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Wholesale Savings

drought porn

During California’s recent drought, the utilities that own their supply sources conserved more than the those that purchase water from wholesale suppliers

-Warning: this post contains hardcore wonkery-

A while ago I blogged about my ongoing work with Youlang Zhang and David Switzer on water conservation in California. The first of our studies is now published at Policy Studies Journal; more are on the way. There we saw that financial incentives and institutional politics led to the surprising result that private, for-profit companies out-conserved local government utilities during a recent drought.

But another interesting pattern emerged from that study: a significant difference in conservation between utilities that draw their water supplies from wholesale sources.

Where utilities get their water

The drinking water utilities that serve American communities get their water in one of three ways*:

1) Pumping groundwater from wells that tap underground aquifers;

2) Drawing surface water from lakes and rivers; or

3) Purchasing water from a wholesale water utility.

In the first two cases, local utilities own wells, surface water intakes, and treatment plants. About 29% of American utilities fall in the third category, getting their water through wholesalers. In these cases, the local utility owns a distribution and/or storage system, but the supply works and perhaps the treatment facilities belong to another utility. Sometimes these wholesale utilities have retail customers of their own, sometimes they are purely wholesale suppliers.

MWD supplies water for more than 19 million Californians

In California, more than a third (36%) of water systems get at least part of their water from a wholesale supplier. A handful of very large wholesale water suppliers like Metropolitan Water District, San Diego County Water Authority, and Santa Clara Valley Water District manage major supply works, and then sell water to cities, special districts, and investor-owned retail water utilities.

Spreading the risk

A major advantage of big wholesale water utilities is that they allow a region’s water supply to be managed holistically and comprehensively. Rather than individual communities competing and depleting water supplies, regional wholesalers can plan and balance water supply needs. From the local perspective, wholesale utilities help diversify supply and so guard against catastrophic supply shortages. They also allow communities across a region to pool their capital for greater efficiency. Together these features spread both supply risk and financial risk across many local utilities.

“Take-or-pay”

Sales agreements between retails and wholesalers vary widely across the country, so generalizing is difficult. But one common feature of wholesale contracts is the take-or-pay provision. Under take-or-pay arrangements, the wholesaler agrees to supply and the retailer agrees to purchase a fixed volume of water over a given period of time for a given price. If retail demand exceeds the contract volume, the retailer pays for more on a volumetric basis. If retailer demand falls short of the contracted volume, the take-or-pay provision requires the retailer to pay the wholesaler anyway, as if it had used the entire contract volume.†

In other words, under take-or-pay contracts, the retailer pays the wholesaler the same amount, even if the retailer uses far less water than the contracted volume.

Wholesale supply & the logic of conservation

Got all that? Still with me?

Here’s what it all means for conservation. Wholesale supply arrangements reduce supply risk and long-term financial risk to local utilities. Take-or-pay contracts make a lot of sense for long-term stability for supply systems that have high fixed costs.

But in the short-term, these wholesale arrangements create disincentives for retail conservation during a drought. Under wholesale agreements, short-term supply risk from drought is shifted from the local utility to the wholesaler: the wholesaler is legally responsible for maintaining adequate supply. Meanwhile, fixed take-or-pay contracts leave retailers on the hook for the same amount no matter how much water their customers actually buy. The retailer may suffer significant sales declines if it rains all summer, or if the state imposes drought restrictions, but the retailer still has to pay the wholesaler as if demand was normal.

Together, these factors create structural disincentives for emergency conservation for retail utilities under wholesale agreements.

Wholesale $avings

Does diluting risk also dilute conservation? As I explained in an earlier post, the recent drought in California prompted that state to impose conservation rules on retail water utilities from June 2015-May 2016. Each utility was assigned a specific conservation target and the state recorded overall conservation by each utility.

Did utilities that operate under wholesale supply arrangements perform differently from utilities that own their own supplies?

Our analysis of data from the drought mandate period is pretty striking. After accounting for a host of organizational and environmental conditions, we found that water systems that rely on wholesale water supplies were 42% less likely to meet state conservation standards, compared with systems that own their own supplies.

We also found that, after accounting for other factors, utilities under wholesale contracts conserved an average of 2.6% less each month relative to systems that use their own wells or surface water sources. In a state as large as California, this small percentage difference equates to tens of billions of gallons.

Follow the money

These patterns don’t prove that wholesale contracts caused California utilities to slack on conservation. But the data certainly align with the short-term incentives that wholesale supply arrangements create, and there aren’t other obvious reasons for the disparity. The lesson here is to pay close attention to wholesale contracts when setting conservation rules, so that conservation and financial incentives work in concert.

 

 

*Technically there are other sources, too—desalination and water reuse, for example–but they’re so rare that they don’t allow for much meaningful analysis.

 ”Take-or-pay” is a weird phrase, since there’s really no “or” to the arrangement. Seems like “fixed fee” is a more accurate label, but then I’m not a lawyer.

Income and Water Service Experiences

Another way in which it’s tough to be poor

Better with more money

Drinking water utilities are great, but they aren’t perfect. Sometimes there are problems. Do those problems occur randomly? Or are there observable patterns in the water service problems?

Recently I’ve been posting about some findings from a Texas A&M Institute for Science, Technology & Public Policy (ISTPP) national public opinion survey. The survey’s carefully-designed sample of nearly 2,000 individuals is representative of the US population, and so offers an extraordinary look at public perceptions about water service. Earlier posts reported on attitudinal differences between water professionals and the general public, and on the ways that gender predicts opinion on water issues. I’m continuing to write up interesting findings from the ISTPP survey as time allows.

Today I’m looking at income.

