From Drinking water

Paper Pushing

Devils (and angels) in the details, Part 4

Nobody wants to talk about this part

In early January the California Water Board published its long-anticipated draft proposal for a statewide low-income water bill assistance program. In the past few posts, I’ve summarized the path-breaking proposal, discussed its potentially perverse incentives for ratemaking, and pondered its implications for small system consolidation. In this post, I take up that crucial but oft-overlooked dimension of public policy: administration.

Administering statewide water bill assistance

The draft proposal acknowledges that administering a brand new social welfare transfer program will be costly and complicated. The low-income water rate assistance program will need to be advertised, applications processed, incomes and personal data verified, customers enrolled, and so on. Then the benefits themselves would need to be distributed in some way. Participants will need to renew their eligibility periodically, which will require re-verification. Audit procedures will be needed to guard against fraud and abuse, and appeals processes established to provide recourse to those wrongfully denied benefits.

The draft proposal punts on who exactly would do all that administrative work.

Benefit distribution

Rather than arguing for a specific administrative arrangement, it lays out four potential approaches to benefit disbursement:

  1. Water bill credits
  2. Energy bill credits
  3. EBT (Electronic Benefits Transfer) cards
  4. Tax credits

The first option might seem most obvious, but the draft report correctly observes that many benefit-eligible households may not receive water bills directly, because they live in multifamily or rental housing and so pay for water service through their rent. Options #2-4 have the potential to reach more households. Options #3 and #4 most closely approximate the received wisdom of welfare research, which suggests that benefits work best when they are received directly by their beneficiaries.

What about everything else?

But there’s much more to a low-income assistance program than handing out benefits. Conspicuously absent from the draft report is discussion of the many other aspects of administering a new assistance program. Here are some options.

Asking for help ain’t easy. Giving it ain’t, either.

Utility administration. Water systems could administer the program on behalf of the state (several California investor-owned utilities already run assistance programs, for example). Utility organizations are, by and large, unaccustomed to administering social welfare programs. Recently I’ve had the opportunity to study a handful of water utilities that administer low-income assistance programs. I found that, when water utilities get into the low-income assistance game, utility staff become de facto social workers. Water customers who apply for assistance often struggle with multiple health, financial, legal, and perhaps cultural problems. It is impossible not to make a human connection in such cases. Laudably, the utility folks I’ve met who administer water assistance programs work hard to do so humanely and responsibly. But welfare administration is, at best, an uneasy fit for many utility organizations. Moreover, the burden of administering an assistance program would be especially onerous for the very small systems that already suffer disproportionately from high prices and poor water quality.

State administration. The California Water Board (or some new agency) could create a new organization to administer the program. This sort of centralized administration could provide economies of scale and help ensure uniformity and fairness across the state. On the other hand, state administration would involve significant new investments in staffing and other administrative infrastructure, all of which would be subject to the vagaries of state politics.

Nonprofit administration. Water bill assistance could be administered through community-based nonprofit community service organizations like the Salvation Army or St Vincent DePaul Society. In addition to providing direct charitable aid, such organizations often are conduits for government assistance programs like LIHEAP. Many of these nonprofit organizations employ sizable, multilingual staffs that include social workers, nutritionists, lawyers, and other professionals who help low-income individuals and families navigate the often confusing and sometimes humiliating process of applying for benefits. These organizations’ expertise, flexibility, and familiarity with target populations offer perhaps the most promising avenue for administration.

The recipient’s administrative burden

Also missing from the California Water Board’s draft proposal—and most of the broader discussion of low-income water bill assistance—is consideration of the administrative burdens that water customers would have to bear in order to receive benefits. Learning about the assistance program, applying, demonstrating eligibility, ensuring receipt, and reapplying are time-consuming and sometimes humiliating processes. These costs may be especially significant for people with low literacy or limited English proficiency. Potentially eligible people may forego benefits if the application process is too burdensome, if they perceive a social stigma associated with public assistance, or if they do not trust government.

