The End of Abundance: economic solutions to water scarcity by David Zetland

Author:David Zetland [Zetland, David]
Language: eng
Format: epub
Publisher: Aguanomics Press
Published: 0101-01-01T00:00:00+00:00

Insurance as competition

I started thinking about measuring and encouraging good management in December 2008, after the levees around a holding pond collapsed and spilled more than a billion liters of toxic coal-ash-laden water into Tennessee's rivers. I wanted to find a way to encourage managers to spend adequate time and money on safety, reliability and other performance goals without spending too much money on gold-plated projects and activities.

The sweet spot between spending too little and too much can be identified by "benchmarking" outcomes (or other performance indicators) for the service of interest against similar services. Benchmarks are common in competitive industries (cars, electronics, sports, universities) but rare in monopolistic industries such as water management. That's because most monopolies do not care to be measured for performance, and it's hard to compare a monopoly with anything; monopolies that do not have substitutes can claim to be unique.

But that definition is too narrow. A local water monopoly is unique to its service area, but it shares similarities with agencies in other areas. That means it may be possible to compare different agencies on measures of interest and reward the ones with above-average performance. This method borrows several techniques from the insurance industry where, for example, unique car drivers can be compared by age, gender, driving record and so on. Car insurance works (encouraging good behavior, paying for accidents) because it's possible to assemble data for many customers, charge more to high risk customers, pay for accidents, and still make enough money to employ analysts who can find key values in the data — even without knowing drivers' exact talents or actions.

The US has 52,000 water systems. Few people know what's going on inside these systems, but most people want to improve their performance. Insurance can deliver better performance by creating competition among water utilities. But what kind of insurance?

It's probably not insurance against water shortages. That risk is easy to understand and easy to correct, via higher prices. The more interesting problem relates to that delicate balance between spending on infrastructure maintenance, water quality and emergency preparedness, where it's hard to know whether spending is too much, too little, or just right.

It's important to remember that there's no sure connection between management effort and outcomes. Careful drivers still have accidents; people who exercise and eat right sometimes die young. Some water managers do everything that they can or should to prevent contamination or broken pipes, but some of them are unlucky. Others take extra risks and have more accidents.

It's possible and useful to insure against bad water outcomes. It's possible because outcomes (interruptions, contamination and breakage) can be measured. It's useful because insurance would smooth out expenses. Managers now choose between a system with low monthly charges and a high probability of failure (leading to expensive repairs and a higher rates) and a gold-plated system with high monthly charges and low probability of failure. Insurance against leaks and repairs would raise rates by less — premiums averaged across many systems reflect the

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