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Updated: May 15, 2010 17:19 IST

Derivation of water rates

D. Murali
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Title: Planet Water Investing in the World's Most Valuable Resource. Author: Steve Hoffmann.
Special Arrangement Title: Planet Water Investing in the World's Most Valuable Resource. Author: Steve Hoffmann.

There are two things that you do not want to see being made: one is sausage, and the other is water rates. Thus instructs Steve Hoffmann in ‘Planet Water: Investing in the world’s most valuable resource’ (www.wiley.com).

“Ideally, a forward-looking water pricing theory provides a class-specific cost-of-service model that charges consumers of a particular class (e.g. residential, multifamily, commercial, industrial, irrigation) in accordance with the particular and unique marginal costs that their consumption imposes on the water system.” However, in reality, the most elaborate cost-of-service econometric models are no match for the subjectivity of an elected municipal water board seeking to appease disparate classes of water users, rues Hoffmann.

“Whether a golf course, irrigation district, residential user, or small business, the special interests must be appeased in order to get consensus on any water rate hike. The political furore that accompanies the derivation of water rates is something to behold.”

Towards conclusion, the author offers a few forward-looking thoughts for water investors. Such as the caution that if we do not come to grips with the reality of our global water challenges, we are destined to replay a scenario where the price of water plays catch-up to decades of institutional mismanagement, and then markets are forced to allocate a scarce resource in the only way they can – recalibrating supply-and-demand equilibrium through price. “This could lead to rampant price increases and the political will to redistribute profits, an analogy to a windfall profits tax on oil…”

Compelling arguments.

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