Water Sector Reform #1: Consolidation
With a major federal investment in water infrastructure possibly on the horizon, the United States has a once-in-a-generation opportunity to leverage that money into reforms to transform America’s water sector. This is the first in a series of posts outlining five broad proposed reforms.
The first is consolidation and regionalization of water utilities. This is the single most important, badly-needed reform. Without this reform, any major federal investment will be a temporary fix, and the rest of my proposed reforms probably won’t work without it. To understand why, start with a simple observation:
There are WAY too many water systems
One of the things that really surprises newcomers to the American water sector is just how many water systems there are. The energy sector provides a useful comparison. In the United States today there are about 3,200 electrical utilities and about 7,800 gas utilities. There are about 50,000 community water systems.
These systems are highly skewed in size. It turns out that 40,000 of those 50,000 are very small, serving populations fewer than 3,300. These small systems serve less than 10% of the population, but they are 80% of the total systems. A little more than half of the US population gets its water from the largest thousand utilities.
It’s difficult to overstate the effects of this extreme fragmentation. Virtually every aspect of America’s water sector is worse because there are so many tiny systems that lack the capacity to operate effectively.
Small systems, big problems
America’s water problems aren’t only in small systems, but there’s no question that small water systems are disproportionately plagued by poor water quality. Here’s the relationship between system size and violations of the Safe Drinking Water Act’s heath standards:
As you can see, violations are strongly related to system size. In small systems it’s not uncommon for utilities to have multiple violations, year in and year out. This graph is from my own analysis w/David Switzer, but study after study after study after study after study finds this same relationship. Here’s the same plot for sewer treatment plants and NPDES permit noncompliance the Clean Water Act:
High prices, too
Adding insult to injury, water is also more expensive in small systems. Small systems pay more for capital, they have fewer customers to share the fixed costs, and they’re more vulnerable to revenue fluctuations, which limits their flexibility in rate design. Here’s the relationship between the price of basic monthly water and sewer service for a family of four (about 6,000 gallons a month) measured in hours of labor at minimum wage.*
Water and sewer services are most expensive in small systems, and get cheaper as systems grow. So with both quality and price, there’s strong evidence that there are huge economies of scale to the water sector. These economies of scale are well-understood.
Regulatory economies of scale
But there’s another, less obvious and more pernicious problem with all these small systems: all that fragmentation creates practical problems for regulators. Every one of those 50,000 systems has to be managed, monitored, and regulated by the EPA, in conjunction with more than a hundred state, territorial, and tribal bureaucracies. 50,000 systems means 50,000 sites to visit, 50,000 files to keep current, and 50,000 records to report. State regulatory offices don’t have legions of workers—let alone the information systems—to handle all that work.
A well-kept secret of the water sector is that small systems are held to much lower standards than larger systems. It’s not just that enforcement is lax with small systems; the agencies that regulate water actually have different enforcement guidelines for small systems, with less stringent standards.
The good intention that paved the way to this particular hell is the recognition that small systems often lack the organizational capacity to comply with the rules. Water regulations are unfunded mandates. So rather than continuously slamming small systems for their violations, regulators move the goalposts, or simply look the other way when violations occur. So the correlation we see between size and SDWA and CWA violations actually grossly understates the real relationship between scale and water quality. Intentionally lax enforcement consigns people served by small systems—often poorer, rural populations—to heightened health risks and poor environmental quality.
Shrink by Growing
These problems are widely recognized. Sure, there are some excellent small systems, and small system operators often achieve remarkable things with limited resources. But the data are clear, and the stakes are high. The common sense solution is to reduce the number of systems through consolidation: shrink the number of systems by growing utility organizations.
Consolidation can happen when multiple systems merge, a bigger utility takes over a smaller one, or when an investor-owned firm buys up small systems. The right consolidation approach will vary from one place to another; we ought to be agnostic with respect to the institutional form. Physically integrated utility systems are best where possible, but small systems can be folded into larger organizations even when they’re physically separate. That is, multiple small systems can be operated by a single organization. Several government and investor-owned utilities already operate under this model.
But it’s hard. Consolidation efforts often face fierce political resistance, either from communities who fear losing control or from staff who fear losing jobs. Sometimes it’s difficult to find larger utilities willing to take on the responsibility for a small, failing systems. Consolidation is controversial in the water sector; in certain circles “consolidation” is a dirty word. I’ve heard privately from multiple regulatory officials that they desperately want consolidation, but are afraid even to utter the word “consolidation” in public. Sometimes it’s just hard to navigate the legal and financial complexities of consolidation. Consolidation has been agonizingly slow in Connecticut; four years after passing a law to promote small system consolidation in California, little has happened.
