Michael Hanemann: Hello. I’m Michael Hannemann. I’m a pro­fes­sor of eco­nom­ics here at ASU in the busi­ness school and in the School of Sustainability. 

Water is full of para­dox­es. Water is essen­tial for life, cable TV as far as I know is not essen­tial for life. Yet many Americans spend more mon­ey each month for their cable TV than for water in their homes. A gal­lon of gas costs a bit over two dol­lars. A gal­lon of milk costs about three dol­lars. A gal­lon of orange juice, maybe four dol­lars. And you have to make a trip from your home to get these items. The water comes direct­ly into your home and you pay only two or three cents a gal­lon. In Phoenix we live in a desert city. We rely on the Colorado River for a sig­nif­i­cant part of our water. For the last six­teen years there’s been a major drought in the Colorado River. Yet, water bills in Phoenix are among the low­est bills in any city nationwide. 

Now oth­er commodities—food, cloth­ing, shelter—are also essen­tial for life. Yet water arous­es pas­sions that are not found with oth­er essen­tial com­modi­ties. Around the world, water is seen as some­thing that should not be treat­ed as a com­mod­i­ty. People see water as a human right, as some­thing you should­n’t have to pay for. The pric­ing of water has been a polit­i­cal flashpoint. 

In Tucson forty years ago, the city coun­cil learned this the hard way. Water rev­enues were not keep­ing up with costs, and the water sys­tem was run­ning out of capac­i­ty to meet peak sum­mer demand. Water rates were raised to finance the improve­ments. Overnight, water bills sky­rock­et­ed. A recall elec­tion was prompt­ly held, and the city coun­cil major­i­ty that had vot­ed for the rate increase was boot­ed out. 

The eco­nom­ics ought to be sim­ple. Water is not a man-made commodity—it falls from the sky. And in fact the eco­nom­ics is sur­pris­ing­ly com­plex. Water is a dif­fi­cult com­mod­i­ty. It is free, and yet cost­ly. It is simul­ta­ne­ous­ly a pri­vate good, and a pub­lic good. It helps cities flour­ish finan­cial­ly, but now it is their finan­cial bur­den. Almost nobody pays for the water per se. The cost of water is the cost of mak­ing it avail­able at the right time, in the right place, and with the right qual­i­ty. It is the cost of col­lect­ing, stor­ing, trans­port­ing, and treat­ing the water. 

That’s why the cost of water in Phoenix is so low. The water is cheap, the infra­struc­ture is new and does­n’t yet need much repair. In Boston, or Chicago, or Detroit, the water is abun­dant but the water infra­struc­ture is old and expen­sive to main­tain, and there­fore the water is expensive. 

The cost of water is over­whelm­ing­ly a cap­i­tal cost. The entire sup­ply chain, from source to tap, has to be in place before a sin­gle drop can be deliv­ered. It’s not mod­u­lar, and there are pow­er­ful economies of scale. You would not set out to build a dam or an aque­duct now and then expand it ten years from now when demand grows, the way you might do with a fac­to­ry. That would turn out to be way too expen­sive. So you must over­build, often decades ahead of demand. 

In 1800, water sup­ply was high­ly decen­tral­ized. People took water from a near­by well, or a pond, or a stream, or from a water pump in town. There may have been a ven­dor going around sell­ing water. But as urban pop­u­la­tions mush­roomed in the 19th cen­tu­ry, the need for a network-scale water sup­ply became very press­ing. With the growth in urban pop­u­la­tion, local streams became pol­lut­ed. So more dis­tant sources of water were need­ed to keep up with the growth of cities. 

As meth­ods of water treat­ment became avail­able, drink­ing water had to be financed. This net­work was mas­sive­ly expen­sive. Today, the sit­u­a­tion is dif­fer­ent. The water and waste­water net­works are aging and crum­bling. And the cities are short of mon­ey. In many cities, there is intense polit­i­cal pres­sure to keep water rates low. The result is that while water rates cov­er oper­at­ing costs, they don’t ful­ly cov­er the cost of main­tain­ing and replac­ing the water infra­struc­ture. This can­not con­tin­ue. Many of the cur­rent pipes were put in soon after World War II, and they are reach­ing the end of their work­ing lives. 

Over the next twen­ty years, the cost to replace urban pipe net­works may reach a tril­lion dol­lars nation­wide. It does not include the cost to meet new drink­ing water stan­dards that will be required for the ever more exot­ic con­t­a­m­i­nants that show up in our water. 

Then there’s cli­mate change. With cli­mate change, droughts will be more like­ly in many areas, includ­ing the Southwest. If there’s a drought and the util­i­ty deliv­ers less water, the cost per gal­lon goes up. For water sup­ply, there’s a schizoid aspect to cli­mate change. The warmer air puts more mois­ture into the atmos­phere, which trans­lates into more intense pre­cip­i­ta­tion. But that can be com­bined with greater dry­ness at oth­er times of the year. The result is a less-reliable water sup­ply. A solu­tion is to have more stor­age. But stor­age is extreme­ly expen­sive. We will end up hav­ing to spend more mon­ey to get the same reli­a­bil­i­ty that we used to have in the past. 

And this is the larg­er real­i­ty that we will all face. Maintaining the water sup­ply that we have now and that we take for grant­ed is going to become far more expen­sive. So view­ing water as a com­mod­i­ty that one pays hard­ly any­thing for is just not going to work for the future. Thank you.

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