From Rates

Why now | Why us| Why it matters

Remarks from the opening plenary session of the AWWA/WEF Transformative Issues Symposium

Earlier this week the American Water Works Association and Water Environment Federation hosted their first-ever Transformative Issues Symposium, a two-day meeting focused on a single critical issue affecting the water community writ large. The topic of this inaugural symposium was affordability. I served on the symposium’s planning committee, and had the honor of speaking at its opening plenary session. Here’s what I said.


It is a privilege to speak today on an issue that’s near and dear to me. Like many of the people in this room, I’ve been thinking about and working on affordability for long time. Later today I’ll be presenting some of my own research, but this morning I’m really speaking on behalf of the conference Planning Committee, so when I say “we,” I really mean the committee, AWWA and WEF, and the utilities community generally. My goal in this talk is to clarify language and lay out an agenda for what promises to be two jam-packed days to geek out on affordability.

But more fundamentally, we want to articulate a vision of what water affordability really means, and how we might turn that vision into reality. The very fact that you’re here in our nation’s muggy capital for two days of discussions on water and sewer affordability indicates that you don’t have to be told that this is an important issue—your presence here demonstrates that you “get it.”

So in a sense I’m preaching to the choir this morning. But as any churchgoer knows, sometimes the choir needs preaching, too; a sense of direction and means of articulating a common purpose on the path ahead. With that in mind, in the next few minutes I want to address three basic questions to unify and guide us for the next two days and the important work beyond.

Why now?

We’re at an extraordinary moment for water affordability, if only because, for the first time in a generation, water and sewer infrastructure are on the national political agenda. A confluence of forces has pushed this issue to the forefront. The country is facing huge replacement costs for aging infrastructure. At the same time, there’s been a steep decline in federal grant support for water and sewer infrastructure—the programs that built these systems in the 1970s and 80s. Over the same period, we’ve seen steady increases in costs of housing & health care—essential costs of living. We’ve also seen a generation of wage stagnation, especially for middle- and working-class workers. So even as the broader American economy prospers, for many households there’s a real squeeze on the resources needed to pay the necessities of life.

But there’s something else going on too.

It’s not fair, but whether we like it or not, the Flint Water Crisis is now the public face of the water sector in America. The Flint Water Crisis put the politics of water infrastructure and regulation on front pages across the country, along with poverty and race. Flint isn’t the first, or largest, or most severe drinking water crisis in America in recent years, but it’s the one that caught the public imagination and put a spotlight on utility infrastructure. What happened in Flint is not just water and sewer, it’s also about poverty and race, working class wage stagnation, and ultimately it’s about human health. Flint’s water crisis began in many ways as a financial problem, and even today Flint customers pay some of the highest water rates in the country. That’s put affordability at the forefront of the national conversation on water.

Over the past two years, hardly a week has gone by without a major American news outlet running a story on drinking water and sewer issues. In 2016 Bernie Sanders mentioned water and sewer plants in a presidential debate (the water twitterverse fairly exploded in astonishment!). Water, sewer, and flood control figured prominently in the White House Infrastructure plan published earlier this year—which was surprising if only because politicians usually only give that kind of love to transportation and energy infrastructure. Just this summer California Senator Kamala Harris introduced federal legislation aimed at addressing water affordability. None of these people is a renowned water geek! You don’t need to be a political scientist to recognize that something’s unusual is happening when ambitious, high-profile politicians are drawn to water & sewer infrastructure.

I’ve been a part of the water utility community for more than twenty years; many of you have been at this for much, much longer. We haven’t seen this kind of widespread attention to drinking water and sewer in many decades. Now is the time.

Why us?

A big part of what’s driving concern for affordability is working class wage stagnation and rising housing and health care costs in the United States.  Those are macroeconomic issues. What does any of that have to do with water and sewer utilities? Utilities don’t do macroeconomic policy. We’re in the water business, not in the poverty alleviation business. We often hear that water is underpriced, and anyway water is cheap compared to things like housing and health care—that’s what’s really squeezing working class families. So why is this our problem?

