Why rate structures, not assistance programs, offer the most promising path to water affordability
When discussions of water and sewer affordability turn to policy solutions, they typically focus on Customer Assistance Programs (CAPs). But a focus on CAPs bypasses a much more direct, effective, and efficient means of improving affordability: rate design. To see what I mean, consider the way we combat infectious diseases.
Therapy vs Inoculation
Clinical therapy and inoculation are both ways to fight infectious diseases. Each approach can improve health, neither is perfect, and some combination of both is useful in practice. But for the most serious diseases, inoculation is far superior to therapy.
Clinical therapy is costly. For therapy to cure a disease, a patient must recognize that (s)he is sick, be aware that treatment is available, seek treatment, and then follow a course of treatment and hope that it works. For health care providers, therapy requires highly skilled employees, careful diagnostic procedures, and treatment that can involve expensive drugs and equipment. Meanwhile, the broader community bears the costs of people who go untreated or carry the disease without symptoms.
Inoculation is comparatively inexpensive. Inoculation requires little time or sophistication from patients, and it is quick and easy for health care providers. A tiny minority might suffer adverse effects, but the community benefits from widespread immunization, which can sometimes effectively eradicate a disease from an entire population.
Customer assistance programs as clinical therapy
CAPs seek to ameliorate affordability problems caused in part by water and sewer rates. CAPs come in lots of shapes and sizes. Some are as simple as shut-off forbearance and budget billing; others involve income-qualified rate discounts or bill forgiveness plans; still others provide high-efficiency fixtures or appliances for low-income households.
Like clinical therapy, CAPs are costly. CAPs have obvious direct costs to the utility, like revenue lost through discounts or the direct cost of installing retrofits. CAPs can also have significant administrative costs: someone must determine which customers qualify, keep records of who receives or is denied assistance, and keep track of those who lose eligibility over time. Utilities sometimes coordinate assistance with other agencies to administer these programs more efficiently, but that only reduces administrative costs, it doesn’t avoid them. CAPs can be politically and legally risky, too, since they are explicit transfers from one group to another. In many states utilities are legally constrained from such transfers.
Less obviously, CAPs are also costly for their recipients. In order to participate in a CAP, a water customer must:
- Learn that the program exists;
- Find out if (s)he is eligible;
- Apply for the program; and
- Follow up with program administrators as necessary to maintain eligibility.
Each of these steps imposes a transaction cost of time and effort on working-class families. If participation requires an in-person visit, then transportation and child care add to those costs. Language barriers and distrust of government can raise transaction costs even further. There are good reasons to believe that many people who are eligible for and badly need CAPs never apply for them.
Rate design as inoculation
Some key elements of rate design can improve affordability directly, without the need for CAPs, by maintaining low prices for essential household water and sanitation. Specifically, affordability-friendly rate structures feature:
- Low fixed charges;
- Volumetric sewer prices based on indoor flows;
- Low volumetric water prices for essential household water use; and
- Steeply escalating volumetric prices for demand beyond essential use.
Like inoculation, rate design is a solution with low administrative burdens. Affordability-friendly rate designs create no additional transaction costs for utilities or customers. Since rate structures apply to everyone, there’s no need to determine or track income eligibility, and there’s no worry that eligible customers are failing to sign up. Customers do not need to learn about, apply for, or document their eligibility. Rate design isn’t an affordability cure-all, but it can go an awfully long way toward immunizing a population against unaffordable water and sewer service.
So why don’t more utilities use rate design to address affordability?
Ordinary organizational inertia is one reason, of course. There’s also a widespread misperception in ratemaking circles that affordability contravenes goals like cost-of-service equity, full-cost pricing, and/or conservation. Happily, affordability-friendly rate design can exist in harmony with all of these principles—I’ll tackle that topic in a future post.
