How to Fix U.S. Water Policy? Less Government, More Market Pricing

by Wayne Crews on April 18, 2012

in Deregulate to Stimulate, Economy, Environment, Features, Natural Resources, Property Rights, Regulation

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Late last week I received an invitation to testify in the Water and Power Subcommittee of the House of Representatives Natural Resources Committee on H.R. 2664, “The Reauthorization of Water Desalination Act of 2011.” We’ve posted the full 20-page testimony; my oral remarks before the committee appear below. The push for politically juiced desalination projects is a diversion from the actual problem; the absence of market pricing to allocate water scarcity.

I am Wayne Crews, VP for Policy at the Competitive Enterprise Institute and I thank the committee for this Tax Day invitation to speak on H.R 2664, a $2 million annual desalination program that, while it won’t break the bank, embraces principles at variance with a lightly regulated and adaptable water sector.

While it does boast crucial working applications, desalination remains an energy-intensive, by-product-laden means of making expensive usable water, despite being an ancient process.

Happily, there’s no need for panic; Water is not getting more scarce overall; it’s an earthly constant, and the nation uses even less than it did in the 1980s.

But pricing and allocation of that supply do matter. To advance tomorrow’s water policy, we must, as we say at CEI, avoid having government steer while the market rows.

When linking research like desalination to human needs, private investors can test low-probability projects, counting on the rare success to offset multiple failures. Progress requires good at killing bad projects.

Federal funding to overcome so-called “market failure” in research, on the other hand, fosters numerous avoidable conflicts: over the merits of basic vs. applied research, over government vs. industry science; over assignment of intellectual property; Over public access to data. Meanwhile, taxpayer subsidies appear not to alter the ratio of GDP spent on R&D after all.

Government steering can create artificial booms, and politics has trouble balancing research portfolio tradeoffs: Why H.R. 2664’s brackish groundwater desalination instead of seawater or countless alternative water investments? The problem affects other sectors: Why nanotechnology instead of biotech? Or the hydrogen economy? Or Robotics?

We should avoid fostering a “Declaration of Dependence” on federal dollars, because that will further mask water market prices.

Also, even as government funding comes with regulatory strings attached, it adds to risks and environmental problems by propelling risky technologies ahead of the free market’s ability to properly assimilate them. (The market’s role in regulation is something we might discuss in Q&A.)

This is important, because we observe in H.R. 2664 the seeds for new regulation propelled by the sourcing and externalities of desalination itself. Instead, market disciplines like liability and insurance must evolve alongside technology.

To me, preferred alternatives to subsidized Desalination are those institutionalizing the separation of water and state.

First, better pricing of existing supplies can make crises vanish; refer to my written testimony on this. Despite everything, gallons of water cost less than a penny, filling swimming pools and hydrating lush lawns in arid areas.

Second, improving infrastructure can reduce the waste that now depletes 17 percent of the annual water supply, as noted in a new CEI report by Bonner Cohen.

Third, better transport, including pipelines, trucking, and crude oil carriers can aid supply. Where’s the water pipeline aorta alongside and perpendicular to Keystone, one might say.

Fourth, improved trade between cities, farmers and NGOs can be essential to pricing and value.

A fifth option would be water sourcing alternatives including gray and wastewater treatment and reclamation; stormwater harvesting, and private conservation such as instream flow purchases.

Finally, we should reduce onerous permitting regulations that inflate desalination’s costs and defy the good in the H.R. 2664 vision. Otherwise, as water expert David Zetland notes, “if it’s possible to get [regulatory permitting] approval [to] raise prices so far, why not just raise prices and skip the project?”

A couple general observations:

First, as CEI’s president Fred L. Smith Jr. puts it, instead of trying to improve speeds by picking the particular R&D horses to run on the infrastructure racetrack, improve the business and regulatory track so everyone can go faster, and let jockeys keep more of their earnings. In the Appendix of my written testimony, I cover liberalization options to better enable a private sector flush with research cash.

Second, this is the water and power subcommittee, and I think it’s vital to step back and explore dismantling regulatory silos artificially separating our great network industries. That is, any investment in non-shovel-ready desalination while settling for 19th and 20th century infrastructure is sub-prime policy, particularly given that, as a free society becomes wealthier, creation of infrastructure should become easier, not harder.

The America of 100 years ago, with its paltry GDP, built overlapping, tangled infrastructure; we might have had an aesthetic problem, but never a natural monopoly problem.

The modern challenge is to welcome water resources further into the market process. We urgently need competitive market discipline to discover, not just desalination’s value relative to sourcing alternatives, but to discover the true value of water itself.

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