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The paradoxes of water: monopoly

As scarcity puts competing stresses on utilities, water conservation erodes companies’ revenues, say James Workman and Montgomery Simus. To increase their bottom line and to thrive, providers are forced to reward waste.

Let us introduce you to our friend – a troubled professional – who manages conservation programmes at your local urban water utility.

Using her name would jeopardise her career, but she’s hardly alone in her confusion and the predicament that caused it. In fact, given the approximately 53,000 water utilities in the United States alone, we estimate that at least 100,000 people in the country suffer like our friend. Her symptoms – a nervous twitch, sweaty palms and rolling eyes – worsen as water scarcity puts competing stresses on her utility’s ageing system.

The roots of her trouble are simple. Nearly a decade ago she was hired, given a small staff, budget and discretionary funds to promote ambitious conservation programmes and rebates throughout the service area of her water utility. It was a job to match her ideals, a rare opportunity to be paid to do what she loves. But there was, alas, a deep and hidden problem.

As she rolled out her conservation initiatives, it soon became clear that the more she succeeded at a noble cause while saving nature, the more she would wreak havoc on her organisation’s financial foundation, destroy the revenue base of operations, and force herself and her team onto the streets.

Conversely, if she utterly failed at her job, and proved hopelessly incompetent at the task defined, everyone won, and loved her. She would boost water sales, generate high returns on little to no incremental investment, and likely land herself a series of promotions, salary hikes, a bigger team and longer vacations until she ran the entire organisation.

The only problem with that route was that she would have to sacrifice her soul and sense of pride, while driving endangered species to extinction.

What’s forcing this modern division? It’s not a matter of government-operated versus private-sector water utilities. That’s not the argument. Whether investors or the public sector operate a water district, it remains a natural economic monopoly. That monopoly needs more money each year just to operate – to pay its staff, invest in repairs, deploy its public-relations programmes, maintain the system, cover employee health-care expenses and fund pensions.  This increase in operating funds depends on increased revenues and higher sales; thus the utility provider is most interested in escalating water use by all end-users – residential, commercial, industrial or municipal.

In theory, a monopoly should be able to increase revenues to match increased operating costs by selling ever-less water at ever-higher rates. In reality, that’s highly unpopular with users. Utilities are watched carefully by officials and customers alike, and people rarely demand the right to pay more for less of something they depend on in every aspect of their lives -- especially something many believe they should receive for free.

Hence the fine monopolistic line our friend must walk and, in recent years, the tightrope beneath her has begun to fray. The current recession makes families and firms consume less water. That’s wonderful for nature, but horrible for her utility’s bottom line. She is simultaneously pleased and tormented. Her job is to lock in more efficiency, but her boss offers veiled threats if she does. Unless our friend backs off on conservation, her position, team and budget risk being eliminated first in austerity measures. If she saves more water, her position in her organisation falls in proportion, if not at an even faster rate. Then her skills become worthless in the marketplace. Who hires someone good at eroding the bottom line?

This is the Third Paradox of Water: conserving water destroys revenues; a thriving utility must reward waste.

Frugal utilities have less room to negotiate. Those that encourage water saving today must punish their customers tomorrow with higher rates. These incongruities remain true at the household level, the building level, the neighborhood, the municipal district and the river. Perversely, the existence of a water monopoly means that all people involved in it – from the person flushing the toilet to the government Water Board setting targets for water allocations – are left with no choice, no competition and no incentives to conserve.

Indeed, the Third Paradox ensures that the most frugal, responsive and equitable users and managers in a vertically integrated water monopoly can only succeed through subterfuge or martyrdom. As this paradox undercuts performance and customer relations, it is known throughout the water industry as “the death spiral”.  We must destroy a monopoly’s water in order to save the utility.

The converse is that we unlock the monopoly in order to save both water and the utility. That resolution to the Three Paradoxes of Water comes in our next and final contribution.

NEXT: Resolving water’s paradoxes

James G Workman and Montgomery F Simus are co-authors of the forthcoming book H2Ownership vs The Three Paradoxes of Water and co-founders of SmartMarkets LLC, an online, utility-based system that they say could unleash a widespread, egalitarian race to conserve water and energy in cities worldwide. Workman is also the author of Heart of Dryness: How the Last Bushmen Can Help Us Endure the Coming Age of Permanent Drought, excerpted by chinadialogue in 2010. The authors can be reached at [email protected] and [email protected].

Homepage image from 3DDock

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anumakonda

饮用水是一个高成本的商品

矿泉水在发展中国家几乎已占主导地位。而饮用水也成了一种高成本商品。

Dr.A.Jagadeesh Nellore(AP),India
E-mail: [email protected]

Drinking Water is a costly commodity

With Mineral water pervading even in Developing countries.drinking water has become a costly commodity.

