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Perverse incentives

Devils (and angels) in the details, Part 2

It’s always about the money.

In early January the California Water Board released its draft proposal for a statewide low-income water bill assistance program. My last post summarized the path-breaking proposal and its promise for addressing affordability in the Golden State. It’s an admirable piece of work on a challenging and complex issue. The next couple posts wade into the tall policy grass in search of snakes. This one looks at the volume of water to be subsidized under the proposal.

Assistance for how much water?

An assistance program for water implies that there is some level of water consumption that is socially important, and that without assistance, water consumption would either fall below that level or force households to sacrifice other essential goods in order to pay for water. What is that level of water consumption? How much water is so important that taxpayers should subsidize it?

For California’s draft assistance proposal, the answer is 12 ccf (about 9,000 gallons) monthly per household.

Consumption in context

Not all residential water use is the same. Public policy discussions of water affordability are mostly concerned with essential needs like drinking, cooking, cleaning, and sanitation. We’re not generally concerned with the affordability of watering lawns, washing cars, or filling swimming pools.

Probably not worth subsidizing

The proposal’s 12 ccf price guideline implies 75 gallons per capita per day (gpcd) for a family of four. To give some context, California utilities average about 100 gpcd, which makes 75 gpcd seem pretty low. But it’s much higher than California’s 55 gpcd water efficiency standard (set to drop to 50 gpcd by 2030), and higher than typical water use in many California communities today. My own past affordability analyses have assumed 50 gpcd for essential use*; conservative San Francisco already averages just 42.4 gpcd for overall demand (not just essential use).†

There’s nothing magic about any of these numbers; in the end, the level of water consumption that is deserving of public subsidy is a decision to be made through the democratic process. But 12 ccf is a lot of water if the policy’s aim is to provide for essential water use. The draft proposal notes that the 12 ccf level is intended to allow for larger households and “modest amounts of outdoor irrigation.”

A perverse incentive

Why does any of this matter? Beyond the normative question of whether taxpayers ought to subsidize outdoor irrigation, a 12ccf standard may have the unintended effect of pushing water utilities toward less affordable, less conservation-oriented pricing.

Low fixed rates and low prices for essential water use make water affordable for everyone, whether or not they participate in an assistance program. Coupled with progressively higher volumetric prices, such rate structures help keep water affordable and encourage conservation. Unfortunately, many utilities have recently responded to falling average demand and revenue volatility by raising fixed rates and imposing higher costs for low-volume use. That’s good for utility revenue, but bad for affordability.

That’s where the perverse incentives creep in. A 12 ccf standard for assistance is likely to exacerbate the trend toward utilities raising fixed charges and low-volume rates. With the state’s assistance program providing aid to low-income customers, utilities can raise rates on volumes below 12 ccf with less concern for affordability impacts. That will naturally dampen the conservation incentive, as higher priced water becomes less expensive. Less obviously, higher prices for lower volumes will exacerbate affordability problems for anyone who is not enrolled in the assistance program. The draft proposal assumes an 84% participation rate; for the 16% of households who don’t participate (for whatever reason), affordability will probably get worse.

A footnote acknowledges a danger of strategic rate-setting (told you I’d get into the weeds!), observing that systems could respond to the assistance program by “shifting the rate burden to consumption levels below 12 CCF, and thus elevate the benefit for eligible households.” Apparently the concern is that utilities will game the assistance program as a means of channeling more state money to local customers. But from an affordability perspective, the more worrisome prospect is that the state’s assistance program will incentivize regressive pricing that ironically makes water less affordable for many.

This perverse incentive will exist no matter what volume is subsidized, but the greater the volume subsidized, the more perverse the incentive will be. If an assistance program is supposed to support a human right to water, then a more modest 6-8 ccf standard for support is more defensible and less susceptible to rate design gamesmanship.

 

 

*My January 2018 article on affordability measurement prompted a grouchy email from a San Francisco official who complained that 50 gpcd was an unrealistically high essential volume for evaluating affordability

I chuckled when typing: “conservative San Francisco.” Our language is funny, sometimes.

 

 

California’s bold proposal for statewide water bill assistance

Devils (and angels) in the details, Part 1

Governor Newsom (nice haircut in the black jacket, back to the camera) dragged his cabinet down the Central Valley to hear what folks had to say about drinking water.

In 2012, to great fanfare, California governor Jerry Brown signed into law AB 685, which declared a “right to safe, clean, affordable, and accessible water adequate for human consumption, cooking, and sanitary purposes.” Last spring I observed that the crucial but unglamorous task of turning the lofty rhetoric of rights into a pragmatic program fell to the California Water Board staff under AB401.

Fast forward seven years: the Golden State now has a new governor, and he’s eagerly established himself as a champion for water access and affordability. Earlier this month the Water Board published its draft proposal for a statewide low-income water rate assistance program with an estimated annual price tag of $606 million. As with so many other areas of public policy, California is blazing a trail that other states and communities could follow. There are lots of interesting things about the proposal. Mostly, though, it’s big and it’s bold.

The proposal

The proposal is complicated. At its heart is a three-tiered assistance program that would provide different discount of 20%, 35%, or 50%, depending on the combination of household income and monthly water prices at 12 ccf (about 9,000 gallons). Customers could qualify if their household income is less than 200% of the Federal Poverty Level (FPL).

