to win not to lose in water utility management
Warning: strained sports metaphor coming.
It’s late January, and the National Football League season soon reaches its climax with the Super Bowl. Both of last weekend’s conference championship games saw a high-octane home teams take the lead. By late in the game, the winning teams’ strategies shifted from trying to score to trying to run out the clock. That meant lots of prevent defense, a tactic familiar to any reasonably attentive American football fan.
Prevent defense is an ultra-conservative strategy, designed to use up time and avoid disastrous, long passing plays—the goal is not really to stop the opposing team, but rather to manage moderate losses. A coach who deploys a prevent defense isn’t so much trying to win as he is trying to avoid losing. That works fine when the team that’s ahead has a comfortable lead. But when the lead is tenuous, prevent defense courts disaster because it can allow a quarterback to lead a heroic comeback. Legendary NFL coach John Madden famously declared that: “All a prevent defense does is prevent you from winning.”
Naturally, all of this makes me think about water utility management.
Compliance as performance
A few years ago I took a water operator training class through Texas A&M Engineering Extension. The course covered principles of safe operations, along with the basic math, chemistry, and physics that operators need. What really stood out to me was how virtually everything about our training involved regulatory compliance. Treatment plant operations, distribution system maintenance, even safety protocols, were all framed in terms of following rules and avoiding violations.
Things don’t seem much different in utilities’ executive suites or board rooms. Although the rhetoric of excellence abounds in water management circles, real policy decisions and capital investments tend to follow regulatory requirements. Treatment plant upgrades happen when the EPA formulates a new rule. Sewer capacity expansions come when overflows become so frequent and egregious that regulators force a consent decree.
A water system’s strategic goal might be public health, environmental quality, citizen trust, and economic prosperity, but the utilities’ management tactics often boil down to regulatory compliance. The practical goal is not so much to achieve good things, but to avoid bad ones.
The main reason is money. One of the challenges of managing great water and sewer systems is that the price of a water is much more visible than quality of water. Customers—who are also voters—know for sure what they pay for it when they get the bill each month. Water systems are literally buried. Unless quality is egregiously awful, the only marker of a system’s quality is regulatory compliance. It’s hard for utilities to demonstrate their real value in terms of anything but monthly bills and disasters.
Utility leaders are thus stuck between a rate increase rock and a regulatory hard place. For many, “success” means avoiding rate increases and regulatory violations as long as possible. The folks who operate these essential systems don’t like running them to the brink of failure, but as one city utility executive told me: “It’s hard to get anything done without a regulatory boot to your backside.”
That’s a fundamentally negative way to think about performance. Is it any wonder that utility managers often run a prevent defense?
From loss avoidance to winning
There are some creative, dynamic, and courageous leaders in the water sector who have found ways to build achievement cultures in their utilities. But hoping for the serendipitous arrival of an exceptional leader isn’t really a strategy. What would it take to change the game? How can we get utility leaders to think about seeking success, rather than avoiding failure?
What’s needed is a comprehensive, independent, and visible system for monitoring and reporting water and sewer utility performance. What if there were monthly box scores for utilities? What if they received a report card and grade point average every year, with results reported publicly?
Aquam cum laude
This isn’t really a radical idea; Congress had transparency in mind when it required utilities systems to provide water quality reports, and the State of New Jersey was thinking about political accountability when it launched the Water Quality Accountability Act. Too often we forget that public information about water system performance also creates a credit-claiming opportunity. But reporting under those laws is complicated and in many ways opaque.
Anyone who has been to high school understands grades and GPAs. A simple, comprehensive report card would give a utility’s leaders a way to communicate progress. A new management team could set clear improvement targets and show how their efforts moved the system’s GPA from 2.7 to 3.5. Mayors and councilmembers could trumpet the improvements, helping to demonstrate the value of those unpleasant rate increases. Water systems that achieve and maintain consistent excellence across the board would qualify for the Dean’s List.
I’m a big believer in the power of measurement and incentives. If we keep score correctly, our utility leaders can do more than avoid disaster—they can play to win health, environmental quality, and economic prosperity for our communities.
U.S. water utilities are shifting costs to low-volume customers—good for revenue stability, but bad for affordability
Rising water and sewer prices linked to increasing capital and operating costs are driving affordability concerns across the United States, and with good reason. Studies of water rates typically measure prices at benchmark volumes that are meant to reflect “average” residential customers.* But for purposes of low-income affordability, how a utility structures its prices across levels of demand is as important as what it charges an average customer or how much total revenue it pulls in.