But the greatest barrier to more affordability-through-rate design is probably revenue stability. High fixed charges generate revenue reliably. Revenue from volumetric charges fluctuate with water sales, which vary seasonally and can skyrocket or plummet depending on the weather. A utility doesn’t sell much high-priced, high-volume water if it rains all summer and nobody waters their lawn. That can leave the utility in tough financial shape, because the utility’s capital and operating costs are mostly fixed. Some utilities have responded to falling average water demand by raising their fixed charges, in large part to manage revenue volatility. That’s bad news for affordability.
So a key to more affordable rate design is developing mechanisms that manage utilities’ revenue risks. Adequately insulated from those risks, utilities can price water more equitably, efficiently, and affordably.
Earlier this week the American Water Works Association and Water Environment Federation hosted their first-ever Transformative Issues Symposium, a two-day meeting focused on a single critical issue affecting the water community writ large. The topic of this inaugural symposium was affordability. I served on the symposium’s planning committee, and had the honor of speaking at its opening plenary session. Here’s what I said.
It is a privilege to speak today on an issue that’s near and dear to me. Like many of the people in this room, I’ve been thinking about and working on affordability for long time. Later today I’ll be presenting some of my own research, but this morning I’m really speaking on behalf of the conference Planning Committee, so when I say “we,” I really mean the committee, AWWA and WEF, and the utilities community generally. My goal in this talk is to clarify language and lay out an agenda for what promises to be two jam-packed days to geek out on affordability.
But more fundamentally, we want to articulate a vision of what water affordability really means, and how we might turn that vision into reality. The very fact that you’re here in our nation’s muggy capital for two days of discussions on water and sewer affordability indicates that you don’t have to be told that this is an important issue—your presence here demonstrates that you “get it.”
So in a sense I’m preaching to the choir this morning. But as any churchgoer knows, sometimes the choir needs preaching, too; a sense of direction and means of articulating a common purpose on the path ahead. With that in mind, in the next few minutes I want to address three basic questions to unify and guide us for the next two days and the important work beyond.
We’re at an extraordinary moment for water affordability, if only because, for the first time in a generation, water and sewer infrastructure are on the national political agenda. A confluence of forces has pushed this issue to the forefront. The country is facing huge replacement costs for aging infrastructure. At the same time, there’s been a steep decline in federal grant support for water and sewer infrastructure—the programs that built these systems in the 1970s and 80s. Over the same period, we’ve seen steady increases in costs of housing & health care—essential costs of living. We’ve also seen a generation of wage stagnation, especially for middle- and working-class workers. So even as the broader American economy prospers, for many households there’s a real squeeze on the resources needed to pay the necessities of life.
But there’s something else going on too.
It’s not fair, but whether we like it or not, the Flint Water Crisis is now the public face of the water sector in America. The Flint Water Crisis put the politics of water infrastructure and regulation on front pages across the country, along with poverty and race. Flint isn’t the first, or largest, or most severe drinking water crisis in America in recent years, but it’s the one that caught the public imagination and put a spotlight on utility infrastructure. What happened in Flint is not just water and sewer, it’s also about poverty and race, working class wage stagnation, and ultimately it’s about human health. Flint’s water crisis began in many ways as a financial problem, and even today Flint customers pay some of the highest water rates in the country. That’s put affordability at the forefront of the national conversation on water.
Over the past two years, hardly a week has gone by without a major American news outlet running a story on drinking water and sewer issues. In 2016 Bernie Sanders mentioned water and sewer plants in a presidential debate (the water twitterverse fairly exploded in astonishment!). Water, sewer, and flood control figured prominently in the White House Infrastructure plan published earlier this year—which was surprising if only because politicians usually only give that kind of love to transportation and energy infrastructure. Just this summer California Senator Kamala Harris introduced federal legislation aimed at addressing water affordability. None of these people is a renowned water geek! You don’t need to be a political scientist to recognize that something’s unusual is happening when ambitious, high-profile politicians are drawn to water & sewer infrastructure.
I’ve been a part of the water utility community for more than twenty years; many of you have been at this for much, much longer. We haven’t seen this kind of widespread attention to drinking water and sewer in many decades. Now is the time.