The proposal is vague about how customers would enroll in the program, how often renewals would be required, who would make eligibility determinations, and who would be responsible for collecting and distributing benefits. The proposal smartly lays out several options for how the program would deliver benefits to participants. Eligible customers could get a water bill credit, an energy bill credit, a tax credit, or a direct payment via Electronic Benefits Transfer (EBT).

To pay for these benefits, the proposal calls for “progressive revenue sources,” including an increased tax on income over $1 million a year and sales taxes on bottled water. Under California law, these would require a supermajority vote in the legislature and a ballot referendum, respectively.

Go big or go home

The Water Board’s proposed program is remarkable in its breadth and boldness. The federal government’s LIHEAP has provided home energy bill assistance for decades, but the proposed California plan would be the country’s first statewide water bill assistance program, promising benefits targeted at low-income water utility customers (as opposed to subsidies for the utilities that serve them). The proposal envisions reaching as many as 4.3 million households. The three-tier eligibility and benefit framework is an admirable effort to match benefit levels to customers’ needs.

The proposal is also unabashedly redistributive in its aims, using tax revenue to subsidize low-income households’ water bills. This sort of redistributive approach is important for an assistance program in a state as large and economically diverse as California. The benefit levels are modest but significant, and although they provide percentage discounts, the three tiers smartly designed with absolute cost burdens in mind.

On the other hand…

Some aspects of the proposal are worrisome. Some bits are merely (and probably intentionally) vague, others could be addressed with some minor tweaks; but others are more fundamental. In the next few posts I’ll look at that other hand.

New Jersey’s Water Quality [Achievement] Act

Former Mayor Lester Taylor, talking about East Orange’s reinvestment in its water system

The Garden State has quietly enacted a law that could transform water infrastructure in America.

Signed during Governor Christie’s waning days in office, New Jersey’s 2017 Water Quality Accountability Act (WQAA) introduced a series regulations requiring local water utilities to develop asset management plans, report on infrastructure conditions, and reinvestment adequately in their systems. For outsiders to the water sector, the WQAA might seem like a set of narrow, technocratic rules. But it’s really much, much more—not because of the rules themselves, but because the data that the rules will generate can change the way that people think about the crucial but unseen systems that sustain American cities.

A renaissance artifact in a German village helps explain why.

Drinking water and credit claiming

While Governor Christie was signing the WQAA, my wife and I were sightseeing in Germany. There we visited Wertheim, a small town nestled on the banks of a river. Right in the village square stands the Engelsbrunnen, or “Angel’s Well.” The village has been there since the 8th century, but this well was constructed in 1574. The well’s construction transformed life in the village—before the well was built, villagers had to walk 100 yards down to the river to fetch water.

16th-century state-of-the-art urban water supply

But the really interesting thing about this well is the structure that surrounds it. This wasn’t just a utilitarian bit of public works—it was, and remains, a jewel at the heart of the village. It’s named for the twin angel sculpture at the top of the structure, but what really stands out is the sculpture in front, at eye-level:

Hey there villager! Enjoying that clean, convenient water?

That is the mayor of Wertheim in 1574. He didn’t just want his people to have water, he wanted them to know who delivered it. And every day, when the villagers filled their pails of water, they’d do so standing face to face with the image of the mayor who built it. For Wertheim, the well was a major improvement in quality-of-life. For the Mayor, the Engelsbrunnen was what political scientists call a credit-claiming opportunity.

Politicians then, like politicians now, like to claim credit for good things. In the 19th and early 20th centuries, modern drinking water systems provided politicians with ample credit-claiming opportunities. And with good reason! Drinking water systems are amazing! They are the everyday miracles of the modern age.

Blame avoidance and infrastructure neglect

Unfortunately the politics of American drinking water have changed. For decades Americans have had the luxury of taking drinking water for granted. Maintaining or upgrading drinking water systems doesn’t offer the same kind of credit-claiming opportunity as building them.

When the public takes water for granted, leaders fear anger over rate increases, which they must balance against the fear of a disaster. As National Association of Water Companies CEO Rob Powelson put it: “No president or governor wants to have a Flint Water Crisis on their hands.”

That’s what political scientists call blame avoidance.

The thing is, blame-avoidance isn’t a very good motivator for infrastructure investment. If my political goal is to avoid blame for a disaster, then my tradeoff is tax or rate increases today vs. the risk of disaster on my watch. Rate increases today are immediately visible and unpopular; to politicians, the risk of disaster can feel remote—my successor’s problem, not mine.

From fear of failure to expectation of excellence

That’s where New Jersey’s WQAA has the chance to transform the politics of drinking water. With the data generated under this new law, researchers will be able to trace the full nexus of the relationships between costs, water quality, system performance, and capital reinvestment. We’ll be able to show how to maintain affordability while also maintaining public health and economic prosperity.

But most importantly, all that analysis can make water infrastructure a credit-claiming opportunity again. We’ll be able to quantify the health and environmental benefits that come from water infrastructure, and so give leaders a reason to brag about their investments in these critical systems.

My only gripe with the WQAA is its name: the word “accountability” implies a threat of punishment for failure, rather than opportunity for success. With due respect to the NJ legislature I’d have preferred a different name: the Water Quality Accountability Achievement Act. Water system maintenance, reinvestment, and public reporting on performance shouldn’t be feared as a cause of punishment, but embraced as a chance to celebrate excellence.

Hats off to New Jersey’s water leaders for seizing this moment and blazing a promising trail. New Jersey’s WQAA gives water sector leaders the chance to make this moment an inflection point: the time when water stopped being an afterthought and became a core policy concern again; when the water sector turned away from fear of failure and back to visionary achievement.