Water service problems

The ISTPP survey asked respondents to say whether they had experienced each of the following problems with their drinking water with a simple yes/no answer:

  • The water does not taste good (31.5% yes)
  • The water is cloudy or dirty (19.5%)
  • Water pressure is low (29.2%)
  • The water causes sickness (3.8%)
  • Water billing or payment problems (10.2%)

Importantly, this survey captures perceived water service problems, not actual problems—we don’t know that any given respondent actually experienced low water pressure, for example. We only know whether a respondent thinks (s)he experienced a problem. Likewise, we don’t know whether water actually caused sickness, only whether the respondent believes that it did. Fortunately, the large majority of respondents said “no” to all of these.

But the “yes” responses didn’t happen by chance. I fitted logistic regression models to identify correlates of water service experiences using the demographic variables in the ISTPP survey, such as race, ethnicity, age, urban/rural location, region, and income. These models estimate the likelihood of experiencing each of the five service problems.

A troubling pattern

The demographic correlates of water service problems vary, but across all five items, household income was the single strongest and most consistent predictor of water service problems. The graph below shows the likelihood of reporting that water billing problems at various income levels, with all else held equal (vertical spikes represent 95% confidence intervals):

At a $20,000 household income, there is a 13% chance of reporting billing problems. At $50,000, the likelihood is to about 9%; at $100,000 the likelihood drops to about 8%. That all makes some sense; we’d generally expect billing problems to correlate with income.

But the same pattern emerges for other kinds of water service problems, too. Here is the likelihood of reporting that water tastes bad at various income levels, again with other variables held constant:

At a $20,000 household income, there is a 37% chance of reporting bad-tasting tap water. At $50,000, the likelihood is to about 30%; at $100,000 the likelihood drops to about 25%.

Here’s the likelihood of experiencing cloudy or dirty water by household income:

Here’s the likelihood of reporting low water pressure by income:

And finally, here’s the likelihood of reporting that water caused illness by income:

Taken together, this is a sobering picture.* There is a clear relationship between income and the way that Americans experience their drinking water utility service. These results resonate with recent research finding a positive relationship between tap water consumption and income, with attendant implications for public health.

 

 

 

*In a future post I’ll look at race and drinking water experience; the picture won’t be much prettier.

Golden State Waterers

A California surprise, Part I

Drought porn

Something unexpected happened when California ordered its utilities to save water: the state’s investor-owned private utilities out-conserved local governments.

California’s long-term drought began as early as 2007, but intensified to crisis conditions by 2012. Conditions worsened, and in response 2015 Governor Jerry Brown and the California State Water Resources Control Board imposed restrictions on 408 drinking water utilities designed to reduce urban water usage by 25% statewide. The order required utilities to cut water use, but left individual utilities to choose the means by which to achieve conservation. The mandate assigned each utility its own conservation target, with standards ranging from 4-36% reductions relative to 2013 levels. These standards were formulaic, and varied based on utilities’ historical water consumption.

It was pretty bad

These conservation rules were in place for twelve months—June 2015 through May 2016—and applied to both local government utilities and private, investor-owned utilities. Conservation rules were assigned based on historical demand patterns and supply considerations only, not on ownership or governance.

Happily, the State of California has shared utility-level conservation data lavishly—a boon to water policy researchers! Over the past year, I’ve been sifting through that mountain of data with Youlang Zhang and David Switzer to see how California’s conservation efforts have fared. We’re discovering some fascinating things. The first of our studies is now forthcoming in Policy Studies Journal.

Restricting the flow

Faced with water scarcity, communities frequently restrict residential outdoor water use, such as car washing and especially lawn/garden irrigation. These water restrictions are effective in driving immediate reductions in water consumption. In California those restrictions typically take the form of limiting the number of days when outdoor irrigation is allowed each week. The graph below shows how public and private utilities regulated outdoor irrigation during the drought.

Eyeballing that graph, there doesn’t appear to be much difference between public and private utilities. But after adjusting statistically for a host of factors like utility size, demographic composition, and hydrological conditions, it turns out that private, profit-seeking, investor-owned utilities restricted irrigation about 4% more than public, local government utilities. That may not seem like much, as we’ll see it’s actually huge.

Meeting the mandate

We were also interested in what made utilities more or less likely to comply with the state’s conservation rules. Overall compliance was about 53%–that is, on average 53% of utilities reached their conservation targets each month. We modeled compliance statistically, and found a number of interesting correlates of success and failure. But most notable was a yawning gap between public and private sector: after adjusting for other factors, private utilities were nearly twice as likely as similar public utilities to meet the state’s conservation standards.

Conservation achievements

Finally, we analyzed overall conservation during the mandatory conservation period. And again, we found that, after accounting for other factors, private utilities conserved an average of 3% more water each month than their public counterparts during the mandatory restriction period. Although this difference is small in percentage terms, it reflects an enormous difference in absolute volume of water. This plot presents the distributions of conservation results from June 2015-May 2016 for local government utilities (green), and what it would have been if each utility had saved 3% more:

Monthly conservation relative to same month in 2013

The areas within the white bars on the right side of the distribution represent the conservation that didn’t happen due to differences in ownership. Three percent greater conservation would have boosted public utilities’ restriction compliance rate from 51 to 62 percent.

In substantive terms, three percent greater conservation by California’s local government utilities during the mandate period would have reduced the state’s water consumption by 54.6 billion gallons—enough to supply the City of San Francisco for more than two years.

Well that was unexpected

So what happened?

California is once again in the midst of a hot, dry summer; other parts of the world are, too. So it’s worth trying to figure out what’s behind the public-private disparity in drought response. Although it’s surprising at first blush, it’s actually a logical result of the institutions that govern water in America generally and California specifically.  My next post will explain why.*

 

 

 

*Spoiler: as usual, it’s about money and politics. If you can’t wait for the next post, you can read the forthcoming article.