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Monday, September 08, 2008

Colorado Springs Utilities to Raise Water Rates Due to Revenue Shortfall Caused by Conservation-

Does this make any sense? For several years, Colorado Springs Utilities has been urging everybody to conserve water due to drought conditions. In addition to a public awareness campaign about water conservation, city council actually made it illegal to water wantonly. As an incentive to get people to conserve water, Colorado Springs Utilities not only espoused the environmental benefits, but also they appealed to our monetary values: conserving water will save you money!! The good residents of Colorado Springs did what they should have done - they cut back their water usage.

The watering restrictions have for the most part been lifted now, but people have gotten into the habit of conserving water. Good for them, right? Wrong. Colorado Springs Utilities, in their infinite backwardness, announced they plan to increase water rates due to falling demand. The decrease in water consumption has hurt their budget because they are no longer getting the same water revenue. Here lies the problem of monopoly. Because Colorado Springs Utilities has no competitors, indeed because it is a government-run enterprise and therefore doesn't have to worry about good business practice like a private firm would, it can simply charge more to make up for falling revenues. Never mind changing business practice to meet the challenge of today's world, never mind having the foresight to see this coming. The good people of Colorado Springs did what they were supposed to do, and instead of being rewarded for their good behavior, they see a rate increase. Our residents are being punished for doing the right thing. And what recourse do they have? Can they simply switch to Colorado Springs Utilities' competitor? Can they cut back their water usage even more to make up for the rate increase? We've already seen what happens if we use that tactic. No, the only option for the residents of Colorado Springs is to accept the rate increase or risk having their utilities turned off.

To fix this, I recommend we pay close attention to city council. There are some council members like Jerry Heimlicher and Scott Hente who are vehemently opposed to this increase as well they should be. City council, to their credit, rejected the idea of a rate increase, but they haven't voted it down yet. Instead they told Colorado Springs Utilities to cut their budget in every possible first, them come back and ask for a rate hike. But pay attention. If city council approves this measure, take note of those who voted in favor of it and do not re-elect them!

Monopoly power is certainly involved in the issue, but it seems to me there are some other elements to consider as part of the larger context.

One is that while there is monopoly economic power, the "decision-maker" on the supply side is also a government entity. The decisions of the government entity are unlikely to be the decisions of a profit-maximizing business, whether that business has monopoly power or not.

The second idea to consider is what would we suggest, based upon economic efficiency, should be the response to a drought? Because a drought seems to imply a decrease in the supply of water, I think the response we would want to see (on efficiency grounds) would be an increase in price. Such an increase in price was not chosen by the government water monopoly at the time of the drought. I wonder if the "need" to increase price now is the result of not having chosen during the drought the response that would have been consistent with efficiency?
I wonder if the increase in rates is not a direct result of urban economics and the deals made for new neighborhoods with little or no infrastructure/new water hookup costs to the developer. My first guess is that "city palnners" and politicans have no concept of economics and seek re-election instead of sound economic policies.
There are two ways to reduce water usage: raise the price thus reducing quantity demanded, or reduce demand. The utility company opted for the second approach by encouraging people to switch away from water and become less dependent on it. Their strategy worked.

Now, as they attempt to raise the price, it is not because water usage needs to be reduced further, but rather it's because they simply need more money.

The first attempt was consistent with efficiency. The second attempt is consistent with the bone-headedness that results when government masquerades as business.
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