Search

A significant alternative to physical rationing of water to achieve conservation is provided by the price system. To act like profit maximizing firms, municipal water utilities (MWD's) should price their water so as to earn the opportunity cost of capital (the market rate of return) on the assets. The actual internal rate of return is calculated for a sample of 30 California MWD's for a 12-year period. For the 26 MWD's with a rate of return less than 10%, iterative simulations are run with increases in the MWD's average price to achieve the target rate of return. The magnitude of water conservation using the rate of return rule is reported for three alternative price elasticities of demand. The new implicit prices necessary to achieve the target rate of return are shown to be less than the cost of the cheapest new surface supply.

This report places the engineering estimates of water conservation made by Sonnen and Evenson into the supply demand form used by most economists. Clarification is made concerning evaluation of conservation elasticities.

The rate of return on invested capital can be used as a guide to resource allocation by municipal water departments (MWD's) in the same way it is used in the private sector. To achieve economic efficiency, the target rate of return for MWD's should be the market rate of return as an approximation to the opportunity cost of capital. The actual internal rate of return for a sample of 30 California MWD's for the period 1970-1982 is calculated for this study. The operating internal rate of return varies across the sample MWD's from less than 2 percent to 14 percent. If 10 percent is taken as the opportunity cost of capital, 25 of the 30 MWD's were inefficient; i.e., earned less than 10 percent. Half the sample earned less than 5 percent. An examination of potential causes of low rates of return shows that low average water prices are the primary reason for the low rates of return. For efficient operation, MWD's should set a target rate of return equal to the opportunity cost of capital and adjust water prices so as to achieve that target.

The property rights theory of the firm is evaluated by comparing the cost structures of a sample of water agencies under two alternative modes of ownership - public and investor owned. On the basis of the sample, investor owned water agencies appear to have lower cost structures.

In the last few years water conservation measures have included increased media campaigns on how to use water more productively; the installation of such water-saving devices as flow restrictors; the introduction of new water-saving technology (drip irrigation); and the provision of financial incentives by changing rate structures, raising prices, or establishing surcharges when water use exceeds some designated amount.* For many agencies several conservation measures or campaigns are established and implemented simultaneously, making it very difficult to separate the effects of one conservation measure from another. To aid in the evaluation of such conservation measures, this paper reports on the water conservation efforts of a single campaignthe installation of conservation kits in a residential neighborhood in Southern California. By mid-1977 the intensity of the drought in Southern California was at its peak. The city of Oxnard, Calif., decided to conduct an active conservation effort by distributing a water conservation kit free of charge to a large, single geographic area. Coordinated by a student intern from the University of California at Santa Barbara and two CETA employees, distribution of an estimated 3200 water conservation kits was accomplished in a large residential neighborhood during August 1977. The water conservation kits contained three separate components: a water guard or dam to reduce the quantity of water flushed in the toilet; a plastic shower head flow restrictor; and a packet of vegetable dye tablets to detect leaks from toilet storage tanks. The Oxnard water conservation team returned one month after distributing the water kits and interviewed 637 households that received the water conservation kit. The socioeconomic characteristics of the households that used and installed the water conservation kits were determined, as was the impact of these kits on water savings, including estimates of the cost effectiveness of this specific conservation effort.

One of the many problems facing local water agencies is forecasting water use, both short term and long term. Long-term forecasts generally use information consisting of futurepopulation (employment) projections and future-per-capita (employee) use estimates, whereas short-term forecasts of additional water consumption are often based on density studies. Density studies involve the computation of average water consu ption for different housing densities or for different residential zoning classes. As long as the general underlying demographic, economic, and technological conditions remain constant, density studies provide a useful guide for future short-term water use as development takes place within the water district. These studies are useful to the local water agencies. Water managers can tell at a glance the average expected consumption per unit of time of any proposed residential development. In addition, the availability of such information allows the water agency to provide local planning authorities with water-use data and potentially improves the flow of information available for various impact statements. The studies can also provide an input to project longerterm water requirements based on the various densities provided in the local general plan. Thus, there is wide applicability of such studies.

The flexibility of the Weibull distribution and the information gain made possible by its use to deal with the problem of uncertainty in benefit-cost analysis are illustrated by application to a benefit-cost study of water importation for Santa Barbara County, California. The Weibull distribution requires few estimated variables and a minimum of information, is relatively simple to work with mathematically, and can approximate the whole variety of distributions which may characterize input variables in benefit-cost analysis. Use of the Weibull distribution provides the standard deviation and central tendency measures of the output (net benefit, benefit-cost ratio, etc.) distribution in benefit-cost analysis as well as the probability of outcomes indicating a project is not economically feasible. The application reported shows that the use of the Weibull distribution is superior to the usual point estimates and sensitivity tests in benefit-cost analysis.

A cross section demand function for water is estimated using individual residential dwelling units as the sample. Both assessed value of property and number of persons per dwelling are significant determinates of the quantity of water demanded consistent with the theoretical development. Moreover, it is concluded that there are economies of scale of water use with respect to household size.