How to Put Systems Thinking to Action on Water Scarcity in Los Angeles. Part 3: Working With the System Towards a Solution.

This article is the third of a three-part series in which I demonstrate how complex real world problems can be better understood using systems thinking. I put this approach into practice by applying it to a concrete challenge: water scarcity in Los Angeles.

The overall series shows that by analyzing how environmental, social, economic, industrial, behavioral factors interact, we can identify solutions with lasting effect and minimized unintended consequences. This third article demonstrates such an analysis for the water scarcity problem in Los Angeles, describes the resulting proposed policy.

In the first article of this series, I mapped the natural system dynamics of water scarcity in Los Angeles (LA) in a causal loop diagram (CLD). That CLD made clear that environmental trends move in the opposite direction of water availability in LA, that is, towards water scarcity. In the second article, I introduced agents; citizens, govenrment, water utilities and companies. These agents added social, economic, and behavioral factors into the system, which I mapped in another CLD. From that CLD, it was clear that behavioral aspects are a major influence in this system.

The significance of behavioral factors in this system is common. Behavior can often be a leverage point, i.e., a place in the system where intervention can have a relatively big impact. That’s because people have the capability to change their behavior relatively quickly, compared to natural or industrial factors. That’s not to say that people always change their behavior promptly, and certainly not that they tend to do it readily. Yet, if we take this case of water scarcity, it is a given that the amount of potable water in the world is fixed (at least on a human timescale). The industrial water system in LA can be made much more efficient, but that will take many years of planning and construction. Yet, LA citizens have shown a major behavioral change in their water use over just the past few years. In fact, recent steep decreases in water use per capita have made water scarcity in LA grow at a much slower pace than one would expect from only looking at the natural systems dynamics.

This behavioral change is positive, however, other behavior in the system was undesired. The CLD showed how some behavioral responses to policies, which were aimed to ensure clean water access, made those policies a lot less effective. In this third and last article in this series, I will show how now that we have mapped the system, we can design policies that either change it when possible, and work with it when necessary. 

Analysis of Current Socioeconomic and Behavioral System

As we saw in the second article, an optimal policy to ensure equitable clean water access should be focused on the two concurring goals of a) ensuring clean water availability for everyone, including the lowest income households, in the long term, while, b) maintaining and strengthening affordability of clean water access for lower income people in the immediate term.

Many opportunities exist for LA to improve future clean water availability. These opportunities lie mostly in upgrades to its industrial water system and include increased capabilities for water capture, storage, decontamination, and recycling. Making use of these opportunities involves management integration and major construction projects. In economic and behavioral terms, this means that the industrial system upgrades require a significant amount of financial capital, as well as cooperation of stakeholders.

In the second article of this series I discussed stakeholder responses to policies that were introduced during the last California drought. These responses included the emergence of peer and moral pressure (Haidt, 2013), and a possible loss of support or even resistance when government measures go against people’s sense of fairness or interests (Haidt, 2013).

The most relevant policies around clean water access in LA have been mandatory water reductions (coercive approach), water rate increases (economic incentives approach), and public appeals, including awareness campaigns, information programs, and nudges (social incentives approach). The below CLD shows the interactions between these policies and behavioral and socioeconomic influences. The policies are displayed in bold.

  Figure 1. CLD of policy effects in the social, economic, and behavioral dimensions. 

The undesirable interactions

Some of the interactions between policies and behavioral and socioeconomic influences obstruct the path towards sustainable clean water access in LA. Reductions in water use help conserve water, but also reduce revenue for water agencies which exacerbates the issue of a lack of funding for industrial upgrades. When water agencies increase prices to compensate; however, the lowest incomes are impacted disproportionally. Additionally, steep price increases feel unfair to some people and might create resistance from residents and industrial heavy water users, eroding stakeholder support. Lastly, people lower their water use when faced with increased costs, resulting in an unwanted positive feedback loop between price increases and reduced revenue for water agencies.

The undesirable interactions can be identified in four links of the CLD in Figure 1:

1. from water reductions to rate increases,
2. from rate increases to less clean water access for lower incomes,
3. from rate increases to less stakeholder support, and
4. from water reductions to less capital to integrate and upgrade the industrial water system.       

