Some fear that North Carolina’s growth is outpacing its water supply. That fear has led to discussions about the best way for the state to approach water policy in the years ahead. Dr. Michael Sanera, John Locke Foundation director of research and local government studies, discussed the issue with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Martinez: Apparently, there has been enough of a concern over the growing population and whether or not we’ll have enough water in this state that a bunch of folks got together. Tell us about that.
Sanera: This is a periodic activity because the bureaucracy is always trying to drum up some scare tactics in order to increase their power and increase their funding. So, the droughts a couple years ago — and now we’re sort of in and out of a drought situation — is creating this crisis, panic situation. And government has always taken advantage of that to increase power, increase control, and so forth. So there is a lot of talk about water, and water, like every other resource, is scarce. And that’s the whole point of economics — how does the economic system allocate scarce resources? That’s the starting point of all economic thinking. The market, in general, does that for a myriad of goods and services — shoes, pencils, your gasoline, automobiles, food, etc.
Martinez: And some people say it will do that for water as well.
Sanera: Absolutely.
Martinez: And that’s your view.
Sanera: Absolutely. The problem is we can’t have a true market in water as long as government owns all the water.
Martinez: Let’s get into the two schools of thought, Michael, because really it seems to be divided up. There are some people who believe in the free market, what you’re talking about, and prices will essentially control the scarcity. Other people say, no, you’ve got to regulate this. Briefly tell us the argument of each of those two schools of thought. Let’s start with government regulation.
Sanera: Well, the idea here is that you have government pricing of water. And so what I’d like to compare it to is government pricing of water, or political pricing of water, and a simulated market. We can’t have an exact market situation because the water is owned by government. So that’s the two ways I’d like to think about it.
And on the side of political pricing of water, we have a lot of this — population is going to increase, so we need more water. We have droughts; we need to figure out what to do about water. And so we’re running out of water, or we have water problems, primarily because political pricing of water has commonly priced it too low.
Martinez: Now that’s going to get people’s attention. “What! He’s saying that my water is priced too low?” Why is it priced too low?
Sanera: Well, because politicians like to be re-elected. And water users are also voters. So a politician has trouble pricing water at a higher rate because voters don’t like it and they’ll vote them out of office. That’s what I mean by political pricing of water.
Martinez: What would happen if the price of water increased?
Sanera: We would have better use of water. Hopefully, people would figure out ways of watering their lawns more efficiently, of taking showers and using their water indoors and outdoors more efficiently. And that has happened in some places. But there’s also a problem of political pricing of water — of pricing it too high. So we have environmental groups, we have all these doomsayers wanting to force people to conserve by pricing it too high.
Now on the market side, what we want to do is to simulate the market by basing water prices on supply and demand. Demand is going to increase as the population increases. But we want to work on the supply side of making sure that we have more supply of water. The problem there is that the amount of water — the supply — is not always in the place where we need it. So we have lots of water flowing into the ocean, but getting that water into the cities where we need it is a difficult problem. So that is why we need to price water based on supply. During a drought situation, we should have a mechanism so that the price would go up and people would conserve. Just [as] the price of gasoline has gone up, people think about driving less.
Martinez: Let’s talk about what you’re seeing actually happening, in practice, around North Carolina, from local entities. Are we seeing some local governments who are saying we need to raise the price, or are they doing the political pricing that you just described?
Sanera: They’re doing both, and that’s the problem. They’re under pressure from environmental groups to raise the price. … Several cities have established tiered pricing, where the more you use, the higher rate you pay. In Cary, for example, the highest rate — when you use a lot of water in Cary — you’re charged $8.10 per hundred cubic feet. The lowest rate in Cary is around $2.40. So that is a tiered system but not a market system because it’s not based on supply. It’s forcing people to use less water. Now the irony of this is, people respond to higher prices; they use less water. And now the cities, such as Raleigh and several others, don’t have the money to pay for their infrastructure.
Martinez: What do they do when they don’t have the money?
Sanera: Then they have to say, you guys did what we want you to do —conserve water — but we’re going to raise your rates anyway.
Martinez: Uh-oh.
Sanera: So the people are really hot when that happens. But again, we need to make sure that water is not priced too low and it’s not priced too high. And I would argue that these tiered systems have no relationship to market thinking and are pricing it way too high.
Martinez: Is there any locality around North Carolina that you know of that’s doing this correctly — according to market forces?
Sanera: Well, no, because it’s also a difficult thing to do because you have to have some measure of supply. And many cities are looking at more supply, which is a good thing, and trying to increase supply. But connecting the supply to the pricing is the problem.
For instance, if we had a way of measuring the water in the reservoir, and during a drought the water in the reservoir goes down, then that would automatically kick in price increases. Now during a wet season, when the water in the reservoir goes up, that should bring prices back down. But the last thing that the scaremongers want is for prices to come back down, and that’s one of the missing components in this.
As cities develop, they have already developed stages where they also kick in another bad thing, which is mandatory restrictions — lawn watering, car washes, pressure washing of houses, and so forth. And in Raleigh, that put people out of business when those mandatory restrictions came in. They could get rid of the mandatory restrictions and instead kick in price increases, based on severe drought considerations instead of the mandatory restrictions. So that’s another way of implementing it.