Taken together, administrative costs—to the state, to utilities, and to low-income households—are a big part of why I’ve argued that rate structures, not assistance programs, offer the most promising path to water affordability. Low fixed rates and low prices for essential water use make water affordable for everyone. Unlike assistance programs, affordability through rate design doesn’t create new administrative costs, and doesn’t make customers endure intrusive and burdensome application processes. As policymakers grapple with water affordability in California and beyond, they should consider ways to help encourage utilities to price water more affordably alongside bill assistance efforts.

 

Life Support

Devils (and angels) in the details, Part 3

Small, rural water systems often struggle with both quality and affordability. (Photo: Tara Lohan, NewsDeeply)

In early January the California Water Board released its draft proposal for a statewide low-income water bill assistance program. My last couple posts summarized the proposal and discussed the perverse incentives for rate design that the subsidy might create. Continuing the theme of unintended consequences, this one looks at what the statewide assistance program might mean for poor-performing small water systems.

Size matters

All else equal, when it comes to water systems, bigger is better. Water and sewer systems require big infrastructure investments and lots of operating costs to work. When those costs can be spread across large numbers of people and businesses, the average price of water is lower. That makes utilities textbook examples of economies of scale.

Less obviously, the organizations that operate utilities also are subject to economies of scale. Larger organizations can hire and retain higher-quality employees and maintain specialized personnel. As my past research work with David Switzer has shown, these advantages help larger water systems take advantage of human capital in ways that smaller systems can’t.

Larger systems also enjoy significant financial advantages. Larger customer bases tend to be more economically diverse, providing a degree of financial stability to a utility. Financial markets favor large utilities, too, allowing them access to finance capital at lower interest rates than their smaller cousins.

Thing is, just as in the rest of the United States, most of California’s water utilities are really, really small. More than three quarters of California’s 2,800 water systems serve fewer than 3,300 people, but collectively serve just 2% of the state’s population. Meanwhile, the 183 largest systems serve 80% of the state’s population.

Small system struggles

Unfortunately, small systems tend to suffer disproportionately from poor water quality. Here’s the correlation* between annual Safe Drinking Water Act health violations and utility size in California, based on EPA data from 2010-2018:

Study after study after study after study confirms the relationship between system size and drinking water quality.

Affordability also correlates with system size. So do poverty, income, and unemployment. My recent analysis of water and sewer rates nationwide shows that, all else equal, both AR20 and HM decline as utilities increase in size—that is, on average, water and sewer affordability gets better as utilities get bigger.

Analysis based on nationally representative data, 2017. Spikes show 95% confidence intervals.

That small systems struggle is no secret, and California has in recent years sought to encourage system consolidation through a variety of carrots and sticks. The process is slow, however, and fraught with political conflict. Consolidation is not a panacea, and there are plenty of struggling large and medium-sized systems. But the data are clear on this point: on average, with water utilities, bigger is better.

Props and levers

What does all this have to do with low-income assistance? The proposed program would transfer significant resources from relatively affluent to relatively poor communities. In many cases, those communities are served by the small, perennially underperforming utilities that too often provide lousy water quality at very high prices. Financial pressures from ratepayers are among the strongest incentives for small utilities to consolidate. A low-income assistance program will disproportionately benefit customers of those systems (which is good), but could inadvertently prop up systems that would otherwise move toward consolidation due to financial pressures (which is bad). To some failing small systems, low-income assistance could be financial life support system.

I’m not an engineer, but this seems bad.

But if structured correctly and implemented carefully, low-income water assistance could help drive small system consolidation. Financial assistance for low-income customers could make consolidation more attractive for the larger utilities and private firms that might otherwise be reluctant to take on the responsibility for troubled small systems with less affluent customers. More directly, the state could make assistance funds contingent on consolidation or compliance with SDWA management requirements. Statewide assistance might be a potent lever to push recalcitrant small systems toward consolidation and its blessings.

That’s why statewide low-income water bill assistance should not be considered in isolation, but rather as part of a comprehensive strategy to improve water systems. The same applies to any plan for a national water affordability assistance program.

Whether a statewide assistance program would prop up failing small systems or lever them into consolidation and sustainability will depend in large part on the administrative structures and processes used to implement the program. I’ll take up those administrative angels and devils in my next post.

 

 

*Fitted with a negative binomial regression.

