Why water utility service can be simultaneously underpriced and unaffordable
Analysis of water and sewer affordability implies a concern that the prices of these critical services might be too high. At the same time, decades of research by resource economists argues that, in much of the United States, water is actually underpriced—that is, people and businesses pay far less than the actual economic value of the water that they use, which can cause inefficiently high water use.
Paradoxically, both can be true: it is possible for water to be simultaneously underpriced and unaffordable. That’s because not all water use is the same.
Water and cheeseburgers
Consider cheeseburgers. There’s really only one reason to buy a cheeseburger: to eat it.
Whether I buy one cheeseburger or ten, they’re really only good for one thing. I can eat them all by myself, I can share them with other people, I can feed them to my dog. Like any other good, cheeseburgers are subject to diminishing marginal benefit, but a cheeseburger’s end use is the same no matter what.*
Water utilities are different. When a utility delivers water to a home, that water can be used for essential needs like drinking, cooking, cleaning, and sanitation. It can also be used for more discretionary needs, such as car washing, filling swimming pools, and irrigating lush lawns. In most of the United States, residential water demand follows a familiar seasonal pattern, which makes it easy to discern, roughly, the relationship between essential and discretionary water use.
Essential water use remains roughly even throughout the year because it is, well, essential. That essential use is also the source of most residential sewage flow. Discretionary water use tends to fluctuate seasonally: car washing, lawn watering, and pool filling happen when the weather is warm and rain is rare. Sure, people might drink or shower a bit more often in the summer, but the real bump in demand comes from these discretionary outdoor uses. That’s also when water is most scarce.
Inexpensive and unaffordable
Unlike cheeseburger demand, residential water demand represents qualitatively different uses of water at different points in the demand curve. People with large lawns and swimming pools complain (often loudly, and to great political effect) when their water bills run to hundreds or thousands of dollars, but public policy discussions about water affordability are generally concerned with essential use.
Thing is, utilities build their supply, storage, treatment, and distribution systems to meet those peak demands. If systems were designed only to meet essential needs, they’d be much smaller and less expensive. The overwhelming majority of the costs of building and maintaining those systems are fixed—the utility incurs the costs whether it delivers a single gallon or 10 million gallons a day. With rare exceptions, American utilities meet residential customers’ essential and discretionary demands through the same meters. Consequently, essential and discretionary water uses both fall under a single price schedule.
That’s why rate structures matter so much for both affordability and efficiency. In an era of falling average demand, many utilities are shifting their rate revenue burden away from high volume charges to fixed monthly charges and/or low volumetric charges. That’s good for revenue stability, but can exacerbate the double problem of unaffordable essential water use and inefficient underpricing of discretionary water use.
*If there are alternative productive uses of cheeseburgers, I’m unaware of them.
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Last week I had the pleasure of speaking at the Connecticut AWWA’s annual conference. There I shared a the stage with a team from Providence Water, who told the story of their city’s struggles with lead contamination in drinking water. One of the most surprising things about Providence’s experience is the way that its customers apparently responded to the Flint water crisis.
Lead in Providence
Lead contamination in drinking water is a long-standing problem in Providence. Like many older American cities, Providence has many buildings with lead plumbing. As in Flint, Providence’s water system requires careful corrosion control in its treatment process to limit the release of lead into the drinking water supply. Lead contamination has been detected consistently in Providence’s water system since testing began in 1992—usually hovering just below EPA’s action level of 15 ppb—but it spiked to 30 ppb in 2009 and again in 2013, prompting increased regulatory scrutiny.* According to last week’s presentation, at least one Providence test site yielded lead contamination greater than 200 ppb—far higher than the levels that sparked outrage in Flint. Unlike Flint, where leaders denied and obfuscated lead contamination, Providence has publicly acknowledged and taken steps to address the issue: they’ve changed maintenance protocols and treatment methods, and introduced programs to replace lead service lines in its system.
As part of that effort, in 2014 Providence Water began offering drinking water lead testing for $10 to any customer who wanted it (earlier this year they started offering testing for free). In providing this service the utility also gathers valuable data on its own system. Initial participation in this voluntary testing regime was moderate, with an average of 4.7 customers requesting testing each month over the first two years of the program.
Then something unexpected happened in 2016: Participation in Providence’s lead testing program skyrocketed—after the Flint Water Crisis grabbed national headlines. Water contamination in Flint made Americans everywhere reconsider what comes out of their own taps. The figure below plots monthly voluntary lead testing in Providence from 2014-2017 (blue line); the utility mails its testing brochure in the May/June billing cycle, and so testing jumps in June and July each year.** The graph also shows monthly average Google News Index for coverage of the lead crisis in Flint (red line). Providence Water’s own lead contamination issues emerged in 2009, but when Flint put drinking water into the national spotlight in 2016, Providence citizens took action locally.
Are the people of Providence responding to events in Flint? It’s impossible to be certain, but the circumstantial evidence is strongly suggestive. A lead crisis 700 miles away apparently caused a 400% increase in lead testing participation by focusing Rhode Islanders’ attention on the contamination that they’d been living with for decades.
