Managing urban water supply

We, the editors, have long believed that a strong knowledge of relatively simple economic and engineering concepts is valuable in solving water management problems. The lack of such knowledge has been apparent to us in some of the journal articles, research proposals and books we have reviewed. The articles which have been written concerning specific local water economies and management issues are scattered over a wide variety of journals, making them hard to access. Most of the extensive water resources literature is concerned with large regional water projects or with narrow technical and regional issues. This book was written to make practical economic and engineering concepts readily available to urban water supply managers, thereby filling a gap in the available literature. It is concerned with decisions made daily, monthly, or annually by managers of urban water supply systems. The book includes basic chapters presenting supply and cost concepts, calculation of demand elasticities, use of marketing concepts, public goods analysis, water markets, industrial water demand and the use of price in water conservation. The authors have included multiple examples of how these concepts can aid in managing urban water supply. The water provider is generally a governmental entity or regulated private utility. Most books on public utilities and their management emphasize gas, electricity, or telephone rather than water. Water is different because of m~or variations in quality by source and the necessity for proper disposal of waste water.

Donald E. Agthe and R. Bruce Billings and Nathan BurasNathan BurasDonald E. Agthe and R. Bruce BillingsBenedykt DziegielewskiDonald E. Agthe and R. Bruce BillingsBonnie G. ColbyDonald E. AgtheSteven RenzettiRonnie LevinR. Bruce BillingsRonnie Levin and Mark A.R. KleimanDevin L. Galloway and Laura Coplin and Steve IngebritsenDonald E. Agthe and R. Bruce BillingsYoav KislevKenneth F. ClarkeDonald E. Agthe and R. Bruce Billings and Nathan Buras

Table of Tables	p. xiii
Table of Figures	p. xv
Preface	p. xvii
Contributors	p. xix
Chapter 1 Introduction	p. 1
1.1 Introduction	p. 1
1.2 Economists and Engineers	p. 2
1.3 Economic Quantity of Water	p. 3
1.4 Demand, Prices, Rate Structures	p. 4
1.5 Long Run and Short Run Water Supply	p. 5
1.6 New Water Sources	p. 6
1.7 Economic Analysis	p. 7
1.8 Institutional Forms and Service Areas	p. 7
1.9 Scientific Choices and Public Choices	p. 8
References	p. 9
Chapter 2 Hydrology and Water Supply	p. 11
2.1 The World Population and Water Resources	p. 11
2.1.1 Introduction	p. 11
2.1.2 The Law of the Minimum	p. 12
2.1.3 The Dynamics of Water on Planet Earth	p. 13
2.2 Subsurface Waters	p. 14
2.3 Mining of Groundwater	p. 15
2.4 Storage of Surface Water in Aquifers, Dams and Reservoirs	p. 16
2.5 Conjunctive Use of Surface and Subsurface Waters	p. 18
2.6 Water Quality Issues	p. 19
2.7 Wastewater Treatment, Reuse and Disposal	p. 20
2.8 Increasing Costs of New Sources of Municipal Water	p. 21
References	p. 22
Chapter 3 Price Rationing	p. 23
3.1 Water, a Scarce Good	p. 23
3.2 Demand	p. 23
3.2.1 Law of Demand	p. 24
3.2.2 Determinants of Demand	p. 26
3.2.3 Change in Demand and Change in Quantity Demanded	p. 27
3.2.4 Derived Demand	p. 29
3.3 Supply	p. 29
3.3.1 Determinants of Supply	p. 29
3.3.2 The Supply Curve	p. 30
3.3.3 Long Run vs. Short Run Supply	p. 30
3.4 Internal and External Cost	p. 32
