I only know what I read in the paper these days about the Metropolitan Water District, Southern California’s giant water wholesaler. But it sure looks from this LA Times story as though the Met is trying to use market mechanisms to impose a 10 percent reduction in deliveries:
The Metropolitan Water District, which imports water from the Sacramento-San Joaquin delta and the Colorado River and sells it to local water districts, will achieve the reductions by imposing penalty rates. Local utilities that use more than their allocation will have to pay more.
Am I understanding this correctly, David?
Yes and no. MET will change DOUBLE prices for agencies that go over their “budget”, so they are kinda using a market.
But here are the problems:
1) MET is not raising its base prices for within budget use. That makes it less-likely that agencies will cut back in a gradual way. (Also note that MET used the same “solution” in the 1977 and 87-91 droughts. They still have not found a better way — see below.)
2) The formula for calculating budgets is flawed (many arguments)
3) There’s no “trading” among member agencies that can go under budget.
My solution is simpler and better: MET can use auctions to allocate a fixed amount of water. Given a know quantity of supply, price will rise until the demand falls to equal supply. No shortage, no “sudden” penalties, etc.
Read all about it in Chapter 7 of my dissertation: http://ssrn.com/abstract=1129046.