The water crisis in Flint is the Cuyahoga River fire of our generation: an event that thrust a widespread but underappreciated problem into the national consciousness. Political scientists call these focusing events: harmful, high-profile occurrences that suddenly put previously obscure issues onto the public policy agenda. One important consequence of the newfound attention to drinking water quality is that citizens everywhere think differently about their own utilities and drinking water. They may not deserve it, but utilities everywhere must now grapple with the Flint Water Crisis’ awful legacy. The effects of the Flint Water Crisis on the people of Providence, Rhode Island show such events afar can transform citizens’ interactions with their own local governments.
*No level of lead is healthy according to the CDC, especially for young children.
**Thanks to Providence Water for providing these data.
The case for rate-funded water affordability
Warning: this post contains hardcore wonkery.
One of the most trenchant questions that emerged during the recent California State Water Resources Control Board affordability symposium (pursuant to California AB-401) was whether low-income water bill assistance should be funded through taxes or rate revenue. That is, who should pay for affordability programs: taxpayers or ratepayers?
A couple caveats before addressing that question. First, utilities can do a great deal to reduce rates for many low-income customers without explicitly redistributive programs. For example, small systems might consolidate for economies of scale, and cost-of-service rate design can distribute more system costs to the high-peak customers who drive capacity needs. Utilities ought to exhaust those options before turning to redistributive assistance. Second, states vary widely in the degree to which utilities are legally permitted to fund low-income assistance through rates. In this post I skirt these practical and legal considerations, and instead focus on the more fundamental issue of…
Public goods, private goods, and government revenue
In public finance, the traditional rationale for whether something should be funded through taxes or fees is whether the something is a public good. In economese, public goods are non-excludable and non-rival in consumption. “Non-excludable” means that, once the good is created, no one can be excluded from its benefits. “Non-rival” means that no one’s consumption of the good diminishes the quality of anyone else’s consumption of the same good. Lighthouses and missile defense systems are classic examples of public goods. We typically rely on governments to provide public goods because it is difficult or impossible for private firms to capture revenue for those goods. Instead, governments levy taxes in order to pay for them.
When governments provide private goods—and much of what American governments do is private good provision—it uses some mix of tax and service fees to generate revenue. State universities are good examples: the people of Texas help pay for Texas A&M University through their taxes, and Aggies contribute through their tuition payments.
Drinking water and sewer service as public goods
Environmental protection is another classic public good: everyone benefits from clean air, soil, and water. It’s little wonder, then, that sewers traditionally were financed through taxes. Everyone benefits from sanitary sewer systems that keep raw sewage out of our streets and waterways. Today sewers in America are paid for primarily through service fees, sometimes in some combination with tax funding.
Drinking water is trickier. The vast majority of American water systems today rely on volumetric service rates to generate revenue. In a conventional sense, drinking water isn’t a public good: it’s possible to exclude people from a drinking water system, and two people can’t drink the same glass of water. Drinking water affordability is a problem precisely because it is excludable and rival in consumption: customers can be disconnected for nonpayment and can’t simply free-ride on their neighbors’ water service.
But there is an argument for drinking water as a public good insofar as it has positive externalities–benefits to the community beyond the household using the water. Lush lawns and car washing may not be public goods, but disease control is. Basic water use for drinking, cooking, and sanitation reduces disease and overall health system costs. People who have access to safe, reliable drinking water at home are healthier and more productive. Some basic, universal provision of potable water could be considered a public good. If we think of a drinking water utility as a collective enterprise that provides a collective public health good, then a basic level of service (say, 35-50 gallons per person per day) can be thought of as a public good.
So it’s reasonable to conclude that water assistance programs should be funded through taxes. But tax-funded assistance programs are politically unpopular. When established, tax-funded assistance programs also tend to be under-funded and perpetually threatened with reduction or elimination when hard times come—which is exactly when assistance is needed most.
Fire & Water: The case for rate-funded affordability programs
But there’s a sound rationale for funding basic drinking water service at an affordable price, using rate revenue, under existing cost-of-service principles. The clues to the logic of affordability-through-rates is in the way we fund fire protection through water rates.
Firefighting is a public good. When a building catches fire, it is clearly a loss to that building’s owner. It is also a threat to all of the other people whose homes and businesses might potentially catch fire. So everyone in a community benefits from effective firefighting.
Communities pay for firefighting mainly through taxes, which pay for the buildings, equipment, and staffing needed to fight fires. Less obviously, most communities also pay for fire protection through their water rates, because firefighting relies on a water system to provide large volumes of water at high pressure through hydrants. Consequently, some portion of any city’s water utility capacity is built simply to fight fires. Communities pay for that capacity through water rates.
The principles of cost-of-service water ratemaking are codified in AWWA’s Manual M1, which identifies public fire protection as a reasonable functional cost. That means that utilities across America are already funding a public good—fire protection—through water rates consistent with cost-of-service principles.
To the extent that drinking water for basic health and sanitation are public goods, there also is a solid rationale for development of a cost-of-service rate methodology that provides for a basic level of indoor potable water use. A modification to M1 would—and should—articulate this logic, and so provide a pathway for rate-funded affordability initiatives.