From Infrastructure

Echoes of Vizzini

No, EPA did not propose affordability guidelines for municipal utilities

Affordability!

Late last week the EPA published in the Federal Register some proposed new guidelines for evaluating sewer utilities’ financial strength. In press releases and public comments, water sector and local government organizations lauded the proposal as an important action on “affordability,” and a few news outlets dutifully reported on the EPA’s new water "affordability" guidance. Likely most people would think that means lower water bills for low-income households.

But the EPA’s proposed guidelines have little to do with affordability as most of us think about that word—the guidelines are not about ensuring that low-income Americans can pay for water. Rather, the proposal is about whether communities have sufficient resources to pay for water pollution controls required under federal law. In practical terms, the new guidelines are about whether sewer utilities have to comply with the Clean Water Act in a timely manner.

Understanding what’s going on here requires understanding a bit about sewers, the Clean Water Act, and why utility managers think about “affordability” differently from the rest of us.  

Clean Water Act and local economics

Municipal sewer systems must meet a variety of pollution control rules under the federal Clean Water Act. Many of these rules require major investments in infrastructure and ongoing operational and maintenance costs. Often these costs can be quite high, especially in older communities that operate combined sewers that suffer significant sewage overflows during rainstorms. Overflows can cause raw sewage to run into rivers, lakes, and coastal waters, with attendant damage to health and environmental quality. The Clean Water Act aims to reduce, mitigate, and eventually eliminate such pollution. Recognizing that pollution controls are expensive, Congress built into the law provisions that a allow sewer utility to delay compliance with water pollution controls if compliance would outstrip its “economic capability.”

Yuck.

With few exceptions, sanitary sewer utilities in the U.S. are owned and operated by local governments. In practice, then, when sewer systems face significant Clean Water Act compliance costs, local officials sometimes try to negotiate delayed compliance with EPA or state environmental regulators by arguing that their communities have insufficient economic resources to comply with the law.

To evaluate these claims, EPA conducts a Financial Capability Assessment (FCA)—an appraisal of water pollution control costs relative to a community’s overall economic resources. This appraisal is supposed to be holistic, capturing a range of economic indicators. Since 1997, a key element of EPA’s assessment methodology has been the residential indicator, which is intended to reflect the impact of sewer system costs on rate payers. The residential indicator is the average sewer bill as a percentage of the community’s median household income (%MHI). When that value exceeds 2.0%, EPA considers pollution control costs to be “high” and potentially eligible for delayed compliance.

This approach isn’t great, but it’s not a crazy way to evaluate community-level financial capability.* Still, the residential indicator has been much-maligned in the water sector and was the subject of a comprehensive critique from the National Academy of Public Administration three years ago. Last year AWWA, WEF, and NACWA joined forces to advance a new analytical framework to guide FCA instead of %MHI. The AWWA/WEF/NACWA methodology incorporated local poverty levels and sought to evaluate Clean Water Act compliance costs in terms of their potential impacts on household sewer bills at the 20th percentile income.

What EPA is proposing

Still with me? Great. The proposal that EPA released last week is a revision to the FCA guidelines with two broad alternatives. Much of the proposal aligns wiht the methodology favored by AWWA/WEF/NACWA. Under the Alternative 1, EPA retains the traditional %MHI residential indicator and the suite of economic indicators in its existing methodology, but would add assessments of local poverty prevalence and potential rate impacts on 20th percentile income households. Alternative 2 would allow utilities to use a “dynamic financial and rate model” to evaluate the impacts of Clean Water Act compliance costs on customers.** At the heart of the new proposal are a pair of tables that integrate the old and new methodologies:

Alphabet soup

More alphabet soup

Recognizing the underlying distribution of economic conditions by accounting for poverty and 20th percentile incomes is an important advancement. Under either alternative, these guidelines are marked improvements on the status quo in that they provide a more complete, nuanced economic picture of the communities that sewer utilities serve.

Still, it’s important to keep the purpose of all this analysis in mind: under either alternative, the FCA would inform EPA’s negotiations with sewer utilities over compliance schedules. The point of these guidelines is to determine whether and how much sewer utilities ought to delay compliance with the Clean Water Act. Compared with current practices, the proposed guidelines are more flexible and could in some instances lead to more permissive regulation.

