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 sector—means 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):
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.
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.
- 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.
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.
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.
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
Water Sector Reform #4: Human Capital
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 a structural transformation of America’s water sector. This is the fourth in a series of five posts outlining broad proposals to reform the management, governance, and regulation of U.S. drinking water, sewer, and stormwater systems. The first proposed reform was consolidation of water utilities; the second was an overhaul of financial regulation; the third was investment in information technology.
My fourth proposal is to invest in water sector human capital through workforce development and streamlining labor markets.
Working for Water
The U.S. water sector’s workforce challenge has been evident for a long time; as early as 2005 observers identified a slow-rolling retirement tsunami washing over utility organizations and recognized that the supply of workers was insufficient to meet the nation’s needs. In many ways, the water sector’s workforce issues mirror those of the wider public sector workforce. But addressing water workforce challenges isn’t just about quantity, it’s about quality.
Once upon a time, water system operations was a semi-skilled job. If you had a strong back, could turn a wrench, and operate a backhoe, you could probably do it. Until recently, a water operator could get by with limited reading comprehension and little to no aptitude for math or science.
That’s no longer true. Today water and sewer system operations are highly skilled jobs. Regulations and technology are ever-advancing. Modern water systems require operators who can interpret complex regulations. Operators must have a solid working understanding of physics, chemistry, and biology, and a good command of math. And they have to be able to communicate with management and engage directly with the public.
Water systems are getting smarter; water operators have to be smarter, too.
But highly-skilled operators are in short supply and human capital isn’t evenly distributed. Training up a utility operator takes a lot of time, and in rural or remote parts of the US it can be especially hard to find an adequate supply of educated workers who can be trained to operate water systems.
Human capital & utility performance
Labor availability has measurable effects on effects on water quality. A few years ago David Switzer and I analyzed the relationship between SDWA compliance and the availability of skilled workers in a labor market. We found a strong relationship between labor force education and utility performance.
We also found that larger organizations are more effective in leveraging human capital than small ones. The reason is pretty clear: if you’re a smart, ambitious person interested in a water career, a small utility is at best a stepping stone, at worst a dead-end job. There may be only a handful of employees and the only opportunity for advancement is to wait for another operator to leave—or to leave yourself. So small systems struggle to attract and retain good employees. I heard directly from one utility manager that systems sometimes deliberately choose not to invest in training because they fear that a well-trained employee will leave. It’s a kind of strategic mediocrity.
Making matters worse, each state has different training and licensing regimes for water operators. There are separate licensing systems for water and sewer. There are separate licensing programs for treatment, distribution, and collection systems. Sometimes states set up reciprocal licensing agreements, but it’s a confusing and frustrating patchwork. All those rules are sand in the gears of the labor market and discourage smart, ambitious people from entering or building careers in the water sector.
Human capital investment
We need to grow the supply of human capital, and we need to streamline the labor market. So proposal number four is to invest in workforce development, and create national certification standards for operators.
This isn’t a particularly new idea—it’s a revival of an old one. Discussions of the 1972 Clean Water Act tend to focus on the pollution controls in Titles III and IV (for obvious reasons). But importantly, the Clean Water Act included a huge federal investment in research and training. In the 1960s environmental engineering was in its infancy as a field, and when Congress passed the Clean Water Act it wasn’t exactly sure how to make the nation’s waters fishable-and-swimmable.* So Uncle Sam built human capital for the water sector as it was building physical infrastructure. It’s telling that Title I of the Clean Water Act was an investment in people, and Title II was an investment in pipes.
Folks in the water sector sometimes refer to the generation of water professionals who emerged in the 1970s and 80s as the “Class of 72,” recognizing that in many ways the field of environmental engineering came of age due to that federal investment. We need a similar investment today to build the next generation of water professionals. We need careful, data-driven research on effective utility management, leadership, and organizations. We need rigorous degree and certificate programs to funnel talent into the water sector. America’s land grant universities (like Texas A&M!) are great institutional venues for these efforts, but there are other good models out there, too.
Freeing the market
Labor markets—like most other markets—work best when buyers and sellers can exchange freely. Along with investments in research and training, we need to harmonize, liberalize, and streamline licensing regimes for water and sewer operations. Instead of a crazy patchwork of training programs and licensing requirements, let’s establish national standards and a national accreditation system for both individuals and training institutions. Organizations like ANSI and AWWA have processes in place to craft water technology standards; the same model could be applied to licensing and certification. With national training and licensing standards in effect, a smart, ambitious person could enter the water sector with the prospect of building a career that could take her anywhere.
*Political scientists call that “speculative augmentation,” which is a polite way of saying “Congress has no idea what to do, so it’s going to kick the problem to experts and hope they can figure it out.” In the case of environmental regulation, it’s worked out reasonably well.