There are probably another dozen or so studies that I could link here.

Perverse incentives

Devils (and angels) in the details, Part 2

It’s always about the money.

In early January the California Water Board released its draft proposal for a statewide low-income water bill assistance program. My last post summarized the path-breaking proposal and its promise for addressing affordability in the Golden State. It’s an admirable piece of work on a challenging and complex issue. The next couple posts wade into the tall policy grass in search of snakes. This one looks at the volume of water to be subsidized under the proposal.

Assistance for how much water?

An assistance program for water implies that there is some level of water consumption that is socially important, and that without assistance, water consumption would either fall below that level or force households to sacrifice other essential goods in order to pay for water. What is that level of water consumption? How much water is so important that taxpayers should subsidize it?

For California’s draft assistance proposal, the answer is 12 ccf (about 9,000 gallons) monthly per household.

Consumption in context

Not all residential water use is the same. Public policy discussions of water affordability are mostly concerned with essential needs like drinking, cooking, cleaning, and sanitation. We’re not generally concerned with the affordability of watering lawns, washing cars, or filling swimming pools.

Probably not worth subsidizing

The proposal’s 12 ccf price guideline implies 75 gallons per capita per day (gpcd) for a family of four. To give some context, California utilities average about 100 gpcd, which makes 75 gpcd seem pretty low. But it’s much higher than California’s 55 gpcd water efficiency standard (set to drop to 50 gpcd by 2030), and higher than typical water use in many California communities today. My own past affordability analyses have assumed 50 gpcd for essential use*; conservative San Francisco already averages just 42.4 gpcd for overall demand (not just essential use).†

There’s nothing magic about any of these numbers; in the end, the level of water consumption that is deserving of public subsidy is a decision to be made through the democratic process. But 12 ccf is a lot of water if the policy’s aim is to provide for essential water use. The draft proposal notes that the 12 ccf level is intended to allow for larger households and “modest amounts of outdoor irrigation.”

A perverse incentive

Why does any of this matter? Beyond the normative question of whether taxpayers ought to subsidize outdoor irrigation, a 12ccf standard may have the unintended effect of pushing water utilities toward less affordable, less conservation-oriented pricing.

Low fixed rates and low prices for essential water use make water affordable for everyone, whether or not they participate in an assistance program. Coupled with progressively higher volumetric prices, such rate structures help keep water affordable and encourage conservation. Unfortunately, many utilities have recently responded to falling average demand and revenue volatility by raising fixed rates and imposing higher costs for low-volume use. That’s good for utility revenue, but bad for affordability.

That’s where the perverse incentives creep in. A 12 ccf standard for assistance is likely to exacerbate the trend toward utilities raising fixed charges and low-volume rates. With the state’s assistance program providing aid to low-income customers, utilities can raise rates on volumes below 12 ccf with less concern for affordability impacts. That will naturally dampen the conservation incentive, as higher priced water becomes less expensive. Less obviously, higher prices for lower volumes will exacerbate affordability problems for anyone who is not enrolled in the assistance program. The draft proposal assumes an 84% participation rate; for the 16% of households who don’t participate (for whatever reason), affordability will probably get worse.

A footnote acknowledges a danger of strategic rate-setting (told you I’d get into the weeds!), observing that systems could respond to the assistance program by “shifting the rate burden to consumption levels below 12 CCF, and thus elevate the benefit for eligible households.” Apparently the concern is that utilities will game the assistance program as a means of channeling more state money to local customers. But from an affordability perspective, the more worrisome prospect is that the state’s assistance program will incentivize regressive pricing that ironically makes water less affordable for many.

This perverse incentive will exist no matter what volume is subsidized, but the greater the volume subsidized, the more perverse the incentive will be. If an assistance program is supposed to support a human right to water, then a more modest 6-8 ccf standard for support is more defensible and less susceptible to rate design gamesmanship.

 

 

*My January 2018 article on affordability measurement prompted a grouchy email from a San Francisco official who complained that 50 gpcd was an unrealistically high essential volume for evaluating affordability

I chuckled when typing: “conservative San Francisco.” Our language is funny, sometimes.