Tastier carrots, bigger sticks
Shrinking the number of systems is the single best thing we can do to improve water infrastructure in America. So my first proposal is to reduce the number of water systems by an order of magnitude—to something like 5,000-10,000 utilities—by 2030. As is often the case in public life, moral appeal and clear empirical evidence have been insufficient to overcome the political barriers to consolidation. That’s where federal leverage can make a difference.
Federal funding for local water, sewer, and stormwater systems must be contingent on consolidation. Let’s spend money to fix failing systems, but only if the fixes put them on a path to self-sufficiency. Low-interest loan programs probably aren’t sufficient to induce consolidation; hundreds of billions in federal grants would be a whole lot more appealing. For small systems, federal grants must be awarded only with consolidation. For larger systems, federal grants should be awarded only to utilities that agree to takeover nearby or adjacent smaller systems. Consolidation can be technically, legally, and financially complicated, so federal funding should also provide technical assistance to support the process.
A key corollary to that federal largesse is a levelling of the regulatory playing field. There must have one rulebook: all water and sewer systems must be held to the same standards. No more loosening the rules for small systems because they lack the organizational capacity to comply with environmental regulations. If systems lack the capacity to comply with the rules, then regulators should be empowered to force consolidation for systems that fail perennially.
Next time I’ll turn to the second major proposal: a change in regulatory transparency aimed at changing the local politics of water infrastructure.
*You can see a bunch more analysis of affordability here.
© 2019 Manny P. Teodoro
What the Cuyahoga River Fire says about the past and maybe the future
Fifty years ago this week the Cuyahoga River caught fire in downtown Cleveland.
Observers of U.S. water policy and environmentalism more generally have been celebrating the fire’s golden anniversary all year, because three years after the Cuyahoga River burned, Congress passed the Clean Water Act. The Safe Drinking Water Act followed two years later. The Cuyahoga River Fire is a textbook example of what political scientists call focusing events: high-profile occurrences that suddenly put previously obscure issues onto the public policy agenda.
The 1969 fire is rightly iconic today, but many forget that it was the twelfth time that the river burned. Why did the 1969 fire catch the public imagination? The truth is that nobody knows. But it did, and it changed the way Americans think about water pollution. The fire presaged a series of laws that fundamentally changed the regulation of water pollution in the United States, invested hundreds of billions in infrastructure, catalyzed new technology, and built a generation of professionals dedicated to protection of the nation’s waters.
A new focus
A year ago I called the Flint Water Crisis the Cuyahoga River Fire of our generation. Flint has changed the way that Americans everywhere think about water infrastructure. As with the 1969 Cuyahoga River Fire, Flint wasn’t the first, wasn’t the worst, and wasn’t the biggest drinking water disaster in recent U.S. history, but it’s the one that caught the public imagination.
The Flint story wasn’t just about water chemistry and failing infrastructure—it was also about bureaucratic organizations and partisan politics. And it was about poverty and race: Flint showed America that water infrastructure is an environmental justice issue. That’s expanded the political coalition focused on water infrastructure. There’s a growing consensus that existing infrastructure funding arrangements are failing.
I’ve worked on water system management, regulation, and finance for more than 20 years and have never seen this kind of public attention to the issue. As recently as two years ago I dismissed the idea of a trillion-dollar federal program for water infrastructure as politically unviable. But something has shifted. Last month Congressional leaders and the president began sketching out a $2 trillion infrastructure package—with potentially hundreds of billions for water, sewer, and stormwater systems.
Those talks have broken down, but the fact that they were even happening suggest that we may be an election away from a major federal investment in infrastructure. Whether it’s next year or two years from now, it looks like Washington may soon be raining infrastructure money. That’s music to the ears of lots of activists who cry out that an injection of federal money is needed to fix America’s water systems.
Recovery & reform
Today people paddle their kayaks on the Cleveland riverfront and safely eat the fish they catch there. If the problems weren’t too big then, they surely aren’t too big today.
To be honest, I was a little relieved when negotiations between the White House and Congress faltered last month, because the breakdown gives us a chance to pause, take a deep breath, and think systemically. Today, the principal barriers to progress in the water sector are not environmental or technological—they are political, social, and economic. Accordingly, a big federal funding package can and should be used as leverage to reform the institutions that govern water in the United States.
