A California Surprise, Part 2
How private implementation separates public policies from their political costs.
Warning: this post contains hardcore wonkery.
In 2015 the California State Water Resources Control Board (SWRCB) ordered drinking water utilities to reduce water usage by 25% statewide. As my last post described, something surprising happened: compared with local governments, the state’s private, investor-owned utilities imposed stricter water use regulations, were nearly twice as likely to comply with the state mandate, and conserved significantly more water overall.
Though counterintuitive, this difference in public and private sector water conservation follows rationally from the political institutions that govern water in America generally and California specifically. The keys to this conundrum are money and politics.
Financial risks of conservation
American water utilities operate on a fee-for-service basis; typically, customers pay a fixed monthly charge, plus a charge for each unit of water. Faced with resource scarcity or some other environmental problem, it may make sense to curb water consumption—say, in response to a drought. But reduced consumption reduces revenue. For utilities that rely on rate revenue to fund their operations (and, in the case, of private utilities, to pay their shareholders), conservation can be environmentally good but financially bad.
The financial risks of conservation are especially severe for utilities due to their very high fixed costs. As I’ve observed before, whether a utility delivers one gallon or ten million gallons, the costs of constructing, maintaining, and operating reservoirs, treatment plants, and distribution pipes are the same. A drop in water sales doesn’t bring a matching drop in costs to the utility, so reduced consumption threatens financial sustainability (for government utilities) and profitability (for investor-owned utilities).
Utilities are natural monopolies, and so could charge customers exorbitant prices if they were allowed to set prices any way they like. For that reason, utilities are subject to government price regulation. But the institutions that govern private and public utilities are different, and present them with very different incentives to comply with state conservation rules.
Price regulation & decoupling
Let’s start with private utilities.
Governments regulate private utility pricing through state Public Utilities Commissions (PUCs); in California the PUC is composed of five appointed commissioners. The PUC process is technocratic and legalistic, usually drawing scant media attention. PUC price regulation proceeds under the cost of service principle: companies are limited to recovering the actual cost of providing service, plus a legally-sanctioned rate of return.
Decades ago, the conflict between conservation and profitability for private utilities led environmentalists to develop rate decoupling: the separation of a firm’s revenues from the volume of product it sells. If conservation causes revenue shortfalls, decoupling provides for automatic rate increases to make up the loss. In that way, decoupling shifts the financial risks of conservation from utilities’ investors to their customers, eliminating the incentive for utilities to sell more and more energy, water, or whatever. Decoupling can work in situations where private utilities operate under PUC regulation, and has generally been successful in stimulating conservation in the energy sector. Today about half of US states use rate decoupling for electrical utilities.
In 2008, California became one of just two states (the other is New York) to adopt decoupling for water utilities when it introduced the Water Revenue Adjustment Mechanism (WRAM). Private utilities take advantage of this provision when conservation causes a loss of sales revenue: financial losses associated with reduced sales volumes are recovered in future rate increases through WRAM. PUC records show that by Spring 2018, at least 39 of the 62 investor-owned utilities subject to California’s conservation mandate had invoked WRAM and raised rates following the drought. Decoupling irritates customers, who understandably grumble about paying more for water they didn’t use—the paradox of conservation. But those grumbles are largely impotent, as the PUC’s technocratic process allows WRAM under state law.
Water rate politics & the conservation paradox
And then there are local governments.
Governments (including counties, municipalities, and special districts) that own drinking water utilities are essentially self-regulated with respect to pricing; their rates are set by city councils and district boards. Public water rates are thus subject to the political calculations of local elected officials. Water customers are also voters who prefer lower rates, and so raising rates can have bad electoral consequences for politicians. Unlike the technocratic PUC process, rate-setting for government utilities can be a contentious affair. In California the political risks are especially pronounced, since public water rates are subject to Proposition 218.
California local government utilities can raise rates when conservation measures cause revenue shortfalls; they need not seek permission from the PUC. But raising rates is politically risky for local officials. Whatever their attitudes toward sustainability, citizen-customers of government utilities are just as irritated as customers of private utilities when they use less but pay more. Government managers and elected officials are wary of angering their voting water customers if revenue losses force rate increases.
Consider the politics of water conservation in the City of Redlands. California’s 2015-2016 emergency rules assigned the city a 33% conservation standard. The city responded with a series of conservation measures, but met its conservation standard in just two out of twelve months and achieved only 11.3% conservation overall. Still, reduced water sales caused a city revenue loss of about $2 million. When utility staff recommended a 19% rate increase to cover the shortfall, more than 3,000 citizens filed protests against the increase in advance of a raucous, five-hour City Council meeting on the subject. Drought-related rate increases prompted similar protests and/or legal challenges in Alameda County Water District, East Bay MUD, Hillsborough, Los Angeles, Pleasanton, and Yorba Linda.
When combined with rate decoupling, private water provision shifts to private firms the political risk that discourages conservation by governments. The unelected PUC absorbs those political risks instead. In this way, investor-owned water utilities provided a kind of political decoupling during California’s drought: private implementation of conservation rules separated a controversial environmental policy from its political costs, and helped make private firms more effective conduits of environmental policy than were government agencies. Youlang Zhang, David Switzer, and I develop the idea of political decoupling and its broader implications in a forthcoming article.