3.5 Other Cost Concepts	p. 33
3.6 Economic Efficiency and Equity	p. 33
3.7 Water Rates and Inflation	p. 34
3.8 Conservation Policy--Regulation, Persuasion, Price Rationing or All Three?	p. 35
3.9 The Need for Metering	p. 36
3.10 Rate Structures	p. 37
3.10.1 Increasing Block Rates	p. 38
3.10.2 Decreasing Block Rates	p. 39
3.10.3 Conservation Rates	p. 40
3.10.4 Customized Rates Based on Water Rights	p. 41
3.10.5 Sewerage Usage Fees	p. 41
3.11 Reclaimed Water Use	p. 42
3.12 Conclusion	p. 42
References	p. 43
Suggestions for Additional Reading	p. 43
Chapter 4 Water Supply Economics	p. 45
4.1 Introduction	p. 45
4.2 Water Supply and Sanitation Systems	p. 46
4.3 The "Full Cost" of Water	p. 47
4.3.1 "Full Supply Cost" of Water	p. 48
4.3.2 Full Economic Cost	p. 48
4.3.3 Full Societal and Environmental Cost	p. 49
4.4 Structure of Water Supply Costs	p. 50
4.4.1 Average Expenses per Unit Volume	p. 50
4.4.2 Components of Water Supply Cost	p. 52
4.5 Cost of Water Supply Alternatives	p. 52
4.5.1 Surface Water Supplies	p. 53
4.5.2 Groundwater Sources	p. 54
4.5.3 Water Demand Reduction Measures	p. 55
4.5.4 Water Reuse and Dual Distribution	p. 58
4.5.5 Desalination	p. 59
4.6 Costs in Economic Analysis	p. 61
4.6.1 Economic Categories of Costs	p. 61
4.6.2 Examples of Average Cost Curves	p. 62
4.6.3 Marginal Capacity Cost	p. 63
4.7 Capacity Expansion Costs in Phoenix	p. 64
4.8 Summary	p. 69
References	p. 70
Chapter 5 Elasticity of Demand for Water Resource Managers	p. 71
5.1 Introduction	p. 71
5.2 The Concept of Elasticity	p. 71
5.3 Price Elasticity of Demand	p. 72
5.4 Derived Demand for Water as a Factor of Production	p. 75
5.5 Price Elasticity and Revenue	p. 75
5.6 Uses of Price Elasticity of Demand	p. 76
5.7 Cross-Price Elasticity of Demand	p. 78
5.8 Income Elasticity of Demand	p. 79
5.9 Economic Modeling to Estimate Elasticity	p. 80
5.9.1 Time Series Models	p. 80
5.9.2 Functional Forms	p. 82
5.9.3 Cross Section Models	p. 83
5.9.4 Use of Sample Survey Data	p. 83
5.9.5 Demand Models for Increasing Block Rates	p. 84
5.10 Conclusion	p. 85
References	p. 86
Chapter 6 Water Transactions as an Urban Water Supply Strategy	p. 87
6.1 Water Transactions in the Western U.S.: An Overview	p. 87
6.2 Concerns About Urban Water Acquisitions	p. 88
6.3 Alternative Ways to Structure Water Acquisitions	p. 90
6.3.1 Voluntary Changes in Use	p. 91
6.3.2 Negotiated Purchases	p. 92
6.3.3 Auctions	p. 92
6.3.4 Standing Offers	p. 93
6.3.5 Water Banks	p. 93
6.3.6 Contingent Transfers for Drought Protection	p. 94
6.4 The Role of Litigation	p. 95
6.5 Policy Changes to Facilitate Water Acquisitions	p. 96
6.6 Criteria for Desirable Urban Water Transactions	p. 97
6.6.1 Positive Net Benefits	p. 97
6.6.2 Fair Distribution of Costs Among Parties	p. 98
6.6.3 Paradigm Shift	p. 98
6.6.4 Enhanced Social Capital	p. 99
6.7 Summary and Conclusions	p. 99
References	p. 100
Chapter 7 Market Structure and Price Regulation	p. 103
7.1 Introduction	p. 103
7.2 Advertising by Water Providers	p. 104
7.3 Customer Classes and Rate Design	p. 104
7.4 Derived Demand: Commercial and Industrial Markets	p. 105
7.5 Marketing Channels	p. 107
7.6 Cost Structure and Provider Mergers	p. 109
7.7 Rate and Service Regulation	p. 109
7.8 Rate Setting: Should Average or Marginal Cost Determine Price?	p. 110
7.9 Regulatory Agency Conflicts	p. 112
7.10 Concluding Remarks	p. 113
References	p. 113
Chapter 8 Industrial and Commercial Water Demands	p. 115
8.1 Introduction	p. 115