Financial Capability ≠ Affordability

EPA did not propose guidelines on affordability for low-income water or sewer customers. Under the proposal, EPA could consider low-income customer assistance programs (CAPs) as part of its overall assessment, but nothing in the proposed guidelines requires or even encourages CAPs. The proposed guidelines would not oblige utilities to structure rates in ways that constrain prices for conservative or low-income customers. Indeed, a utility that was looking for ways to delay investments would actually have an incentive to set more regressive prices: high fixed charges and declining block rates would make FCA metrics look worse, and so help justify compliance control delays.

So despite the rhetoric in headlines and press releases, these guidelines really aren’t about affordability in the way that most of us understand the term. Sure, delayed Clean Water Act compliance will reduce a sewer utility’s revenue needs. But EPA doesn’t regulate rates under the Clean Water Act, and so there’s no guarantee that financial savings from Clean Water Act noncompliance will accrue to low-income customers. In short, these guidelines are not about low-income affordability, they’re about utility finances and water pollution.

Don’t blame EPA for this confusion—they’ve been scrupulously clear and consistent that their guidelines are about financial capability. Regrettably, the industry press releases and news stories have been waving an affordability banner where it doesn’t quite belong.

Can communities afford clean water?

All this confusion over terminology invites reflection on what affordability really means. When municipal sewer utility leaders declare that they can’t “afford” to comply with the Clean Water Act, they’re making a political judgment that spending on other things or keeping taxes and service rates low is preferable to following water pollution rules. That is the prerogative of local policymakers. Communities need to pay for many important things, and clean water is just one of them. The democratic process is meant to help us sort out our collective priorities.

That’s why there’s more at stake here than pedantry. In expanding the meaning of “financial capability” to recognize the distribution of incomes in communities, these guidelines invite us to think about the distribution of environmental conditions in the same communities. The proposed guidelines don’t contemplate whether foregoing water pollution control in the name of “affordability” really helps or hurts low-income households. Do working class folks benefit when a city has low utility bills, but faces frequent and ongoing sewer overflows? Who suffers when raw sewage flows into rivers, lakes, and harbors because utilities can’t “afford” Clean Water Act compliance?

Using the right words compels us to confront these uncomfortable questions, and focuses our attention to what FCA guidelines mean where the sewage meets the street.



*%MHI is, however, terrible, horrible, no-good, very bad way to measure low-income household affordability.

**This alternative is going make rate consultants happy.

40 Degree Day

The congressional COVID cavalry isn’t coming to save the water sector

"Nobody got nothing to say about a 40-degree day."

The ink was barely dry on a $2 trillion coronavirus response law when Congress started working on a second massive coronavirus relief bill. Water infrastructure was initially high on the congressional priority list for the next phase, with rumors of perhaps hundreds of billions of dollars for water and sewer systems. Structured carefully, a massive infusion of federal funds could help end shutoffs that threaten public health, give immediate relief for utilities reeling from lost revenue, help spur economic recovery through investment in badly-needed infrastructure, and maybe even drive fundamental structural reforms to the water sector. There was palpable excitement in the water sector as legislation was taking shape in April and early May. ​I even fielded a few inquiries from policymakers looking for guidance on structuring the bill!

On May 15 the House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) bill—an unprecedented $3 trillion package of programs to aid “the economy, public health, state and local governments, individuals, and businesses” in response to the COVID-19 crisis. The bill now sits in the Senate, its final shape and prospects ​uncertain.

The outcome probably won’t matter much for the water sector, however: the HEROES bill passed by the House provides next to nothing for water and sewer systems, and provisions for low-income water bill assistance are structured in a way that will mainly help customers in large utilities with existing assistance programs. That, my friends, is what Stringer Bell would call a 40-degree day.

Aid for utilities?

Back in late March I argued for a formulaic, conditional grant program that would channel $70 billion in federal assistance directly to utilities that agreed to end shutoffs, ensure service to all occupied residences, forgive financial penalties accrued during the pandemic, and restructure prices to maintain affordability. Grants would be based on the poverty rates of utilities’ service areas. The main merits of the conditional grant model are reach and speed: the program would help nearly everyone, minimize administrative costs to utilities, eliminate qualification processes, and get the water flowing fast to stave off a public health emergency. It would also provide an immediate and durable economic stimulus, as utilities could use these funds flexibly to support jobs and capital investment.