Of course, decoupling conservation from its political costs does not eliminate those costs so much as place them beyond the reach of ordinary citizens. That might make for effective drought response, but it weakens democratic local governance.
A California Surprise, Part 3 will discuss what happened after the SWRCB dropped the conservation mandate.
A California surprise, Part I
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.
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.
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:
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.
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.
Public Administration Professionalism at the Flashpoint
Presidents issue orders, Congress passes laws, and courts make judgments, but immigration policy really succeeds or fails when bureaucrats interact with people seeking entry to the United States. Immigration policy is what happens when an ICE agent detains an individual (or doesn’t), separates children from parents (or doesn’t), and puts kids in cages (or doesn’t). Immigration policy is what happens when a DHS contractor attends to a wailing toddler, or leaves frightened children to their own devices in adherence to administrative guidelines. In the end, human rights are protected or violated not by politicians, but by the men and women who put regulations into action.
What drives bureaucratic behavior?
Although public attention tends to fixate on laws and rules when trying to understand public policy, decades of public administration research indicates that organizational norms and values determine what public servants do. Public employees from soldiers to teachers to police officers look to their peers for informal guidance on what is honorable, acceptable, or forbidden. Monitoring systems and the threat of disciplinary action turn out to be lousy predictors of public administrators’ actions. When bureaucrats enforce (or refuse to enforce) rules, it’s because their fellow bureaucrats sanction that behavior. Smart public agency leaders do not rely solely on orders, but rather seek to instill systems of ethics and build a sense of mission in their organizations.
Professionalization in public administration is an effort to enhance this kind of peer accountability by building loyalty to principles of public service. America’s military academies are excellent examples: they seek to build within officers not only respect for chain-of-command, but also a system of ethics that defines military professionalism. In the ideal, professions provide an “inner-check,” enforced by social approbation or disdain by fellow professionals, that guides individuals to uphold shared norms and resist unethical orders.
Administration at the border
The agencies at the flashpoint of America’s current immigration crisis give plenty of reason to worry. The main bureau charged with implementation of immigration laws is the Immigration and Customs Enforcement (ICE) agency, which was formed fifteen years ago when the US Customs Service (part of the Treasury Department) and Immigration and Naturalization Service (Justice Department) were consolidated within the new Department of Homeland Security as part of the post-9/11 reforms. Organizational culture and professionalization take time to develop, but this young agency has been charged with implementing some of the country’s most vexing and incendiary policies, even as its nascent culture is still forming. In early 2017 the Trump Administration ordered the hiring of 10,000 new ICE agents. Simply hiring and training that many people quickly is a daunting task; professionalizing and building a sense of mission in each new agent even more so. The Federal Bureau of Investigation (FBI) provides a useful contrast. ICE and FBI agents each receive 20 weeks of training upon entry into their agencies. But new FBI agents must also be accomplished college graduates, and upon appointment they enter a highly-professionalized agency with thousands of experienced agents, a storied history, and deep sense of organizational identity. It is not surprising that FBI officials have been more defiant, and ICE officials more acquiescent, in their relationships with the Trump White House.
DHS also relies heavily on private contractors to operate detention facilities, and some of the most troubling accounts of child migrant treatment emerge from these privately-operated facilities. If public administration professionalism implies loyalty to professional norms and ethics, then private contracting does just the opposite. A contractor’s livelihood depends upon satisfying a client (in this case, DHS executives), adhering to regulations, and fulfilling contracts. A contractor whose personnel refuse to treat migrant children as specified in a contract is likely to find that contract terminated.
Administrative evil and public professionalism
Governments can do great good and evil because bureaucratic agencies provide the capacity to put policy into action, as Guy Adams has observed. Administrative evil is not a consequence of inefficiency (the usual bureaucratic lament), but rather a result of a technical rationality that is the very hallmark of bureaucracy. Without professionalism, bureaucrats pass accountability for their actions to political superiors. Indeed, a naïve view of democratic accountability would demand dutiful compliance by ICE agents to orders (or tweets?) issued from above. Public service professionalism implies that a federal employee’s primary duty is to the public good, not to the whims of the person at the top of the organizational chart. Without a foundation of professional ethics and systems of accountability to professional peers, the rational administrator can find himself or herself participating in destructive acts.
So long as the United States has borders, it will need an agency to make those borders meaningful. But building a sense of professionalism and peer-accountability to ethical principles is crucial to ICE’s or any other border enforcement agency’s role in a democratic state. In 1952, political scientist Norton Long reflected on the lessons of the Second World War for American public administration:
It is a fortunate fact of our working constitution that it is complemented by a bureaucracy indoctrinated with the fundamental ideals of constitutionalism… In a real and important sense, it provides a constitutional check on both legislature and executive. It is no neutral instrument like the German bureaucracy, available to Nazi and democrat alike, pleading its orders from ‘die hohe Tiere’ as an excuse for criminal acts.
The decency of the agents charged with implementing public policy is a crucial check against government abuse. Professional public servants are the first line of defense and the last best hope for protecting human dignity in times of political turmoil.