Recently I was asked to speak about water infrastructure at the University of Rhode Island’s Metcalf Institute. With the Cuyahoga River Fire’s golden anniversary on my mind, I proposed five broad reforms to the U.S. water sector that ought to accompany any big federal program. They are:
- Consolidation / Regionalization
- Regulatory Equality & Transparency
- Technological Investment
- Human Capital
- Water Equity
Later this week I’ll start a series of posts elaborating on these to help get a deeper conversation going. Since this is a blog, I’m going to breeze by a great deal of detail and keep things at a 30,000-foot level. But each proposal is rooted in empirical research, each part is ambitious, but also technically and politically feasible. Over the next 2-3 years we have a once-in-a-generation opportunity to rebuild and reform water governance. Let’s make the most of it.
A trillion-dollar federal infrastructure package and a chance to reform the water sector
– Warning: mixed metaphors ahead –
Observers of America’s water, sewer, and stormwater systems have known for years that the nation faces a trillion-plus-dollar bill for repairs, replacements, and upgrades. I’ve long been skeptical about the prospect of federal funding alleviating that burden in any significant way. With Congress ideologically divided and its chambers split across parties, the idea of a major infrastructure program coming out of Washington would seem unlikely on its face.
But rumblings over the past eighteen months have made me reconsider. Last spring the White House released an infrastructure plan that called for significant investments in water.*
Just before the 2018 mid-term elections, Congress passed the bipartisan America’s Water Infrastructure Act, which signaled federal priorities for the water sector but stopped short of sending tens of billions into the nation’s pipes and canals. Then last week President Trump met with House Speaker Pelosi and Senate Minority Leader Schumer and apparently agreed in principle on a $1-2 trillion federal infrastructure program.†
Little is known about the dimensions of the program, beyond the eye-popping figures. What might a huge federal infrastructure package mean for the water sector?
Back to an afterthought?
Transportation is the politician’s perennial infrastructure darling, as “roads and bridges” (Rosenbrigez) offer excellent credit-claiming opportunities for politicians who like to associate themselves with gleaming, highly visible projects. President Trump has made a career of putting his name on buildings, so we shouldn’t be surprised that he’d like to put his name on some Rosenbrigez, too. Although Pelosi and Schumer’s letter on infrastructure to the White House last week mentions “broadband, water, energy, schools, [and] housing,” transportation continues to grab the headlines: Time’s glibly declared that all $2 trillion was for Rosenbridgez.
Although water, sewer, and flood control systems are arguably more vital, much of that infrastructure is literally buried. Politicians aren’t clamoring to put their names on sewage treatment plants. Creating credit-claiming opportunities for water infrastructure is an ongoing challenge. If Washington is really going to pour hundreds of billions of dollars into infrastructure, water sector leaders will need to work hard to make sure their systems aren’t forsaken in favor of sexier transportation projects.
The promise & perils of fiscal federalism
Let’s assume for blogging’s sake that the water sector gets some major love (say, >$300 billion) in a trillion-dollar infrastructure bill. When contemplating such a massive federal capital infusion, it’s worth considering the last time Uncle Sam poured hundreds of billions into the water sector. The 1972 Clean Water Act and 1974 Safe Drinking Water Act included grants that provided as much as 90% matches for local investments in water and sewer infrastructure. The political genius behind the CWA and SDWA was that sweeping new environmental mandates came with considerable sweeteners in the form of federally-funded jobs in construction and environmental engineering. The federal funding made the new regulations politically palatable. From a policy perspective, the idea was for the federal funding to help create systems that local governments would operate, maintain, and upgrade in perpetuity.
Unfortunately, it hasn’t worked that way. One of the main reasons so much of America’s water infrastructure is in trouble is that there are strong structural disincentives for local leaders to invest adequately in water systems, as I’ve observed before. Maintaining water infrastructure doesn’t offer much of a credit-claiming opportunity, and local officials worry a great deal about being blamed for rate increases. Many of the organizations that operate water systems are ill-suited to the task; the institutions that govern and regulate water infrastructure are badly fragmented and often ineffective.
Attaching some strings
A federal water infrastructure funding package that fails to address the systemic factors that got us into this mess would be a wasted opportunity. Hundreds of billions of dollars might help shore up failing systems today, but would simply kick the problem down a generation: our children and grandchildren would face a similar infrastructure crisis in 2070, and justifiably curse their forebearers.
Rather than simply firing a money cannon at local water systems, federal leaders should use a massive funding package as leverage to reform the institutions that govern, regulate, and finance water infrastructure in America. In future posts I’ll explore some of the strings that Congress might consider attaching to their water infrastructure dollars.
*President Trump has since disowned his own plan. 🙄
†Still unclear is the small matter of how to raise a couple trillion dollars. Donald, Nancy, and Chuck are supposed to meet about that soon.