A big part of what’s driving concern for affordability is working class wage stagnation and rising housing and health care costs in the United States. Those are macroeconomic issues. What does any of that have to do with water and sewer utilities? Utilities don’t do macroeconomic policy. We’re in the water business, not in the poverty alleviation business. We often hear that water is underpriced, and anyway water is cheap compared to things like housing and health care—that’s what’s really squeezing working class families. So why is this our problem?
There are at least three reasons. The first is simply that communities are demanding solutions. Water and sewer utilities are public services, and the public demands service. If the public perceives an affordability problem and demands solutions, “it’s not our problem” is not going to be a satisfactory answer. Ultimately, the legitimacy of the water sector depends on the public trust. Dismissing the issue of affordability as outside our portfolio damages that legitimacy. A public that does not trust the water sector to provide for the most vulnerable will be understandably skeptical of our requests for resources and authority.
The second answer to “why us?” is because we can. We can’t do anything about income stratification or wage stagnation. We can’t do much about housing or health care costs. We’re in charge of water and sewer systems. But water and sanitation are among the basic necessities of life, and for some households they represent significant cost burdens. Utilities can’t solve macroeconomic problems. We can’t cure poverty. But we can help, and where we can help, we must.
And that brings us to the last “why us?” reason, which ties into the last big point:
Why it matters
Affordability is central to utilities’ core missions: human health, environmental quality, and economic development. Drinking water and sanitary sewer systems are the most amazing everyday miracles of the modern age. In fact, access to drinking water and sanitation are the very definition of development. It’s what marks a society as modern and developed. Water and sanitation systems save more lives than all of the hospitals in the world. Safe drinking water and clean environmental water facilitate economic growth everywhere. They facilitate economic growth and prosperity. Once upon a time, governments built water works with tax revenue and provided water without charge. Today they’re paid for with service fees, which makes a lot of sense for a lot of reasons. But when those rates become unaffordable, it strikes at the very heart of utilities human health mission.
Research finds that if people can’t afford high-quality tap water or perceive tap water to be unsafe, they substitute sugary beverages and bottled water or kiosk water—ironically far more costly—which exacerbates the affordability problem. We’ve also begun to see a troubling trend of communities across the country are experiencing increasing public defecation and straight-piping, with attendant effects on public health. It is a startling return to 19th-century water problems. At a deep and fundamental level, the affordability strikes at the foundations of the water community as a whole.
Water people are my favorite people. The men and women of the water sector are smart and amazingly dedicated—it’s a community of true believers. They’re in this business because they want healthier, more prosperous communities. Nobody gets into this business to squeeze every last dollar out of the customer. Nobody gets into this business because they want to shut people off from their water supply. But in the words of Abel Wolman, “Just as there is no escape from a hydrologic cycle, there is no escape from the dollar.” Wolman is one of the most important environmental engineers in history—in many ways the father of modern wastewater technology, and a huge influence on the development of the Clean Water Act. Wolman understood that affordability is at the very core of utilities’ mission, every bit as much as treatment or resource management.
Affordability is a big, complex, multi-faceted problem that will require complex, multi-faceted solutions. That’s daunting, but certainly not insurmountable—and in some ways, it’s encouraging.
Consider violent crime. Back in the late 1980s and early 1990s America faced a crisis in violent crime, prompting raft of responses in the public and private sectors, at every level.
Here’s a graph of violent crime in the United States since 1960. As you can see, it peaked in the early 1990s. Since then, violent crime has fallen steadily, and is now half of what it was at its peak. Researchers have spent a tremendous amount of time, crunched a lot of numbers, and spilled a lot of ink trying to figure out what exactly caused that drop in crime.
