issue or be on panels. And so it does take quite a bit of time, but it's an important thing, obviously, for agriculture. And I also, ultimately, feel like it's very important for the entire state, I feel.

GARCIA: Today's first water indicator, or actually indicators, are 20 percent and 40 percent. Twenty percent is the portion of Cannon's farm expenses - his money - that has to do with water. And 40 percent is the amount of his time that Cannon estimates he spends dealing with water. He says he expects both of those numbers to only get bigger.

VANEK SMITH: And those numbers are really big. But Jay Famiglietti, the water scientist, says there is a positive side to that. He said as water got scarcer and more expensive, he saw farmers get more creative and start to think about water differently.

FAMIGLIETTI: The drought in California was just so epic. And the ag industry - I saw it change. I saw it change, you know, while I was living in California. And I thought that that was a very, very positive thing.

GARCIA: But farmers were not the only ones looking at water shortages. Cities were, too. Southern California has one of the fastest growing populations in the country, and a lot of its water comes from hundreds of miles away, from Northern California and from the Colorado River.

VANEK SMITH: What is the weather like outside right now?

PAUL COOK: Hot (laughter). It's hot. For us, I think it's about 90.

VANEK SMITH: What about rainfall?

COOK: Yeah. Rainfall in the summer is pretty much nonexistent.

VANEK SMITH: Paul Cook is the general manager of Irvine Ranch Water District. It provides drinking water to about half a million people in Orange County, Calif. - cities like Tustin and Irvine. And in 2011, when the drought hit, the area was looking at shortages.

GARCIA: Paul and his team were up against a problem. How do we keep water affordable for everyone but still get people to conserve?

COOK: We call it budget-based tiered rate structure.

GARCIA: The budget-based tiered rate structure. And it works like this. Every home was allocated a certain amount of water.

COOK: And if they do stay within their means, they're billed at a very, very low rate.

VANEK SMITH: Apparently, 80 percent of residents stayed within this range and paid less than $2 for every 800 gallons of water. Eight-hundred gallons is roughly a week of water use for the average Californian.

COOK: Now if you exceed your budget, you're into the next tier, which is inefficient.

VANEK SMITH: Inefficient - when you hit this tier, you start paying about 4.75 for 800 gallons of water.

GARCIA: And if you exceed that, you're now in the wasteful category.

VANEK SMITH: They actually put that on your bill.

GARCIA: I love it.

VANEK SMITH: Shaming.

(LAUGHTER)

GARCIA: You will actually spend more than $13 per 800 gallons of water. That, by the way, is our second indicator - $13, the shameful, wasteful tier.

VANEK SMITH: Paul says once water use hits that level, the monthly water bill gets really high.

COOK: It could quickly get to 80, 90, $100. That's going to get somebody's attention. It might create a behavioral reaction from me that would cause me to go out in my yard and look for a broken sprinkler head. It might cause me to go ask my young sons why are they taking so long in the shower? It might even engender a call to the water district saying, why is my bill so high? And we have a whole department of folks who will kind of walk people through.

GARCIA: Paul says the tiered pricing seems to have worked. People cut back their water use, and the city was able to use some of the money it raised to build a water recycling plant and help educate the population on how to conserve water.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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