8.2 Features of Industrial and Commercial Water Use	p. 116
8.3 Economic Determinants of Industrial and Commercial Water Use	p. 117
8.3.1 Modeling Commercial and Industrial Water Demands	p. 117
8.3.2 Empirical Estimates	p. 118
8.3.3 The Value of Commercial and Industrial Water Use	p. 120
8.4 Case Studies	p. 121
8.4.1 California's Urban Conservation Office	p. 122
8.4.2 Ontario's Green Industrial Analysis Project	p. 123
8.4.3 U.K. Environment Agency's "Waterwise" Program	p. 123
8.5 Conclusions	p. 124
References	p. 125
Chapter 9 Public Drinking Water in the United States	p. 127
9.1 Regulation of US Public Drinking Water	p. 127
9.1.1 History of Drinking Water Regulation	p. 127
9.1.2 Definitions of Public Water Systems in the US	p. 129
9.1.3 Current US Drinking Water Standards	p. 130
9.2 Profile of US Public Drinking Water Systems	p. 138
9.2.1 Number of Systems	p. 138
9.2.2 System Ownership	p. 139
9.2.3 Operating Characteristics	p. 140
9.3 Challenges Facing US Public Drinking Water Systems	p. 141
9.3.1 Infrastructure Needs	p. 141
9.3.2 Climate Change	p. 141
9.3.3 Microbial Contamination	p. 143
9.3.4 Ground and Surface Water Sources	p. 143
9.3.5 Urban Development and Land Use Pressures	p. 143
References	p. 144
Chapter 10 Water System Organization and Financial Decision Making	p. 147
10.1 Monopoly Market is Most Likely	p. 147
10.2 Private vs. Public Provision of Water	p. 147
10.2.1 Goals of Public and Private Providers	p. 147
10.2.2 Funding Differences	p. 149
10.2.3 Recent U.S. and U.K. Experience	p. 149
10.3 Taxes, Government Spending and Water Utilities	p. 150
10.4 Influencing Urban Development	p. 151
10.5 Public Health Issues	p. 152
10.6 Benefit-Cost and Project Analysis	p. 152
10.6.1 Define the Objectives or Goals	p. 153
10.6.2 Use Brainstorming	p. 153
10.6.3 Quantify Each Cost and Benefit	p. 153
10.6.4 Adjust for Uncertainty	p. 153
10.6.5 Discount Future Values	p. 154
10.6.6 Compare Discounted Benefits and Costs	p. 154
10.7 Considerations for Capital Repayment by General Taxation	p. 155
10.8 Benefit Cost Analysis: an Example	p. 155
10.8.1 Estimating a Demand Function for Urban Water	p. 156
10.8.2 Using the Demand Model to Estimate Benefits	p. 157
10.8.3 Discounted Benefits and Sensitivity Analysis	p. 160
10.8.4 Project Cost	p. 160
10.8.5 Benefit-Cost Analysis	p. 163
References	p. 165
Chapter 11 Drinking Water Disinfection in the United States: Balancing Infectious Disease, Cancer and Costs, Market and Nonmarket Failures	p. 167
11.1 Introduction	p. 167
11.2 Waterborne Infectious Disease in the United States	p. 168
11.2.1 Microbial Contamination of Drinking Water	p. 168
11.2.2 Estimated Incidence of Waterborne Infectious Disease	p. 168
11.2.3 The Monetized Costs of Waterborne Infectious Disease	p. 171
11.3 Disinfection Byproducts	p. 172
11.3.1 Toxicology and Epidemiology of DBPs	p. 174
11.3.2 Estimated Incidence of Health Effects Associated with Exposure to DBPs	p. 174
11.3.3 The Monetized Costs of Exposure to DBPs	p. 175
11.4 Water Treatment Operations and Constraints	p. 175
11.5 EPA's Recent Microbial Contamination Rule	p. 177
11.6 EPA's Recent Disinfection Byproducts Rule	p. 179
11.7 Market and Government Failures in Regulating Drinking Water	p. 180
11.8 Technological Innovation	p. 180
11.9 Conclusions	p. 181
References	p. 182
Chapter 12 Effects of Land Subsidence in the Greater Houston Area	p. 187
12.1 Introduction	p. 187
12.2 Land Subsidence Due to Aquitard Drainage	p. 188