Turns out that lots of things contributed; new law enforcement strategies and criminal sentencing guidelines, certainly. But also early childhood intervention, community outreach initiatives, gang intervention programs, drug interdiction—all of the above. No single one of those factors accounts for that generational drop in crime—it was the interaction and combination of all of those efforts. The solution to violent crime took dedication, resources, and lots of hard work by lots of people at every level of society, from policymakers in DC to law enforcement professionals to community organizers.
If we can make that kind of progress with violent crime, I have to believe we can deal with water affordability. It’s a big, complex problem. This is a big, complex, diverse country with lots of overlapping and interlocking institutions. Meeting this challenge is going to require contributions by lots of people from lots of angles.
It’s crucial to keep the goal in mind: essential water and sewer affordability for low income households. That’s the goal. That’s the purpose. That’s the subject of this conference.
It’s NOT about utilities or governments—this isn’t about whether utilities have the financial capacity to pay for capital and operations. It’s NOT median or average customers—in all but the smallest, most desperately poor communities, the median customer doesn’t really have an affordability problem. It’s about the working-class individuals and families who may receive little or no public assistance, but nonetheless still struggle to make ends meet. It’s also NOT about all water service—We’re not here to address the affordability of filling a private swimming pool or irrigating a half-acre lawn. It’s about essential use for drinking, cooking, and sanitation.
How do we get there?
The causal chain
It’s a complex path, which brings us to what the planning committee called “the causal chain.” Lots of things affect affordability, and so lots of individuals and institutions are involved in addressing affordability.
The most immediate and obvious are utilities, which directly serve and bill the customer. Rate design is the most important and obvious factor affecting affordability. Forbearance, and direct customer assistance programs funded or operated by the utilities themselves also affect low-income households. But rates and other utility programs are a function of a utility’s capital and operating costs. Factors that affect costs can flow through to low-income households. Critically, cost reduction or efficiency improvements at the utility level do not necessarily improve affordability at the customer level, at least not for all customer in the same way. Customers experience those costs through their rates; increased costs can hurt affordability, but not necessarily. Reduced costs or increased efficiency can help affordability, but they do not necessarily. A dollar-per-customer of reduced operating cost doesn’t necessarily mean a dollar-per-customer reduced bill. We should bear in mind that there are a couple of links on the causal chain between utility costs and customer affordability.
Then there are state & federal policies that can affect utility costs. Regulations, infrastructure funding, research, training, and technical assistance by state and federal agencies can increase or reduce costs for utilities. But those increased or decreased costs don’t necessarily flow through dollar-for-dollar to low-income households. Let’s say a state regulator changes a rule in a way that increases treatment costs. Utilities absorb those costs, but can do so more or less efficiently. They can then recover those costs in a variety of ways through their rate structures, in ways that might or might not affect low-income affordability. In the same way, a federal grant or loan program can reduce a utility’s operating costs, but that grant doesn’t necessarily help low-income affordability. The point is that there are a lot of links on the causal chain that connects federal water policy to low-income customers. It depends on how the utility manages the grant, and how that grant funding is used to offset various kinds of rate revenue.
On the other hand, state and federal governments might have programs aimed directly at customers, such as fixture rebates or assistance programs meant to subsidize utility costs. A great example from the energy sector is LIHEAP, which provides direct assistance to low-income customers to pay for home energy. That kind of policy connects state and federal governments directly to low-income customers.
There are also nonprofit and social service organizations that affect customer-level affordability through direct assistance. Federal government and utilities can also reach customers indirectly in cooperation with social service and nonprofit organizations.
All of these pieces operate simultaneously. In the end, what matters is how they converge to affect affordability for low-income households. It’s important to keep the eye on that ball—that orange box at the right-hand side of the slide is what matters. That’s a big, messy picture—but each piece can contribute to or alleviate the problem of affordability. Each piece can help or hurt utilities’ public health missions, too. We hope this figure will be a touchstone as we move through today and tomorrow, reminding us how all the pieces fit together, where each of us fits in the big picture, and most of all, keep us focused on that orange box at the right.
