From Rates

The Plan

A five-point proposal to transform U.S. water ​system governance

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 sectormeans 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):

1. Consolidation

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.

2.Regulatory reform

​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.

Specifically:

​Best of Both Worlds

  • 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.

3. Technological transformation

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.

4. Human capital

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.

5. Environmental justice

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.

The Bundle

Important developments in California for utility affordability

You probably need all three

California’s Public Utilities Commission (CPUC) is working on establishing methods to measure affordability for utility service. The CPUC governs ratemaking for the state’s investor-owned water, energy, and telecommunications utilities.* The idea behind the CPUC’s process is to craft sensible, valid metrics to gauge low-income households’ ability to pay for essential services.

As part of their efforts, CPUC has been reviewing the latest academic research on affordability measurement. I was involved in this process through a series of conversations with CPUC staff and a workshop in San Francisco earlier this year. It’s been fascinating to watch the CPUC grapple with this important issue, and gratifying to see principles that I’ve advanced take shape in policy.

​The room where it happens...

Comprehensive measurement

I spend a lot of time thinking, researching, and writing about water affordability; other scholars think about energy and telecom—that’s how industries and disciplines are organized. But of course, the same people who use water utilities also use electricity, gas, telephones, and Internet service. The affordability of any one of these services depends in part on the prices of all the others. So a realistic picture of utility affordability has to include all of them.

What’s particularly exciting about the CPUC’s current work is that they’re crafting a single affordability metric to capture the cost of all these utility services. That requires defining essential service levels for each service, measuring the prices for those levels of service, and estimating the ability of low-income households to pay for that bundle of services in combination. It’s an analytically daunting task.

Principles in practice

The CPUC staff took up the challenge, and crafted a smart proposal for comprehensive affordability measurement. The proposal sets essential water supply at 50 gallons per person per day (gpcd), Essential energy is set at “baseline quantities,” with end use studies underway. Telecom essential services are defined as 20 Mbps, 1024 GB/month, and 100 minutes per month. The total price of essential service for all three is the real cost of utilities.

The proposal then uses a combination of three metrics to assess affordability: the Affordability Ratio (AR), Hours at Minimum Wage (HM), and the Ability to Pay Index (API). Each of the metrics offers a different but important perspective on affordability. Here’s how the CPUC report summarizes the three metrics:

The report describes each metric in detail and discusses the ways that they can complement each other. I won’t lie—I’m pretty geeked to see the first two of those, since I introduced and have been evangelizing for them in the water sector. CPUC staff have picked up these principles and run with them.

The CPUC affordability rulemaking process is ongoing, but this staff proposal is an exciting development in utility pricing.




*The CPUC’s efforts are running in parallel with similar work by the California State Water Resources Water Board, which regulates the state’s water utilities, public and private.

Garden Badger

Water Sector Reform #2:
Regulatory Transparency & Fairness

Bringing together the best of both states

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 transformational, institutional solutions for America’s water sector. This is the second in a series of five posts outlining five broad ideas 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 proposed reform is an overhaul of the processes and institutions that regulate water system finance using regulatory models from New Jersey and Wisconsin. The goal of this reform is not to regulate water quality directly, but rather to change the incentives for the organizations that operate water systems.

The need for regulatory reforms follow from the ownership structure of the U.S. water sector.

Infrastructure ownership

Another important way in which water is different from energy and other utilities is ownership. The overwhelming majority of Americans get their electricity and/or gas from a private, investor-owned firm, with small minorities receiving service from government utilities. But water is a different story: about 88% of Americans get their drinking water service from a local government, with about 12% served by private firms.

Source: US Dept of Energy, US Dept of Transportation, US Environmental Protection Agency

Ownership is crucial because different institutions govern private and public systems, creating different incentives for infrastructure investment.

Public Utilities Commissions

Let’s start with the private sector. The profit motive, constrained by regulation, drives management of investor-owned utilities.

Private utilities of all kinds—water, energy, telecom, whatever—are operated by corporate managers in the interests of their shareholders. But utilities are natural monopolies, and so we can’t count on free markets to guide investment and pricing. Instead, prices are not set by the companies themselves, but rather by the state Public Utilities Commissions (PUCs). The PUCs require utilities to report publicly their asset management plans and financial records in order to justify their pricing. PUC-regulated systems must also report a variety of performance data, which commissioners scrutinize to ensure that utilities are maintaining adequate service.