As it turns out, it is possible to either remove these interactions or reverse their sign. For that, another upgrade is needed. Not of the industrial water system, but of the pricing mechanism in the policy that takes the economic incentives approach.

Budget-Based Rate Design

There is a way to achieve both of the seemingly opposing two goals of water affordability and availability in LA. Academics (Dinar & Dinar, 2016) and organizations like the OECD have for years been advocating for what consultants call a “water budget rate” to solve the tension between stable revenues for water agencies and water affordability. In essence, budget-based rates consist of increasing the block tariff structure. This means that a larger part of the water bill is fixed. However, this is the budget part, which is priced low. Customers can go over their budget, but that would be considered discretionary water use, which will be priced considerably higher. This rate design reflects the current trend of bifurcation in disposable spending as a result of growing income inequality. The budget tariff block allows water access for the growing number people that are falling back to a sustenance income level (Galbraith, 2016). The more expensive water use —above the budget allocation — would likely come predominantly from those that still enjoy a growing real income: the upper class (Galbraith, 2016; OECD).

The budget rates policy represents a shift in mindset as well as customer approach. The shift in mindset is that the rates reflect not how much water the household uses, but how efficiently it uses it. Customers’ monthly water bills are calculated based upon how much water is used and whether the customers stayed within their allocation. The shift in stakeholder approach is that the budget-based method builds on continuous dialogue instead of the water agencies simply telling customers what they shall pay. The agencies and their customers exchange information about how and why water rates change, customer’s water needs and habits, as well as efficiency tips (Dinar & Dinar, 2016). A more active stakeholder involvement is in line with a general trend towards more holistic public environmental conservation management approaches. These approaches blend environmental modeling with empirical social science and stakeholder involvement, because this yields higher success rates and minimizes unintended consequences (Orr, 2014).

How the Policy Changes the System

How does a water budget rate policy resolve the undesirable interactions? With water budget rates, efficient water use is cheap and inefficient water use is expensive. This takes away each of the four unwanted interactions in Figure 1 as follows:

• Low prices for lower income households. Given that the lower income households are only using water for basic needs, their water use would stay affordable. This reverses the sign of the arrow from rate increases to less clean water access for lower incomes.
• Sufficient stakeholder support. Water budget rates satisfy people’s need for fairness. A key difference between the budget-based rates and tiered rates is that customers with bigger water needs get a bigger budget, so people are not asked or forced to achieve what they feel are impossible standards of water conservation (Dinar & Dinar, 2016). Water bills of big users would thus stay manageable, assuming that they use water efficiently. Most residents’ objections around pricing fairness are negated because efficient water use in this situation does translate into a lower water bill. Those (wealthy) residents who still feel no obligation to use their water efficiently will be helping to fund significant parts of the necessary upgrades in the industrial water system (Dinar & Dinar, 2016). The human tendency to substitute paying money for acting in the common best interest, discussed in this series’ second article, will thus be justified in this case. The focus on stakeholder dialogue in this policy will foster trust and understanding between involved parties. All of these factors go a long way towards removing the link from rate increases to less stakeholder support.
• Stable revenues and adequate funding for water agencies. The budgets provide a stable base revenue stream for water utilities (Dinar & Dinar, 2016). The much higher priced above-budget water use will supplement this base stream with the extra funding for necessary upgrades. This then takes away the unwanted link between water reductions and rate increases, as well as the link from water reductions to diminished capital to upgrade the industrial water system.

The above described effects alter or remove the unwanted interactions, resulting in a transformation of the CLD in Figure 1. The transformed CLD, in Figure 2 below, is a coherent network where positive feedback loops work in a mutually reinforcing way towards the goals of water conservation and clean water access affordability. Tom Ash, the consultant who worked with the agencies that have already made the transition to water budget rates, describes the result: “customers are more efficient, they [the water agencies] don’t have the revenue instability, their customers are satisfied – that’s kind of the trifecta”.

     Figure 2. Transformed CLD of policy effects in the social, economic, and behavioral dimensions.

