The paradoxes of water: monopoly - China Dialogue
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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].

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