Tuesday, February 2nd, 2010

Chris Barnett: It Falls From the Sky

When the well’s dry, then we know the value of water” – Benjamin Franklin

Whiskey’s for drinkin’; water’s for fightin’” – Western aphorism

It used to be that people and policymakers in the eastern portion of the US (roughly east of the 100th meridian, which is the western boundary of the main body of Oklahoma) didn’t worry about having enough water. After all, that part of the US has abundant rainfall, mighty rivers, relatively frequent floods, and infrequent severe droughts that always end before the lakes go dry. Under such circumstances, even well-educated and thoughtful people ask themselves: How could there ever be a long-term shortage of water? When catastrophic multi-year drought occurs, as in the Southeastern US from 2006-2008, nature seems to right itself. After the extremely wet summer and fall of 2009, Lake Lanier, near Atlanta, has again reached full pool, less than two years after going nearly dry. Consequently, water conservation measures are perceived as unnecessary; swimming pools, green lawns, and oft-washed cars are again the order of the day in Atlanta. And it is likely to be so until the next drought, or until a Federal judge’s ruling takes effect: the water in Lake Lanier will no longer be available to Atlanta, as it is required for maintenance of Chattahoochee River flow downstream where it supports other cities in Georgia and Alabama and ultimately, the Apalachicola estuarine system on the Gulf Coast of Florida.

The Atlanta story above touches but does not begin to address the complexity of water supply issues: interstate surface water rights allocations, environmental stream-flow requirements, ground water usage and recharge in paved-over urban areas, stormwater and combined sewers, wastewater discharge and re-use (including the “emerging contaminants” issue of pharmaceutical concentrations in waste streams), and the water-energy nexus. Nor does the Atlanta story address the western issues of city growth vs. agricultural use of water, or the use of groundwater for irrigation of crops even in the eastern US. But the Atlanta story does illustrate a fundamental psychological and socio-economic truth of water in the eastern US: given that water falls abundantly from the sky and runs freely in streams and rivers, its perceived value is nearly zero in many places…and thus, so is its price. This is the part of the water story I’ll elaborate on in this post.

At some level, every city’s power structure understands that adequate quantities of good-quality water are absolutely essential to the city’s very existence. The US’ three largest cities all have water-supply legends: decades ago, NYC and LA secured (some would say “grabbed”) water from distant watersheds, and Chicago undertook a massive engineering effort to keep its Lake Michigan drinking water pure by making the polluted open sewer called the Chicago River flow “uphill” over the Great Lakes/Mississippi divide and down the other side into a tributary of the Mississippi. So this is not a new urban issue. But it is largely ignored in broad public debate: city-dwellers and suburbanites simply expect the local water purveyor (whether city-owned or private) to find all the potable water they want to use, and to provide it cheaply. After all, it falls from the sky free…all the water purveyors have to do is capture it, right?

Oklahoma City is leading a two-billion dollar storage and pipeline project to divert additional water from the Red River watershed of Southeastern Oklahoma, to assure water supply to its growing metro area in the Canadian River basin of Central Oklahoma. T. Boone Pickens bought up groundwater rights in the Texas Panhandle (above the southern end of the multi-state and very deep Ogallala Aquifer), intending to pump water from great depths and sell it via pipeline to the fast-growing Dallas-Fort Worth metroplex. Las Vegas and Central Arizona undertook a sophisticated trade-and-storage deal for some of their Colorado River water allocations. And little Waukesha, Wisconsin is trying to buck the Great Lakes Compact to pull Lake Michigan water up over the Eastern Continental Divide by way of a connection to the Milwaukee municipal water system. The common thread: all these projects are engineering-based and capital intensive, treating urban water supply as a matter of building the right infrastructure from source to tap. Water can flow uphill, toward money. But should it?

“City water” is seen as other public goods: to any single individual, it appears that the “supply” of water is, or should be, almost unlimited and nearly free. Further, because water is essential to life, there is a bit of a “do-gooder” notion that it should be cheap or free for users. Finally, there is the truth that public goods are seldom priced near actual cost, at least as long as the municipality has a good bond rating and can borrow against tomorrow indefinitely. This leads to the “tragedy of the commons”: because there’s more than enough for one person, the resource is overused by everyone.

Even though water falls from the sky freely, it costs money to locate, capture, treat, and distribute to users. The supply is limited, and the costs are quantifiable. Public water suppliers generally don’t build the real cost of the distribution system into prices. For example: let’s assume that Indianapolis Water has about 250,000 water connections. It’s not exact, but close enough for gross calculation. The city paid (borrowed) in excess of $500 million to buy the system in the early years of this decade; the embedded average capital cost per connection in the system was thus pegged at around $2,000. Using the dubious assumption that this amount approximates the replacement capital cost of the system, and assuming an average life of 25 years for the system’s capital plant, the system would have to recover $80 per year in Y2K dollars per connection (rounded, about $7 a month) just to maintain and replace system infrastructure. Interest on outstanding debt (at a low 4%) would be another $7 per month. This $14 would not cover any operating costs, just capital replacement expenditures and interest costs on the system purchase. Yet last month, my residential water bill had a fixed charge of only $9.10, which means that after the $7 for interest, just $2.10 ($25 a year) goes to system replacement…a built-in assumption that the system life is 80 years! Pipes, pumps and treatment plants are pressure vessels and big machines, and they just aren’t going to last 80 years on average. This calculation doesn’t even address the imputed average cost of $2000 to extend a new connection and increase system capacity as the system’s service area grows.

