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 that we sampled in 2017.
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.
Important developments in California for utility affordability
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.
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.