ASU Professor Michael Hanemann, an expert in environmental and resource economics, explores the past, present and future of water, and how climate change will impact water supply, distribution and costs in the U.S. and around the world.
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Question: Water is one of Earth’s most valuable resources, but is inexpensive for consumers. Why is that?
Answer: Water is essential for life. Cable TV, as far as I know, is not essential for life. Yet many Americans choose to spend more money each month for their cable TV than for water in their homes.
A gallon of gas costs a bit over $2; a gallon of milk costs about $3; a gallon of orange juice, about $3.50. And, you have to make a trip from your home to get them. Water comes directly into your home, and you pay only 2 or 3 cents for a gallon.
In Phoenix, we live in a desert city. We rely on the Colorado River for a significant part of our water supply. For the last 16 years, the Colorado River has experienced the worst prolonged drought in over a century. Yet, Phoenix has some of the lowest residential water bills in the country.
Around the world, water is seen as something that should not be treated as a commodity. Instead, people see water as a human right, something that is provided but that should not have to be paid for.
Q: How did that viewpoint come about?
A: In 1821, a water activist in London said, “Water must be considered one of the elements necessary to existence, the same as light and air; therefore, its supply to a great city ought not to be the subject of [commercial] trade.”
The pricing of water is a political flashpoint.
In Tucson, forty years ago, the City Council learned this the hard way. Water revenues were not keeping up with costs, and the water system was running out of capacity to meet peak summer demand. Water rates were raised to finance the needed improvements. Overnight, water bills skyrocketed.
A recall election was called and the City Council majority which had voted for the rate increase was booted out. As it happens, rates stayed up anyway, but the memory lingers and “Remember the Recall” remains a potent slogan.
Q: How have the economics of supplying water changed over time?
A: The economics ought to be simple. Water is not a man-made commodity. It falls from the sky.
But, in fact, the economics of water is surprisingly complex. From an economic perspective, water is a difficult commodity. It is free and yet costly. It is simultaneously a private good and a public good. It helped cities flourish financially but now it is their financial burden.
Water comes from nature at no charge. Three quarters of the earth’s surface is water. But, people don’t always live where water is located – in Phoenix, for example. They need water year round, not just when it rains. And the quality has to be right.
The cost of water is the cost of making it available at the right time, the right location, and the right quality — it is the cost of collecting, storing, transporting and treating the water.
That is why the cost of water in Phoenix is low: The infrastructure is new and doesn’t yet need much repair. The water itself is essentially free. In Boston, Chicago or Detroit, the water is abundant, but the water infrastructure is old and expensive to maintain. Therefore, water bills are high.
The cost of water is overwhelmingly a capital cost, much more so than electricity or gas or telephones. If you supply a bit more or a bit less water, the total cost hardly changes. Operating costs account for more than half the total cost of electricity supply, one third the total cost of for natural gas, but only about one tenth of the cost for an urban water network.
Q: Maintaining water systems is a complicated process that will only get more complicated due to rising temperatures. How might climate change affect costs?
A: In many municipal systems, there is intense political pressure to keep water rates low. The result is that, while rates cover operating costs, they don’t fully cover the cost of maintaining and replacing the water infrastructure.
The American Waterworks Association recommends 1 percent of pipe networks be replaced each year. That is equivalent to saying a pipe should be replaced after 100 years. But in some municipalities, to keep water rates down, the investment in maintenance is equivalent to replacing a pipe only after 1,000 years.
This cannot continue. Many of the current water pipes were put in soon after World War II and they are reaching the end of their working lives. Over the next twenty years, the cost to replace urban pipe networks may reach about a trillion dollars nationwide. Water agencies will have to spend three or four times as much on replacing pipes as they do today. If anything, this might lower rather than raise property values.
This is the cost to replace the network that we have today. It does not include the cost to meet new drinking water quality standards required for ever more exotic contaminants showing up in our water.
Then, there is climate change. With climate change, droughts are likely to occur more frequently in many areas. Because of the cost structure, if there’s a drought and the utility delivers less water, its costs hardly go down. It will have to charge more per gallon supplied. Rates should go up, not down, with drought.
Additionally, in Phoenix water lines are usually buried one to two feet below the ground. But the ground surface is getting warmer, and this is heating up the water pipes. At some point the pipes will have to be dug up and buried deeper. This isn’t rocket science — but it is expensive.
For water supply, there is a schizoid aspect to climate change. The warmer air puts more moisture into the atmosphere, which translates into more intense precipitation. But that can be combined with greater dryness at other times of the year. The result is a less reliable surface water supply.
A solution is to have more storage capacity. But storage is extremely costly. We will end up having to spend more money to get the same supply reliability that we used to have in the past.
This is the larger reality that we will all face: Maintaining the water supply that we have now, and that we take for granted, is going to become far more expensive. Viewing water as a commodity that one pays hardly anything for is just not going to work in the future.