Water businesses: in a land of their own
Water utilities are one of the few industries that:
Operate as monopolies but are largely user-pays
Face highly variable service value (from priceless to a burden)
Competition vs. monopolies
Most industries set prices based on supply, demand, and competition. Water utilities don’t have that luxury. They are natural monopolies—it’s inefficient to have competing water networks—but unlike other monopolies, they don’t control their own pricing. Instead, governments and regulators decide how much people should pay.
Water utilities sit in a rare place:
Most monopolies are taxpayer-funded (defense, central banking), but water is user-pays.
Most user-pays industries have competition (electricity, telecommunications), but water doesn’t.
Changing marginal utility
“Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it”
The Adam Smith quote examines the value of water vs. diamonds, noting that water is useful but not highly valued while diamonds are largely useless but valuable.
A more developed view is that water is not valuable where it is in surplus but very valuable when there is scarcity.
Humans cannot go 3 days without water so extreme scarcity should make it very valuable.
During floods, people are willing to pay to take it away as it is creating negative value (destroying things).
In Australia, climatic conditions do change water prices (perhaps not as high as diamonds).
Murray Darling Basin allocation price volaility
The implication is that water does change in value (as represented by prices) and could, in some very extreme circumstances of scarcity, be worth more than diamonds. It also could be, at times, generate high levels of negative value (costs).
Exploring water’s unique position
Let’s visually explore the idea that water utilities have a unique position compared to industries that we commonly associate with water utilities such as defense, air traffic control, healthcare, postal services, retail electricity and ride sharing.
A 3D representation based on:
Competition (X-Axis)
Who Pays (Y-Axis)
Value Volatility (Z-Axis)
Let’s start with a written description of the three axis for each m
Then we can develop a 3D plot using a 1-10 scale
What does this mean?
If we adopt the idea that water is unique in that is monopolistic by nature but the users pay, and that the user pay model should avoid ‘willingness to pay’ as the utility would be exposed to high price volatility (including times when the utility would actually pay to have the water taken away), then the cost-based (prudent and efficient) economic regulation is the logical regulatory process.