From 7/1/13

By a strange coincidence I became a part owner and CEO of a small private utility company supplying water and wastewater services (a nice word for sewer) to a small community in Texas.

In the process, I have learned that this operation is basically a cost-plus operation heavily regulated by the state. More importantly and fascinatingly, it became clear to me that we, as well as all other utilities, do not really charge for the water we supply to our consumers. We charge for the cost of getting the water to them; we charge for the cost of treating the water after they send it back (sewer); we charge to some extent for the cost of having to explore for other water sources; but we charge ZERO for the cost of water. That is the situation I believe ALL OVER THE WORLD!

This is probably true for all other utilities, not only water. However, in the case of all other utilities, there is no “product” that is being sold. As an example, in the case of electricity, the charges are for the production of the electricity and its delivery, not for the electricity itself. But electricity is an unlimited product. One can generate as much as one wants; it will never end as long as the raw material to move the generators and turbines producing it exists and one does charge a lot for such raw materials—say fossil fuels.

In the case of fossil fuels, say oil, the cost of a barrel of oil is determined by the market. Therefore, it does have a price. It is not only the cost of delivery of the oil. The cost of oil is the maximum that the market will bear at the equilibrium point like all products and goods in open markets (OPEC slightly skews the notion of an open market but first, its influence is waning, and second, a monopoly does maintain the price/demand equilibrium still).

Water is unique: It is the ONLY product in the WORLD that consumers pay ZERO for, maybe except air, which is also free. The difference is that air is regenerated by the process of photosynthesis. Water is NOT.

Why are we not charging for water?

Like any other market that is skewed by government intervention, the fact that water is free cerates huge imbalances. A lot of water is used in countries and places that do not have enough water for uses that would not have been justified if it was not for the fact that water is free:

  • Growing fruits for exports in countries where there is not enough water is one example. In effect, one is exporting water for free. What is the logic in that?
  • Gardening, lawns, etc. are all uses that generate low-level returns and would never have been taken on in areas where water is in short supply if it was not for the fact that water is free.

This has significant implications in the long run.

World leaders are focusing on global warming or climate change but that is overrated and hyped as I have written many times before. (I intend to soon write another blog on it given the new developments on this front.) One aspect of the “climate change” that is being totally ignored is the fact that at a certain level, more CO2 is actually good for the world because it generates more photosynthesis, more oxygen, and more food-creating materials. That is especially important given the fact that the real issue, although not trying to be an alarmist here, is that of global population growth. I am not a Malthusian but one cannot ignore the fact that we have more people on this planet than ever before. The one absolutely necessary raw material to sustain life, the basic building block for life, is water!

Water is NOT self-regenerating, it is not likely to be found by shale fracking, and it IS getting more and more rare and in short supply.

So why are governments doing NOTHING about this issue? Where is the scientific community on this matter? Are they afraid of the Malthusian experience? He has always been widely derided for his predictions, most of which came to nothing, except that he was right about population growth. He was wrong about the end of resources except . . . water.

There are water desalination technologies but they are not prevalent enough. Why? Because the price is too high. And why is the price too high? Because water is free.

Water is more important even than fossil fuels and at the moment, seems to be less plentiful because it is free.

It is my prediction that unless governments put a significant price on water, soon the world will end up in a world war surrounding the access to, and availability of, water.