Over the past year I’ve been working with Texas A&M graduate student Robin Saywitz to analyze 2019 water and sewer rates data.† Among other things, we’re comparing our recent dataset with similar data from 2017. Although it’s difficult to infer trends from just two time periods, we’re seeing a troubling pattern in U.S. water and sewer rates: not only are prices increasing overall, average prices are rising much faster for low volumes than for high volumes.
That’s very bad news for affordability. Why are utilities squeezing their low-volume customers with higher prices?
The answer starts with two broad water sector trends that have converged to drive water prices to their present point. First, long-deferred capital maintenance and upgrade costs are finally coming due, and long-deferred water and sewer revenue needs are rising accordingly. Utilities need more money to pay for pipes and people. Emerging challenges like lead service line replacement and new contaminants like PFAS only make things more expensive.
At the same time, average urban water demands have been falling steadily over the past twenty years. Back in the 1990s when I first got into the water business it was an article of faith that long-term water demand increased with economic and demographic growth, and long-term supply adequacy was a paramount concern in many parts of the U.S. The water sector responded with a widespread push for conservation. Thanks to organizations like the Alliance for Water Efficiency, we’ve seen an astonishing decline in average water demand—especially for essential indoor use. For the first time, America has seen sustained urban growth with steady or even declining overall water consumption. That’s an extraordinary accomplishment, and it’s rightfully celebrated.
But the combination of rising costs with declining average demand creates a revenue problem for water utilities. Declining total demand means that the average price of water must increase steeply in order to generate needed revenue.
Perils of progressive pricing
For years, utilities have been pushing for progressive water rate structures to distribute costs equitably and to encourage conservation. Indeed, progressive pricing is part of why we’ve seen declining demand. As I’ve observed before, water service is unusual in that its use varies considerably at different levels of demand. For residential customers, low volumes reflect essential uses like drinking, cooking, cleaning, and sanitation. Higher volumes are typically associated with discretionary uses like car washing and outdoor lawn irrigation. So progressive rate structures that charge relatively low prices for low water use, steeply higher marginal prices for high volume use, and volumetric sewer charges generally result in better affordability. What’s more, good rate design helps affordability without the transaction costs, administrative burdens, and social stigma that come with means-tested assistance programs.
But progressive rate structures raise utilities’ revenue risk. Revenues from volumetric charges fluctuate 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. Even worse, sales can fall sharply during drought emergencies when customers conserve water. That can leave the utility in tough financial shape, because the utility’s capital and operating costs are mostly fixed. Progressive pricing can put the squeeze on utilities’ revenue needs.
So utilities are, in turn, putting the squeeze on their most conservative customers with more regressive pricing.
The first gallon price of water and sewer service is a useful touchstone to understand the real impact of rate structure changes.
The first gallon price is the price a customer pays for using any water at all: any fixed charges plus the price of the first unit of water or sewer service. For example, if there is a $20 monthly fixed charge for water service and the first thousand gallons of water is $2.00, then the first gallon price for water service is $22.00. Here are the weighted average prices of water and sewer service in 2017 and 2019 at one gallon, 6,000 gallons, 12,000 gallons, and 20,000 gallons:
Unsurprisingly, the first gallon price increased from $35.80 to $40.89 over the two-year period, and average prices went up at each volume level. If prices were simply going up across-the-board, we’d see roughly equal increases in prices at every volume. But the 2019 data show that price increases were uneven in percentage terms:
At 20,000 gallons monthly, average prices went up by 8%, but the first gallon price increased by more than 14%. As prices have increased, low-volume customers have on average borne a much larger share of utilities’ rising revenue burdens than their more profligate neighbors.
The financial challenges associated with equitable, affordable, progressive pricing are real: utilities can’t survive without revenue, and falling or fluctuating demand creates real risks for sustainable utility management. But there are better ways to manage risk than squeezing the most conservative customers.
A rate structure that provides basic volume allowances at low fixed prices with steeply inclined prices at higher volumes is one good option. As I’ve observed before, consolidation can help maintain progressive pricing because larger customer bases can withstand revenue shocks more easily than small systems. Utilities should also use larger cash reserves to stabilize revenues across seasons and years—and governments should keep their hands off those reserves! More creative approaches could include regional water revenue banks or development of a secondary market for utility revenue risk.