12.2.1 Minor Reversible Deformation Occurs in all Aquifer Systems	p. 189
12.2.2 Inelastic Compaction Irreversibly Alters the Aquifer System	p. 189
12.3 Regional Setting	p. 190
12.4 Houston Grows and Subsides	p. 192
12.4.1 Initial Subsidence Due to Oil and Gas Extraction	p. 192
12.4.2 Subsidence Reflects Evolving Patterns of Fluid Extraction	p. 193
12.5 Subsidence Exacerbates Flooding	p. 193
12.6 Texas and Houston Act to Arrest Subsidence	p. 195
12.6.1 Special Districts Chartered to Control Subsidence	p. 195
12.6.2 The Ongoing Conversion from Ground Water to Surface Water	p. 196
12.7 Wetlands Lost to Subsidence	p. 198
12.8 Subsidence Activates Faults	p. 199
12.9 The Direct and Indirect Costs of Subsidence	p. 199
References	p. 202
Chapter 13 Solving Groundwater Overdraft in Arizona Urban Areas	p. 205
13.1 Introduction	p. 205
13.2 The Arizona Groundwater Management Act and the AMAs	p. 206
13.3 The Safe Yield Concept and Problems of Measurement	p. 207
13.4 Costs of Overdraft	p. 208
13.5 Costs of Achieving Safe Yield	p. 208
13.6 General Analysis of the AMAs	p. 209
13.6.1 Phoenix AMA	p. 210
13.6.2 Prescott AMA	p. 211
13.6.3 Tucson AMA	p. 211
13.7 Exempt Wells	p. 212
13.8 AMAs Replacement Water Options	p. 213
13.9 Conservation Policy	p. 214
13.9.1 Who is Responsible?	p. 214
13.9.2 Marketable Private Water Rights	p. 214
13.9.3 Raising Water Prices to Limit Demand	p. 215
13.9.4 Increasing Block Rates and Summer Surcharges	p. 215
13.9.5 Commodity Taxation to Limit Demand	p. 217
13.10 Commodity Value of Water in Arizona	p. 217
13.11 Concluding Remarks	p. 218
References	p. 218
Chapter 14 Urban Water in Israel	p. 219
14.1 Introduction	p. 219
14.2 The People and the Economy	p. 219
14.3 The Water Sector	p. 221
14.3.1 Public Control	p. 223
14.3.2 Allocation	p. 224
14.3.3 Hydropolitics	p. 224
14.4 Early Urban Supply	p. 226
14.5 The Municipal Sector	p. 226
14.6 Urban Water	p. 227
14.7 Prices and Cost	p. 230
14.8 Municipal Cost and Surplus	p. 231
14.9 The Restoration Fund	p. 232
14.10 Quality and Health	p. 232
14.11 Sewage Collection and Treatment	p. 234
14.12 Incorporation	p. 236
14.13 Water Policy	p. 237
14.14 Structural Reforms	p. 238
References	p. 240
Chapter 15 The British Experience	p. 241
15.1 The Geography of the United Kingdom	p. 241
15.2 The History of Water Supply and Sewage Disposal in the U.K.	p. 242
15.3 Water Supply Models	p. 244
15.3.1 England and Wales	p. 244
15.3.2 Scotland	p. 245
15.3.3 Northern Ireland	p. 245
15.3.4 Evaluation of Alternative Models	p. 246
15.4 Regulation	p. 247
15.4.1 Office of Water Services	p. 247
15.4.2 Drinking Water Inspectorate	p. 248
15.4.3 Environment Agency	p. 250
15.5 United Kingdom Water Companies: Three Examples	p. 251
15.5.1 Anglian Water Group	p. 251
15.5.2 Three Valleys Water	p. 252
15.5.3 Thames Water	p. 253
15.6 The Future	p. 253
References	p. 255
Chapter 16 Concluding Remarks	p. 257
16.1 Economic and Engineering Challenges in Urban Water Supply	p. 257
16.2 Groundwater Overdraft	p. 258
16.3 Soft Path Water Management	p. 258
16.4 Availability of Water Service	p. 261
16.5 Security of Supply	p. 262
16.6 Creating a Legal Environment for Urban Water Supply Management	p. 263
16.7 Wastewater Recycling	p. 266
16.8 Markets and Prices	p. 267
16.9 Future Management--More Business Like?	p. 268
16.10 The Role of Political Economy in Urban Water Management	p. 268
References	p. 269
Index	p. 271

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