PUCs allow private utilities to set prices based on the amount of capital they invest in the system: the more capital invested, the more revenue they earn. That can create an incentive for private utilities to over-invest in infrastructure because those investments allow them to raise rates—a problem known as the Averch-Johnson Effect. Much of what the PUCs do is scrutinize all those investments to ensure that they’re justified and that utilities aren’t gold-plating their systems. In other words, PUCs act to prevent over-investment in utility capital.

But remember, that’s only about 12% of the water sector.

Local governments

The overwhelming majority of water service is provided by local governments—usually cities, counties, towns, villages, authorities, and special districts. These systems are managed by local bureaucrats, with investment and pricing decisions made by local elected officials. For all the talk about federal funding, U.S. water infrastructure investment is mainly a function of local politics.

Local politics are unkind to water infrastructure because the price of water is much more visible than the quality of water. As in all things, people generally like high quality and low prices. Thing is, most contaminants in water are invisible. Unless my water is so bad that I can smell or taste it, unless there are frequent an ongoing outages and main breaks, I really have no idea how good my water system is. Unlike roads and bridges, water systems are literally buried.

But the price of water is easily observable. Voters may not know what contaminants are in the water, but they know for sure what they pay for it when they get the bill each month.

Now suppose I’m an elected official who wants to please my voters. If I make decisions that maintain or improve water quality, that’s good! Alas, my voters may not recognize the improvement. But quality improvement might cause prices to increase, which is bad because higher prices are immediately visible to voters.

No mayor wants to roll into the office & find these folks waiting

But blame avoidance isn’t good for infrastructure investment. That’s a big part of why all those facilities built back in the 1970s and 80s are crumbling today. Back when the CWA and SDWA sent hundreds of billions of dollars to local governments, the idea was never for the US government to own and operate water systems. The goal was for ​Uncle Sam to help get those systems up and running in compliance with the new environmental laws. Local governments were then supposed to take over responsibility for those systems. In too many cases political forces have led local officials to run those systems to failure. Local politicians don’t neglect water infrastructure because they’re stupid​; they do it because they’re responsive to voters.

Jersey to the Rescue?

In 2017 New Jersey passed the Water Quality Accountability Act (WQAA), which requires all water utilities—both government and investor-owned—to develop asset management plans, report on infrastructure conditions, and reinvest adequately in their systems. Rule-making to implement the new law is still under way, but what the WQAA requires of all water systems is similar to what PUCs already require of investor-owned utilities: transparency about infrastructure conditions, evidence that they are managing assets responsibly, and evidence of system performance.

Making all that system information transparent can make water’s quality as visible at its price. We can make water infrastructure a credit-claiming opportunity for local officials, not just a blame-avoidance game. Mayors seeking reelection should point at their cities’ water system performance with pride, not merely seek to duck responsibility for rate increases.

Meanwhile, in Madison…

A thousand miles away, Wisconsin employs a unique regulatory system that’s a perfect complement to New Jersey’s new law. All fifty states and the District of Columbia have Public Utilities Commissions, but Wisconsin is the only state where all systems—public and private—are subject to PUC financial regulation. That is, Wisconsin local governments must get approval of their rates from the PUC (or the Public Services Commission, as they call it there).

expected a cheesier logo

As with other utilities commissions, the traditional role of the Wisconsin PSC with respect to rates is to guard against over-pricing by private monopolies. But in the case of local government utilities, the PSC’s authority could include New Jersey-style asset management requirements and a guard against underpricing due to inadequate reinvestment. At the same time, the PSC provides something of a shield for local leaders. As a 2012 Alliance for Water Efficiency report observed:

“The Wisconsin Public Service Commission regulates both public and private water systems, and assumes the responsibility for approving all changes to water rate-making in the state. Thus, the political ‘heat’ is off at the local level and water systems can more easily approach the PSC for needed changes to their revenue structures.”

In theory, if a utility isn’t adequately investing in maintenance and upgrades, the Wisconsin PSC might actually be able to compel rate increases. (I’m not sure that’s ever actually happened).

Regulatory overhaul

Together, the Garden State’s new WQAA and the Badger State’s PSC authority over local governments would be a potent regulatory combination. So my second proposed reform is to require comprehensive asset management and performance reporting for all water utilities (as in New Jersey), and to extend PUC pricing regulation to government utilities (as in Wisconsin). The idea is broadly consistent with Australia’s model for urban water price regulation. As with my other proposed reforms, achieving such a significant overhaul to the nation’s regulatory institutions will require federal leverage.

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 incentives for sound management of water systems.