Practical example

A few water utilities in LA County, in Irvine and Palmdale, have shifted to budget-based water rates. The Irvine Ranch Water District (IRWD) is a frontrunner; it has been working with a budget-based rates since 1991. The IRWD has put the budget-based rates in practice by determining standards of efficient water use for both inside and outside of the household. Based on these standards, a monthly water budget for users is determined. This basic monthly water budget provides a reasonable amount of water for a customer’s needs. Irvine residents’ monthly budget is calculated by the default number of residents in the home, the type of home, square feet of landscaped area, and the amount of water plants need to stay healthy based on actual daily weather conditions. The latter condition means that the budgets change with the weather throughout the year, which is done automatically by the IRWD.

 An “Economic Policy Instrument” evaluation ordered by the European Commission reported a 61% reduction in landscape irrigation water use and 25% residential water use reduction since 1991 for the IRWD. In addition, the water agency reports stable fixed revenue recovery, reduced water runoff, fully funded conservation programs which are paid for only by water wasters, and an 85% customer satisfaction in independent surveys to top it off.

Limitations of the Policy

I do not intend to present this policy as a silver bullet. Clean solutions rarely come without unintended consequences, but the other side of that token is that effective solutions are rarely a quick fix. For one, establishing fair budgets and rate designs takes time. It can take an agency anywhere from six months to a year to change the water rate design. The rates need to be discussed, designed, and consulted with all stakeholders. This is not a frustration-free process. As Ash put it: “Agencies are afraid to talk to their customers about why they have to change”. Yet, as mentioned, stakeholder engagement is also a way to increase a policy’s probability of success over the longer term. The quicker to implement policy of tiered (higher) rates is also the policy that caused the most resistance, because it did not fully take into account their range of possible motivations and behavioral responses from stakeholders.

Additionally, it is not yet certain that citizens won’t be able to successfully sue against this policy as they did against tiered water rates, because so far such a case has not been brought forward. The main reason that wealthy residents were able to successfully sue against a tiered pricing policy comes from state Proposition 218, which mandates water be made available to residents at cost. Experts believe that a legal case against water budget policy will not be successful, because how the agency’s costs are paid for by the above-budget water rates is more transparent than with the tiered water rate policy (Dinar & Dinar, 2016). However, there is legal uncertainty until a lawsuit has been brought and lost.

Conclusion

This article concludes the series on how to put systems thinking into practice on the concrete and complex case of water scarcity in LA. The first article showed that this scarcity can be expected to increase based on environmental dynamics. My second article showed that the challenge of safeguarding clean water access for all LA residents is marked by an adverse tension between ensuring availability and affordability. The source of this tension became clear when the social, economic, and behavioral aspects of this issue—including their interactions—were mapped and analyzed in a CLD. The CLD showed that most current forms of policies that use economic incentives, i.e., price increases, carry the unintended socioeconomic and behavioral consequences of reduced water affordability for the lowest incomes as well as an erosion of stakeholder support.

Once the root cause of these undesired effects was identified, it became easier to identify a solution: A budget-based water rate design. This water rate policy is aligned with social incentives for residents and organizations by focusing on their needs and rewarding efficient water use instead of low water use. With stakeholder dialogue being an integral part of water budget rates, the policy works with rather than against the dynamic influences involving clean water access, and so serves as an effective next step towards a more sustainable water system in LA.

Afterthought: The Merit of Reading Connections

Did we really need systems thinking to discover this policy? Some might not. There are many people with a strong intuition for thinking in systems who might not have needed to map the interactions. A CLD is a very simplified map of reality, i.e., a model. Every systems thinker will admit that ultimately all models are wrong. As I mentioned in the first article: a CLD is a tool (and only a basic one in the systems thinker’s toolkit). It helps align people around a solution because it provides a language in which to describe the problem and analyze it. This can be hugely beneficial in some cases. The aim of this series was to show how thinking about connections can lead to better outcomes when analyzing a complex problem like water scarcity. I hope you find that I succeeded.  

References not Linked in Article

Dinar, S., & Dinar, A. (2016). International water scarcity and variability: Managing resource use across political boundaries. Oakland, CA: University of California Press.

Galbraith, J. K. (2016). Inequality: What everyone needs to know. New York, NY: Oxford University Press.

Haidt, J. (2013). The righteous mind: Why good people are divided by politics and religion. New York, NY: Pantheon.

Orr, S. K. (2014). Environmental policymaking and stakeholder collaboration: theory and practice. Boca Raton, FL: CRC Press.