Furthermore, the 1500 gallons of water used last month cost $4.03, or less than 3 cents per ten gallons, which presumably covers the actual cost of treating and pumping the water to my meter. Altogether, with sales tax, it cost a little more than $14 for the water (which, incidentally, cost close to $16 to send down the sewer or out the dryer vent—but that’s another post entirely). It required quite a bit of math to even figure out usage in gallons: Indianapolis Water bills are expressed in units of “100 cubic feet”.

Those are ridiculous numbers. Electricity, natural gas, food, and transportation are all equally necessary for me to live and work in the city, and I probably spend close to $14 per DAY (before ever eating out) on those other basic necessities; their price assures that I don’t waste them. To the do-gooder argument of water as a necessity of life: if I am too poor to afford necessities, there are social-service providers or government welfare to help me; as an affluent and largely urban society, we don’t buy the rationale that food should be nearly free for everyone because it is a necessity of life. Water should be treated likewise. Further, the low price of water and water infrastructure almost assures that it is taken for granted and that significant amounts are wasted. Even the unit of measure sends the message “you aren’t using that much water.” But 100 cubic feet is 750 gallons, enough safe drinking water for four people for a full year or enough to flush a low-flow toilet 400-500 times. One person living alone used twice that amount in a single month!

Against this backdrop, some low-growth (or shrinking) Midwestern communities have lots of spare water-treatment and distribution infrastructure capacity. Several are using water availability as an economic development tool. Dayton, Ohio ran a half-page ad in the Wall Street Journal earlier this year touting its abundant (and well-protected against contamination) groundwater supplies. Milwaukee is gearing up to go after high-volume water users based on its Lake Michigan supply; its breweries and tanneries of the 19th and 20th centuries were based on the economic geography of water, grain, and livestock. Anderson, Indiana “won” a Nestle factory based on available water and labor (GM was once the major employer and now is gone). Grain ethanol production is extremely water-intensive, and it is no coincidence that its boom has occurred where both corn and nearly-free water are available: rural areas of Ohio, Indiana, Illinois, Iowa, Nebraska. But the resource isn’t unlimited; are states, cities, towns, and counties pricing the commodity too low, and essentially suggesting that water-wasters should move to the Midwest?

Lack of available and affordable freshwater is the one thing that has the potential to choke off industrial and population growth in arid-zone boomtowns (Denver, Albuquerque, Phoenix, Las Vegas, the LA megalopolis, and San Diego among them). Even Atlanta and Tampa-St. Pete don’t have enough freshwater; Tampa is using desalination and reclaimed water (highly-treated sewage) to meet some of its needs. Yet there is generally no federal mandate for water resource planning, or for a “grid” of system interconnections by pipeline to support regional or national markets (as exist for electrical energy and transportation).

Thus water is a local (in some cases, mini-regional) commodity and prices vary wildly across the country. This creates the very supply arbitrage that Milwaukee and Dayton hope to exploit. (Imagine a non-connected electrical, phone, gas/oil pipeline, or fiber grid!) There is no real control in most places on rural wells…which is why grain ethanol plants are generally in the middle of nowhere. Until the price of water starts rising, and in rural settings, until metering and volume charges are instituted, there will be no market incentive for really large users to become more efficient in their water consumption. Thomas Frank provided a sample of how much large industrial users spend in various US cities, and a sympathetic take on unintended consequences of low water prices and water-as-economic-development tool.

Given the current economics of water, Midwestern cities will indeed have a distinct water-availability advantage over their warmer and drier counterparts to the west but this may or may not persist for some cities. For Midwestern cities generally, presence within the Great Lakes watershed could bode well in a water-short US with expanding population. Metros on small rivers (such as Columbus, Dayton, Indianapolis, Madison, and Des Moines) will need to incorporate water resource planning as well as conservation measures and higher water costs into their growth plans just as their western cousins do today, as their water supplies are less obviously adequate than some of their Midwestern neighbors’. River cities that rely on the great rivers for their water (Pittsburgh, Cincinnati, Louisville, MSP, St. Louis) will increasingly have to deal with the issue of “microcontaminants”, primarily pharmaceutical products in upriver waste streams that are neither treated by sewage plants nor by conventional drinking-water treatment methods, on top of the “normal” load of industrial and agricultural contaminants the rivers carry.

Could the 19th-century location advantage of Cleveland, Detroit, Chicago, and Milwaukee on the Great Lakes also become a 21st-century advantage? It may very well be so when the real value of cities’ fresh water supply is more widely recognized and when true cost is reflected in “city water” pricing.

To inject this issue into a current thread of urban policy debate: how could Detroit play its Great Lakes water-supply and location advantages in the 21st century? Could Detroit partially rebuild its business base around ocean-going shipping and water-intensive industries? Should shrinking cities with ample water supplies and excess treatment capacity (like Detroit) become suppliers to the bottled-water industry, to ease the strain on scarce resources elsewhere? Thermo-electric power generation requires lots of fresh water and throws off a lot of heated “cooling water” that can be piped from the exit side of steam turbines. Could Detroit specialize in electric generation for the east-central US grid and develop a co-product of year-round urban hothouse agriculture? Food for thought.

Chris Barnett has been a “practicing microeconomist” and manager through careers in industrial procurement, neighborhood business ownership, and community development in Indianapolis. He has also been a leader in groundwater protection locally since the 1990s, and received The Groundwater Foundation’s Phil Peters Award for service on its Groundwater Guardian Council 1999-2006. Most recently, he worked with a Central Indiana ad-hoc committee to plan, organize, sponsor, and moderate a three-session symposium on groundwater issues in urban redevelopment for urban planners, engineers, and development professionals. In his spare time, he is helping to organize Indianapolis’ first member-owned cooperative grocery. He can be reached at cbarnett.indy@gmail.com.

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

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Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.

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