Unfortunately, HEROES provisions for water systems are all conditions and no grants. The bill requires water systems that receive HEROES funds to end shutoffs, safely restore service to customers who had been shut off, and forgive penalties (😃).

And what do water and sewer utilities receive in exchange for giving up the main mechanism they have for ensuring timely payment? Limited subsidies for low-income assistance programs, and a boatload of administrative work (😐).

That’s it. That’s all. HEROES includes no categorical grants to water or sewer systems.*

I've never identified so much with a gymnast.

​Wither customer assistance?

​For a few years now, House Democrats have been pushing for a $1.5 billion Low-Income Household Drinking Water and Wastewater Assistance Program (LIWAP?), a LIHEAP-style policy for water bill assistance. I’ve argued before that a LIHEAP-style program isn’t an awful idea but has some pretty severe limitations. Congress apparently heeded that warning, as §190703 retains the LIWAP label but doesn’t build a new LIHEAP-style program. Instead, it would channel funds through state and Tribal governments to utilities to support water and sewer bill reductions for low-income customers.

Allotments to utilities would be based on federal income and poverty guidelines. In addition to ending shutoffs, restoring service, and forgiving nonpayment penalties, utilities that receive bill assistance funds would be subject to audit. To its credit, the House bill seems to acknowledge administrative burdens on customers associated with such programs: §190703(g) requires utilities to “conduct outreach activities designed to ensure that such households are made aware of the rate assistance” and to notify customers of the assistance that they receive. HEROES allows utilities to spend up to 8% of federal funds on support for administrative processes, but participating utilities would also be subject to mandated state audits.

The main problem with this approach is that it puts significant administrative obligations on utilities with relatively little payoff. It is difficult to see why small or medium-sized water and sewer utilities would opt to participate in a program that carries such onerous requirements for a program that will in most cases benefit a small, politically weak minority of their customers. Why would utilities with little organizational capacity agree to heavy shackles with so few shekels? Unfortunately, water/sewer affordability is, on average, worse in smaller systems. HEROES is unlikely to do much for the nation’s neediest water customers.

San Antonio has a good assistance program, and HEROES could make it better.

​The main beneficiaries of the $1.5 billion HEROES water assistance program will be large systems that already run assistance programs, since their administrative and audit processes are already in place.**

​HEROES funding would allow those large utilities to expand or extend benefits, and maybe boost their administrative capacity.

HEROES act? More like ZEROES act, amirite?

I dunno, man. The bill is more than 1,800 pages and funds everything from unemployment insurance to suicide prevention to wildlife biosurveillance. I sure didn’t read the whole thing, and there’s undoubtedly a lot of good stuff in there. The direct cash benefits at the heart of the bill will surely help lots of people. But the HEROES bill that emerged from the House of Representatives does little for water affordability directly, doesn’t help water/sewer systems generally, and certainly does not provide sufficient leverage to achieve more fundamental reforms to the water sector. The bill does give members of Congress the chance to take a position on water affordability and claim credit for tackling shutoffs. Whatever its fate in the Senate, the HEROES bill has accomplished those political goals.

​Systemic reforms ​to the U.S. water sector remain needed and possible, but will likely have to wait until COVID-19 recedes and a new Congress arrives.



*There’s one exception: HEROES allocates $20 million to the Bureau of Indian Affairs to support Tribal water provision, which really need help with capacity. More on this topic coming soon!

**Friends on Capitol Hill tell me that large utilities lobbied for this program.

The Plan

A five-point proposal to transform the U.S. water sector

As daunting as the challenges in the U.S. water sector are, solutions are possible and within our grasp. Thanks to legions of smart, creative scientists and engineers, we know a lot about the threats to environmental quality and health, and we’re pretty good at finding ways to address them. Today the principal barriers to progress in the water sector are not environmental or technological; they are social, economic, and political.