© 2019 Manny P. Teodoro
A decoupling drama plays out in San Jose
Over the past year I’ve blogged about my research with Youlang Zhang and David Switzer on public and private water utilities’ responses to the drought that gripped California from 2014-2017. One of our most interesting findings was that California’s private, investor-owned utilities conserved significantly more water than government utilities. We argued that a main reason for the difference was politics and California law, which allows rate decoupling for private water utilities.*
The timing of the San Jose story was uncanny: I wrote my 2018 water conservation update just as SJWC was filing its request for the rate increase. The story of conservation and rates in San Jose is a useful illustration of why decoupling is so economically effective but politically perilous.
One city, three water systems
San Jose is unusual among large American cities in that three separate utilities provide drinking water service to its residents. The San Jose Municipal Water System (SJ Muni) is governed by the San Jose City Council, which sets the utility’s investment, operating, and financial policies. Two private water systems also serve San Jose: Great Oaks Water Company and San Jose Water Company (SJWC). Corporate boards and executives make investment and management decisions for these systems. Serving a population of more than a million, SJWC is the giant of the trio; but SJ Muni and Great Oaks are also large, each serve populations of around 100,000.
Importantly, very different processes govern price-setting for the three systems. San Jose’s elected City Council sets rates for SJ Muni. As investor-owned systems, SJWC and Great Oaks set their rates through the California Public Utilities Commission, whose members are appointed by the governor. That means San Jose voters can influence SJ Muni’s rates through their elected councilmembers. Rate-setting for SJWC and Great Oaks is a more technocratic affair, with the process handled mostly by lawyers, engineers, and economists at the CPUC.
All three systems charge fixed monthly service fees plus volumetric prices. However, their volumetric rate structures differ in subtle but important ways. The two private utilities employ inclining block rates, which charge progressively higher unit prices as volume increases. For example, SJWC customers pay $3.20 per hundred cubic feet (ccf) for the first three ccf; prices jump to $4.80/ccf for the next 15 ccf, and then to $6.40/ccf for volume beyond 18 ccf per month. Great Oaks uses a similar three-block rate structure, although its rates are considerably less progressive. SJ Muni uses a flat rate: customers pay the same unit price for all water, regardless of how much they use.† Here’s how these prices translate into bills for demand ranging from 0-30 ccf per month:
Great Oaks’ prices are lowest overall. SJ Muni’s and SJWC’s prices are similar at low volumes, with the private company’s total prices about $7-10 higher through the first 15 ccf. Without detailed financial, operational, and customer data, it’s impossible to say whether that gap is justified. We can say that the gap widens at higher volumes due to SJWC’s more progressive pricing: at 40 ccf/month a SJWC customer pays $52.09 more than a SJ Muni customer. That means SJWC likely gets significantly more of its revenue from the high-volume customers who pay high prices for water.
Is water consumption in San Jose consistent with those differences in pricing? This chart shows SJ Muni’s water conservation from 2015-2018, and population-weighted conservation for SJWC and Great Oaks for the same period, compared with the same month in 2013:
Notice how the green (private) line is close to but usually slightly above the blue (SJ municipal) line? Overall conservation tracks pretty closely for public vs. private over the four-year period, but San Jose’s private systems have averaged about 1% more savings.
The difference in per capita water use is much more noticeable; here’s residential gallons per capita per day in 2018:
San Jose’s private utility customers are much more conservative with water than are SJ Muni’s customers, using about eight gallons per person less water on average. The disparity is greatest during the seasonal peak period when supply stresses are also greatest.
Decoupling to the (utility’s) rescue!
In 2018, SJWC’s water customers were so conservative that the utility had a $9 million shortfall in sales revenue. California’s policy of rate decoupling allows the company to make up that shortfall with a rate increase in 2019. San Jose residents and lawmakers are angry that their reward for conservation success is a rate hike. Flat rates help keep SJ Muni’s revenues steadier and so spare the city council from the citizen wrath that such a rate increase might unleash.
Lots of things cause people to use more or less water, and so we can’t say for certain that prices drove the conservation patterns we see in San Jose without detailed customer-level data and a carefully-designed study. But it’s fair to say that San Jose’s experience is consistent with the public-private differences we see in the rest of California. Without decoupling, it’s unlikely that private utilities would use progressive pricing and risk the kinds of revenue losses that they experienced in 2018.
Economics is supposed to be the dismal science and politics the art of the possible. But for California water, the opposite seems to hold: decoupling makes conservation economically viable for private firms, while politics forces governments into difficult choices that can mean financial success at an environmental cost.
† SJ Muni’s flat water rates vary by geographic zone. The graph here uses a simple average of those rates.