4 Aug 2011

Management fail? Screw customers!

BP sent this:
My friend X lives in the [xxx] area. He is served by the small [xxx] Mutual Water Company rather than the city of [xxx].

Apparently the mutual water company has been so mismanaged that they are now adding extra fixed charges for customers.

You can see that there is a quantity charge, a meter charge, then something called a "land charge" and a "surcharge". According to X, the land charge applied to all customers depends on the size of your lot, irrespective of how much water you use.

In other words, X, who has 5 acres, is charged more in total fixed charges than a neighbor with a smaller lot, even if the neighbor uses a lot more water. The land charge is almost $30.00 per acre.

Then, there is a surcharge. Apparently they just started adding the land charge twice and calling the second one a "surcharge." This was done because the water company has been so poorly managed they were running out of money. They apparently just added a surcharge to recoup losses?!!

On top of all this, their tiers are crazy. The first tier gives a user up to 50 units of water! What is the point of having 4 tiers if you can stay within the first one so easily.
My responses:
  1. Water companies can charge whatever they want to "cover costs," even when they are wasteful or losing money because it's very hard to replace them with new companies (lots of political and regulatory transaction costs).*

  2. Almost any mix of fixed and variable charges is possible and justifiable, given the variety of targets that managers can aim for -- everything from water conservation to fiscal stability (maintaining your debt rating).

  3. Some charges (per acre? for a water company?) are stupid.

  4. There are two ways to rectify the situation: hope for outside subsidies (via takeover by the local city/private operator or a cash transfer) or overthrow management on a platform of "fairer" pricing. Given the subsidy from landowners to water users, I am not sure how that fight might go.*
Bottom Line: Water managers with monopoly power -- not customers -- choose how to do their jobs.

* I discuss water management, politics and collective action in Chapter 7 of my book :)

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