Research

Municipal water utilities are mandated to recover costs, balance equity concerns, and send conservation signals. Yet the degree to which observed prices reflect the scarcity value of water remains largely unexplored. This paper develops a stochastic dynamic program in which the optimal two-sector price decomposes into a Ramsey markup, a scarcity rent on the water stock, and sector-specific marginal cost. Residential and non-residential demand elasticities of −0.59 and −0.82, respectively, are estimated from a panel of 194 Arizona water utilities (2014–2019). Simulated model-implied optimal prices show that increasing block rate (IBR) utilities price closer to the dynamic optimum than uniform-rate utilities. The welfare cost of suboptimal pricing is approximately $5 per connection larger under uniform rates than IBR in mild supply conditions and approximately $21 per connection larger under shortage stress. At the median 10 kgal consumption tier, uniform-rate Central Arizona Project (CAP) utilities price approximately 25 percent below their model-implied optimum while IBR CAP utilities price approximately 11 percent below theirs, a gap roughly twice as large under uniform rates. In this sample, IBR utilities more fully incorporate the scarcity rent into observed prices than uniform-rate utilities, and uniform-rate utilities retain a welfare gap of approximately $19 per connection under severe shortage conditions.

Using a novel least average cost dispatch (LACD) algorithm, this paper evaluates the economic and environmental costs of Texas maintaining an isolated electricity grid. We build a structural model to characterize the supply of electricity and simulate counterfactual integration scenarios. We find that Texas's largest population zones connected with neighboring states to the East results in reductions of generation costs of $100M annually. We also show that accounting for fixed costs in the dispatch model allocates generation to units with lower average fixed costs than under least marginal cost dispatch. This change in allocation along the margin results in large differences in emissions impacts. We find that some interconnection scenarios decrease the social cost of emissions by up to $360M annually, while others result in higher emissions. In a case study for one proposed interconnection, we show that generation and revenues shift to the Texas zone. We also show that reductions in costs of maintaining reliability are about as much as generation cost reductions.

Power disruptions are costly to households. How do consumers value power reliability disruptions? I exploit the variation in daily lightning strikes to provide new evidence on the capitalization of power reliability into home values. Ground lightning strikes lead to voltage fluctuations, damage to the electricity distribution network and power outages. Increases in lightning density (strikes per square mile) is associated with increased outages and decreases in county-level housing prices. I find that the average marginal willingness to pay for a 1 unit reduction in annual outages is about .37% of home price. I also evaluate the short-run impacts of power reliability shocks on short-run housing inventory outcomes. I find that a 10% increase in probability of experiencing at least one monthly outage is associated with as much as a .2% decrease in median listing price.