Dr.A.Jagadeesh Nellore(AP),India
E-mail: [email protected]

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gaidee

节约之痛:经济学

对于节约这件事情的研究,我们还不是很多。这篇文章为我们提供了一个楷模,那就是,美国人说的不总是对的,至少是理论上如此。美国,最为全球最先进,也是最先开展public utility管制的国家,各州以及各县的管制情况应该是千差万别,所以呢,中国读者不用为美国这么多的自来水公司感到吃惊。

自来水行业呢,实际上是垄断性比较小的行业,绝大多数都是地区性质的小企业,这也难怪美国那么多的水公司。相反,电力行业的集中度就很高,目前在美国大约有3600多个电力公司。所以,本文上来就说自来水公司这种自然垄断实际上是不很合适。另外,按照美国著名的托梅因教授(Professor Joseph Tomain)的意见,垄断最主要的特征是随着规模的扩大,或者营业额的提高,成本会自然下降,这实际上是对消费者有好处的。当然了,前提是,政府要“管得住”,公用事业公司的财务要透明,要接受监督,要民主参与才行。

关于这位女士遇到的问题,我在想象中也遇到过。我认为实际上这不是问题的“问题”。因为,对水的需求侧管理实际上呢,在加州以及很多地方开展的很多,成效也很大。关键在于市政当局的参与,而不是像这位女士这样的,孤军奋战。作为公用事业单位,首先部位盈利为主要目的,主要目的在于提供公众服务,也就是纳税人的钱为自己服务,为了吸引投资人,一般也会为这样的业务提供一个相对有吸引力的投资回报率,在中国一般是年回报率4-5%左右。别忘了,这些所有的投资以及回报最主要的目的是为公众服务。那么,如果用水量持续下降,那么为了取得必须的、受到法律保护的投资回报,就需要提高水价,以便实现财务平衡或者取得预设之盈利目标。这在电力行业很普遍,不足为奇。或者说到底,就需要把水公司的盈利部分或者全部和营业额脱钩,英语叫做decoupling。

回到这位女士的问题,很遗憾她是个好人,但是好人并不一定就做得了好事,因为这不是她的个人努力就能实现的事情。简单来说,这说明这个女士的公司没有一个明确的营业战略,特别是从节水的角度来说。这也很可能说明,当地政府对节水还停留在表面状态,一点也没有深入下去, 和我们中国的情况类似。如何做呢,我可以在下一篇中解释。

The pain of saving: Economics

We have done very little study on saving. This article has provided an example that what Americans say is not always right, at least in theory. The US, the most advanced country on earth, which is also the ealiest to implement public utility regulations. There must be much difference in regulations among states and counties given various different situations. Therefore, Chinese readers shouldn't be surprised that there are so many water companies in the US.

In fact there is relatively low level of monopoly in water industry. Most of water utilities are small regional firms. So no wonder there are so many water companies in the US. On the contrary, the level of concentration is high in electricity industry. At present, there are over 3600 electricity companies. Therefore, it is not appropriate that the article started by saying that water companies have natural monopoly. In addition, accoding to the renowned Aemrican Prof. Joseph Tomain, the most important nature of monopoly is that the costs would decrease with the expansion of the scale or the increase of the revenue, which would benefit comsumers. Of course, the assumption is that the government is able to "control" and the untilitles's financials have to be transparent and are monitored by public.

I imagined that problems encountered by this lady mentioned in the article. I don't think these problems are actual issues. Because the water demand management is actually implemented in many places including California with remarkable achievements. The key to success is to involve authourities, not to fight alone like the way that lady did. The utitlies as a company is focused on profit, providing a public service, ie, serve the taxpayers with their own money. In order to attract investors, a reasonable investment return has to be in place. In China, the annual return is about 4-5%. Don't forget, the overriding purpose of the investment is provide a public service. If the water consumption is declining, it's necessary to increase water rates so as to reaslise the profit target or financial balance in order to achieve the necessary investment returns set out by law. It is the common place within elelctricity industry. The bottum line is that the profit of a water company should be partially or entirely decoupled with the revenue.

Go back to the lady's problems. She is a good person. Unfortunately the fact is that being a good person doesn't mean that good deed can get done as the deed can not be accompolished by her indivivual effort only. Put it plainly, her company lacks a clear business strategy, especially from the water saving point of view. It is possible that the local government's water saving startegy is only at the superfacial level without diving itself deep down the issue, similar to situations in China.

I will explain how to tackle this next.