*A lot of studies claim to measure “average bills,” but are really measuring bills at specific volumes that are assumed to reflect an average customer. Studying true average bills across large numbers of utilities is hard because there’s no reliable source of data on average consumption across utilities.
†An initial working paper reports the full methodology and descriptive findings in detail.
An update on what low-income U.S. households must pay for essential service
About a year ago I also published the results of a national study of affordability using these new metrics using data from a nationally-representative sample of utilities in 2017. This year, I’ve been working with Texas A&M graduate student Robin Saywitz to update that study for 2019 with fresh data and an expanded sample of utilities. A working paper details the full methodology and results for the 2019 update; this post reports the main findings.
Water and sewer affordability remain at the forefront of discussions among utility policymakers, managers, and regulators as communities across the country face rapidly rising capital, maintenance, and replacement costs. Since good policy requires good measurement, I’ve spent a lot of time in recent years evangelizing for a new, double-barreled measurement approach published early in 2018: the Affordability Ratio and Hours at Minimum Wage. These metrics are designed to capture the sacrifices and trade-offs that low-income households face when paying for these essential services.
Sample & data
There’s no central repository for water and sewer service rates in the United States, so valid depictions of affordability requires gathering data directly from utilities. We drew our sample from the EPA’s Safe Drinking Water Information System (SDWIS), which contains basic system information for the country’s nearly 50,000 water systems. To get a representative picture of the nation’s affordability we stratified the sample and then randomly selected systems. Our analysis then adjusted mathematically for the sampling procedure to make sure we get representative results.
We collected rates data during the summer of 2019 with an active survey—that is, we gathered rates information directly from utilities rather than relying on responses to questionnaires. The final dataset included full water and sewer rates data for 399 utilities—an increase of 70 systems compared with the first study.*
Basic water & sewer share of disposable income
The first main metric is the Affordability Ratio at the 20th income percentile (AR20), which estimates basic water and sewer prices as a share of disposable income, which for present purposes is total income minus other essential living costs (including taxes, housing, food, health care, and home energy), estimated using Consumer Expenditure Survey data.
In 2017 AR20 averaged 9.7 in the United States; we found that average AR20 is up sharply since 2017, with the national average now at 12.4. In substantive terms, that means that in the average U.S. utility, basic water and sewer service prices for a four-person household consume about 12.4 percent of disposable income for a household at the 20th income percentile. Here are the distributions of AR20 for 2017 and 2019:
As the figure shows, the overall distribution has shifted markedly since 2017, especially at the high end. AR20 is less than ten for about 60% of systems, but we found a troubling growth in very high values of AR20.
Basic water & sewer in hours at minimum wage
The other way I like to measure affordability is to convert basic monthly water/sewer prices into Hours’ Labor at Minimum Wage (HM). It’s not a precise way to measure affordability, but it’s intuitively meaningful.
The overall HM distribution also shifted up overall, with an average HM of 10.1 in 2019. In other words, the average monthly price of basic water and sewer service for a four-person household in the United States requires about 10.1 hours of labor at minimum wage. Average HM was 9.5 in 2017, so we see an increase in 2019, but the change in average HM is not as dramatic as the change in AR20. Here’s affordability in the United States measured in terms of local minimum wage, again with 2017 and 2019 side-by-side:
So what’s going on with affordability?
Trying to infer trends from just two time periods is tough, but some important patterns are evident in the 2019 update. The most striking result overall is the sharp increase in AR20, which reflects increases in water and sewer prices, increases in essential expenditures, and stagnant or even declining 20th percentile incomes.
The more modest increase in average HM is consistent with nominal inflation, but in terms of minimum wage labor the increase of +36 minutes is noteworthy as minimum wages have not increased in many parts of the country.
We’re still unpacking what it all means, and I’ll have more to say about what the 2019 data show. For now, these figures offer another snapshot of water and sewer affordability in the United States to help frame discussion over improvements and structural reforms to the American water sector.
*399 might not seem like a very large sample for a country with 50,000 water systems, but the sample is much larger than most studies of water rates, it’s representative, and we’re highly confident in the validity of the data because we gathered the data ourselves. It’s also 70 more systems than we sampled in 2017.