David Zetland writes more on pricing water in relation to energy concerns at Growing Blue:
Water, energy and the economy
…let’s set aside the issue of environmental water and concentrate on water as a resource that can be used for economic activities. Most resource water is managed, priced and distributed by local monopolies, whether it’s an irrigation district delivering water to farmers or a utility delivering water to residential and industrial users. These monopolies often sell their water at the cost of delivery — covering the fixed costs of pipes and variable costs of treatment and pumping. It’s extremely rare that water prices reflect water scarcity, which means that it’s also rare for the price of water to rise when demand exceeds supply. This means that some users may consume “too much” water, leaving other users high and dry. (Or they may not – deciding that they’ve taken “their fair share,” but such restraint is rare when it’s possible to use more cheap water to increase profits.) Water managers may not work to prevent these shortages, since they are not penalized for shortages, allowed to raise their prices above cost, or worried about losing business to competitors.
That’s not the case for energy, steel or trucks, as each of these businesses operate in markets, where prices adjust to equalize supply and demand and where competition makes it easier for new suppliers to meet demand when their competitors run out of inventory.
The impact of water shortages are much greater than implied by lost sales of water. A restaurant may pay one dollar for 100 gallons of tap water that is used to produce food worth thousands of dollars. An industrial facility may pay the same to produce products worth hundreds of times more. All of these users would be willing to pay far more in the event of water shortage, but their money is worthless when there’s no water. They then have to close the restaurant, turn off the turbines and shut down the machines for producing silicon chips or potato chips. Workers lose their wages, customers lose access to products — the effects multiply and spread, all for lack of “cheap” water that does not exist.
The solution to these problems is the same solution that will end our need to discuss the water-energy nexus: price water for scarcity. Such a solution would treat “economic water” as we treat oil, coal, shoes, coffee or any other product: prices will rise when demand exceeds supply and fall when supply exceeds demand.
Prices that reflect scarcity will keep supply and demand in balance, rationing water to those willing to pay more and preventing shortages. (Water managers will make more money than the cost of delivery, of course, but they can refund excess revenues to customers under the supervision of their regulators.) These operations require only a change in perspective: we need to treat water as a valuable input to our economic activities.