Finally—and this is crucial—we have to keep in mind that that those low-income households are people. They’re individuals and families. They’re citizens, not subjects. At each step of the way, it’s important to understand the lived experiences of people who live paycheck-to-paycheck, and how decisions on each link of that causal chain shape those lived experiences.
The path ahead
It’s a complicated problem, and it’s going to require creativity and leadership to solve. This symposium is an exciting step toward meeting the challenge. End of lecture!
My turn to sit down and enjoy some affordable tap water.
Social science and defying the choice between clean and affordable water
Warning: sports cliché coming.
Boxing is more popular as a literary metaphor than as a spectator sport these days. Still, I’m a boxing fan. The combination of athleticism, strategy, and drama of the sport are unrivaled.
Every fighter wants to win, naturally. But there’s no shame in losing a hard-fought bout to a tough opponent. When you take on great opponents, sometimes you lose—on the scorecards, by stoppage, or by knockout. Fans greatly respect unbeaten fighters, but revere those who risk a blemished record to take on the toughest challengers. Most beloved are those who suffer early knockdowns to come back and win. The one kind of loss that boxing fans can’t abide is quitting on the stool: when a fighter chooses not to continue—not because he’s injured, not because his trainer decides he can’t win, but because he lacks the will to continue.
Technical triumph, political pessimism
Last month I participated in an all-day meeting with a group of professors from across the country, all of whom work on drinking water and water quality. We were hashing out a vision for future research to advance the water sector. I was one of just two social scientists in the room; the rest were civil, chemical, and environmental engineers. It was a stimulating and productive day.
But a remark by a renowned professor emeritus from one of America’s top schools of environmental engineering startled me, and has been nagging at me ever since.
“We are facing a future where we’ll simply need to accept higher levels of pollution,” he said. The Clean Water Act’s vision of fishable-and-swimmable waters was unattainable, he argued. His pessimism was not due to the emergence of new, impossibly difficult contaminants or technological barriers. The obstacles to clean water he identified were political and economic: the country simply wouldn’t pay for solutions to pollution. I’m not sure if all his fellow engineers agreed, but more than one head nodded in agreement.
Such pessimism is ironic, coming from an environmental engineer.
One of the most astonishing things about the 1972 Clean Water Act and 1974 Safe Drinking Water Act is that, at the time Congress passed them, nobody really knew how any of it was going to work. The technology needed to achieve fishable-and-swimmable and to ensure safe drinking water nationwide simply didn’t exist at the time. Political scientist Charles Jones called this process speculative augmentation: politicians called for a cleaner environment, and entrusted the bureaucracy and the emerging field of environmental engineering to figure out how to deliver it.
Amazingly, it basically worked. The 20th century was an unprecedented period of advancement for water—it was nothing short of a triumph. Water utilities, sanitary sewers, and stormwater management saved more lives than all the world’s hospitals, and has done more to improve quality of life than any other economic policy. For all their problems, the CWA and SDWA have been pivotal in making those improvements in America. We owe much of that success to engineering research.
Environmental science and social science
The greatest water quality challenges of the 20th century were chemical, biological, and physical. Those challenges remain, and new water quality threats emerge all the time. But the most formidable obstacles ahead are social and political. We know how to handle water contaminants. We don’t know nearly as much about overcoming political barriers to water quality. That isn’t a reason to despair, it’s a reason to refocus.
Medical researchers aren’t paid to declare that diseases are incurable; water researchers shouldn’t counsel acceptance of pollution because politics are hard.
We are a prosperous and resourceful people. I refuse to choose between water quality and affordability. To do so would be to consign society’s most vulnerable and future generations to suffer because we couldn’t or wouldn’t solve institutional problems. If dysfunctional politics force such choices, then we need rigorous, hard-headed research on water politics, policy, management, and finance to overcome them. There are lots of smart and insightful social scientists working on water; we need more. We need another moment of speculative augmentation, this time with social science finding the path forward.
The clean water fight’s not over—we’ve only just started the middle rounds.
Never quit on the stool.