Fixing the water sector—really fixing the water sectormeans more than government money for pipes. The crazy quilt of institutions that govern, regulate, and manage water in the United States hinders effective, lasting solutions. Fortunately, institutions are human creations, which means we can do something about them. There’s nothing wrong with water governance in America that can’t be solved.

Over the past few months I’ve written a series advancing five broad institutional reforms to the U.S. water sector that ought to accompany any big federal investment.* This post summarizes them. They’re a package deal: each reform complements the others, and each is unlikely to be successful without the others. It’s an ambitious plan, but it’s rooted in empirical research, and together the five parts are technically and politically feasible. Here they are (click each heading for the full post on each):

1. Consolidation

There are more than 50,000 community water systems and 15,000 sanitary sewer systems in the United States. Virtually every aspect of America’s water sector is worse because there are so many systems. Let’s reduce the number of water systems to fewer than 5,000 by 2030. Consolidation can happen by merging neighboring systems into a regional utility, creating new authorities or nonprofit organizations, or when an investor-owned firm purchases small systems. To make it happen:

  • Federal funding for water, sewer, and stormwater systems must be contingent on small system consolidation.
  • Laws governing utility mergers and acquisitions should remove barriers to and create incentives for consolidation. Consolidation laws should ensure that struggling systems are consolidated and guard against “cherry-picking.”
  • All systems must be held to the same environmental standards. Exemptions and waivers for small systems should be eliminated and regulators should be empowered to force condemnation and consolidation for perennially failing systems.
  • State and federal agencies should provide technical and legal assistance to facilitate the consolidation process.

Reducing the number of water and sewer utilities through consolidation is the single best thing we can do to improve water utilities in the United States.

2.Regulatory reform

​Let’s follow regulatory regimes used in New Jersey and Wisconsin to change the incentives for utility leaders to invest in their systems adequately and manage them responsibly.

Specifically:

​Best of Both Worlds

  • Regulatory authorities should collect and publicly report performance metrics for each water and sewer system,
  • Water, sewer, and stormwater systems must develop comprehensive asset management plans, and demonstrate that capital assets are adequately maintained.
  • Public Utilities Commission pricing and service quality regulation should be extended to all utilities, not just investor-owned systems.

The great promise of the regulatory regimes pioneered in New Jersey and Wisconsin is that transparency and fairness can make buried infrastructure more visible, and so shift the political and economic incentives for sound management of water systems.

3. Technological transformation

America’s water systems need a technological leap forward with comprehensive deployment of information technology. Let’s get our systems out of the 19th and 20th centuries and into the 21st and 22nd. Funding for water, sewer, and stormwater systems should support data collection and analytical capacity for more effective and efficient investment and operations.

4. Human capital

The water sector needs a stronger supply of human capital, and we need to streamline the labor market. To that end, let’s:

  • Invest in the next generation of water professionals with new and rejuvenated educational and training programs.
  • Create national standards for operator licensing and certification.
  • Build a body of rigorous, data-driven social science research on effective utility management, leadership, and organizations.

5. Environmental justice

Let’s build environmental justice into water, sewer, and stormwater policy. Specifically:

  • Federal and state authorities must establish standard metrics to assess racial, ethnic, and socioeconomic equity in environmental conditions and infrastructure investments.
  • Utilities must collect and publicly report data on service shutoffs and restorations, and work toward an end to shutoffs.
  • Regulators must demonstrate equity in inspections and enforcement actions.
  • Eligibility for federal infrastructure funds must be contingent on utilities demonstrating equity or progress toward equity.
  • Channel extra funding and technical assistance to communities that suffer from significant disparities due to historical or structural disadvantages.

The way forward

Just over a year from now Americans will head to the polls for a pivotal federal election. With water on the national political agenda in a way it hasn’t been since the 1970s, we are, perhaps, an election away from a major federal investment in infrastructure, and with it an opportunity to reimagine water governance. Let’s use that opportunity do more than rebuild pipes; let’s rebuild institutions. If we do it right, those institutions will keep the pipes working for generations to come, and our legacy will be a cleaner environment and healthier, more prosperous people.


*The five-part plan debuted in a talk I gave at as part of the University of Rhode Island’s Metcalf Institute public lecture series last summer. You can catch the whole talk here if you’re so inclined.


© 2019 Manny P. Teodoro