Measuring the Welfare Losses from Urban Water Supply Disruptions

The paper evaluates welfare losses from urban water supply disruptions. The analysis incorporates important features of the water industry that may cause the initial allocation of water to be inefficient, namely that ther are a large number of retail-level water utilities, and that mosst water utilities engage in a form of average cost pricing where volumetric rates are used to finance fixed expenses. We consider a sample of 53 urban water utilities in California collectively providing service to over 20 million customers. We calculate shortage losses for these utilities using existing water rates and utility-specific price elasticities dervied from a demand estimation based on a panel data set of 37 California water utilities. Welfare losses for an annual 10% shortage ranging from an average of $1,458 per acre-foot of shortage to an average of $3,426 per acre-foot of shortage for a 30% supply disruption. The results indicate a household-level willingness-to-pay to avoid an annual shortage of approximately $60 to $600 depending on the shortage size and location. Beyond average losses, we also find evidence that there is substantial variation in shortage losses across utilities. For a 30% supply disruption, for example, the standard deviation across utilities of mean annual losses per acre-foot is $4,102.