Terrible, horrible, no good, very bad measurement, part 4
My criticism of average bill ÷ Median Household Income (MHI) as a measure of household-level water affordability isn’t especially new. Lots of other people have pointed out the problems with this conventional methodology, and I’ve been presenting and publishing these arguments for more than twelve(!) years. But golden numbers are stubborn, and bad habits are hard to break—even when people know better.
The remarkable persistence of a bad idea
Over the years I’ve presented to hundreds of utility professionals and spoken personally with scores of managers, analysts, and rate consultants about the pathologies of %MHI and the virtues of alternative approaches. The reception is universally warm and agreeable, as most water professionals genuinely care about affordability and immediately recognize the fundamental flaws of the conventional approach.
Alas, there’s an and yet.
Even well-informed specialists continue to use and promote the tried-and-false conventional methodology. Researchers who recognize that average-bill-as-%MHI is deeply flawed employ it anyway because it’s easy and widely recognized (for example). Managers who know that %MHI is a misleading statistic continue to put it in front of their elected officials because it’s familiar and they feel that they have to use this metric because everyone else does, and because they believe it’s an EPA standard (it isn’t). Advocates, analysts, and rate consultants who I like and respect persist with the conventional approach in their studies, even when they know these metrics are fundamentally flawed (many have told me as much!).
Examples abound. The Alliance for Water Efficiency has a nice tool that’s designed to help water utilities model the financial impacts of various rate structures. Sensibly enough, their model includes an assessment of affordability. Unfortunately, it uses the familiar flawed metric:
UNC’s Environmental Finance Center continues to feature average-bill-as-%MHI as the sole affordability indicator on its rates dashboards. Folks at EFC know about the problems with this metric (they blogged about it here), but continue to display it prominently nonetheless.
Easy metrics die hard, it seems.
Water and sewer ratemaking is a niche specialty (to put it mildly). That’s good news, because if the community of specialists who analyze and design rates for a living get affordability metrics right, there’s a good chance that the utilities they serve will get affordability right, too.
I’ve developed better ways to measure affordability; others are working on this issue, too. At this stage there’s no consensus over the best metrics (naturally, I think mine are great). But abandoning the flawed measurement convention is an important first step.
Terrible, horrible, no good, very bad measurement, part 3
As my last couple of posts explain, the conventional method of measuring household-level water affordability is to divide a utility’s average residential bill by its community’s Median Household Income (MHI). If the resulting percentage is less than 2.0 or 2.5 (4.0 or 4.5 for water and sewer combined), then water is deemed “affordable;” if it’s greater, then water is “unaffordable.”
This post explains the fourth, and in my view most serious, problem with the conventional approach: the arbitrary threshold that it uses to define affordability.
An arbitrary standard
I’ve never—and I mean never—seen a theoretical or empirical rationale for a water/sewer affordability standard as a function of %MHI. Apparently the 2%MHI threshold emerged from the mists of federal regulatory history in a 1970s-era USDA rural grant program. At some point EPA began using the metric as part of its regulatory enforcement program. Despite those strange and ill-fitting origins, the 2.0 (or 2.5) %MHI affordability threshold is now held up as a definitive measure of household-level affordability, apparently for no other reason than convention.
The affordability of anything is rarely a strictly yes/no phenomenon—things are more or less affordable relative to the costs of other things and the resources available to pay for them. But rather than deal with those nuances, analysts simply cite precedent and invoke average-bill-as-%MHI as an EPA “standard” (though as I’ve noted before, it’s not an actual EPA standard, and the agency never intended %MHI to be a measure of household-level affordability).
The 2% or 4%MHI threshold has become what organizational theorists call a golden number. Golden numbers are standards that have no basis in theory or evidence, but are so widespread that they take on independent importance simply by virtue of their familiarity. The trouble with golden numbers like 2%MHI is that they preempt or short-circuit serious deliberation over values. Managers of a utility that satisfies the %MHI threshold can use the standard as an excuse dismiss affordability concern, even if many of its customers struggle to pay their bills.
Worse yet, a golden number like 2%MHI that has a tangential relationship to an EPA guideline puts a veneer of legitimacy on what is ultimately an arbitrary norm. Performance metrics reflect an organization’s values and help guide management toward decisions consistent with those values. In that regard, the golden number that predominates water rate analysis fails fundamentally.
Communities and their elected leaders should set affordability standards consistent with their values. Average bill <2%MHI distorts the affordability picture and distracts from meaningful consideration of the issue.
Terrible, horrible, no good, very bad measurement, part 2
As my last post explained, the conventional method of measuring household-level water affordability is to divide a utility’s average residential bill by its community’s Median Household Income (MHI). If the resulting percentage is less than 2.0 or 2.5 (4.0 or 4.5 for water and sewer combined), then water is deemed “affordable;” if it’s greater, then water is “unaffordable.”
There are at least four fundamental problems with average bill ÷ MHI as a measure of household-level affordability. This post will address the first three; I’ll address the fourth problem in my next post.
Problem #1: median vs. low income
In America, water and sewer utilities are inexpensive relative to what most of us pay for energy, to say nothing of cell phones, Internet, or espresso. In all but the smallest or desperately poor communities, the median-income household doesn’t have a water or sewer affordability problem.
The most frequent criticism of the conventional metric is that a focus on median income misses the real subject of affordability concerns: poor households. For low-income families, water and sewer services may force important economic tradeoffs. Measuring affordability as a function of an entire community’s median household income obscures the impacts of rate setting on low-income customers. As income stratification in a community increases, the degree to which %MHI masks affordability problems increases.
Problem #2: average vs. essential use
Average residential demand is a poor basis for affordability analysis. For most American utilities, average residential water consumption is considerably higher than its median, because a minority of high-volume customers drives up the average. Moreover, most utilities exhibit significantly greater demand during summers due to discretionary use for things like lawn care, car washing, and swimming pools. A great deal of a utility’s average water bill pays for non-essential water uses.
Most people who are worried about water and sewer affordability aren’t much concerned with the cost of maintaining large lawns. Rather, worries about affordability are about customers’ abilities to pay for water and sewer service to meet their essential needs for drinking, cooking, cleaning, health, and sanitation. In most cases evaluating affordability as a function of average consumption implies an unduly high demand.
Problem #3: essential (non-water/sewer) costs of living
Water and sewer services are not the only goods and services that people need to live. Housing, food, health care, home energy, and other essential goods and services also affect water and sewer affordability to the extent that they strain households’ financial capacity. These non-water/sewer costs vary widely across communities. Water bills may be low as a percentage of income, but much higher as a percentage of disposable income if the costs of housing or health care are high, for example. In such cases, water rates that are nominally low may still force serious sacrifices for low-income customers. The conventional affordability metric is insensitive to these differences in costs of living.
My next post will take up the fourth, and possibly most pernicious, problem with conventional water affordability metrics.