There are at least three reasons. The first is simply that communities are demanding solutions. Water and sewer utilities are public services, and the public demands service. If the public perceives an affordability problem and demands solutions, “it’s not our problem” is not going to be a satisfactory answer. Ultimately, the legitimacy of the water sector depends on the public trust. Dismissing the issue of affordability as outside our portfolio damages that legitimacy. A public that does not trust the water sector to provide for the most vulnerable will be understandably skeptical of our requests for resources and authority.

A reasonable expectation

The second answer to “why us?” is because we can. We can’t do anything about income stratification or wage stagnation. We can’t do much about housing or health care costs. We’re in charge of water and sewer systems. But water and sanitation are among the basic necessities of life, and for some households they represent significant cost burdens. Utilities can’t solve macroeconomic problems. We can’t cure poverty. But we can help, and where we can help, we must.

And that brings us to the last “why us?” reason, which ties into the last big point:

Why it matters

Affordability is central to utilities’ core missions: human health, environmental quality, and economic development. Drinking water and sanitary sewer systems are the most amazing everyday miracles of the modern age. In fact, access to drinking water and sanitation are the very definition of development. It’s what marks a society as modern and developed. Water and sanitation systems save more lives than all of the hospitals in the world. Safe drinking water and clean environmental water facilitate economic growth everywhere. They facilitate economic growth and prosperity. Once upon a time, governments built water works with tax revenue and provided water without charge. Today they’re paid for with service fees, which makes a lot of sense for a lot of reasons. But when those rates become unaffordable, it strikes at the very heart of utilities human health mission.

Research finds that if people can’t afford high-quality tap water or perceive tap water to be unsafe, they substitute sugary beverages and bottled water or kiosk water—ironically far more costly—which exacerbates the affordability problem. We’ve also begun to see a troubling trend of communities across the country are experiencing increasing public defecation and straight-piping, with attendant effects on public health. It is a startling return to 19th-century water problems. At a deep and fundamental level, the affordability strikes at the foundations of the water community as a whole.

Water people are my favorite people. The men and women of the water sector are smart and amazingly dedicated—it’s a community of true believers. They’re in this business because they want healthier, more prosperous communities. Nobody gets into this business to squeeze every last dollar out of the customer. Nobody gets into this business because they want to shut people off from their water supply. But in the words of Abel Wolman, “Just as there is no escape from a hydrologic cycle, there is no escape from the dollar.” Wolman is one of the most important environmental engineers in history—in many ways the father of modern wastewater technology, and a huge influence on the development of the Clean Water Act. Wolman understood that affordability is at the very core of utilities’ mission, every bit as much as treatment or resource management.

The challenge

Affordability is a big, complex, multi-faceted problem that will require complex, multi-faceted solutions. That’s daunting, but certainly not insurmountable—and in some ways, it’s encouraging.

Consider violent crime. Back in the late 1980s and early 1990s America faced a crisis in violent crime, prompting raft of responses in the public and private sectors, at every level.

Crime was bad when I was in high school & college. Wasn’t me, I promise.

Here’s a graph of violent crime in the United States since 1960. As you can see, it peaked in the early 1990s. Since then, violent crime has fallen steadily, and is now half of what it was at its peak. Researchers have spent a tremendous amount of time, crunched a lot of numbers, and spilled a lot of ink trying to figure out what exactly caused that drop in crime.

Turns out that lots of things contributed; new law enforcement strategies and criminal sentencing guidelines, certainly. But also early childhood intervention, community outreach initiatives, gang intervention programs, drug interdiction—all of the above. No single one of those factors accounts for that generational drop in crime—it was the interaction and combination of all of those efforts. The solution to violent crime took dedication, resources, and lots of hard work by lots of people at every level of society, from policymakers in DC to law enforcement professionals to community organizers.

If we can make that kind of progress with violent crime, I have to believe we can deal with water affordability. It’s a big, complex problem. This is a big, complex, diverse country with lots of overlapping and interlocking institutions. Meeting this challenge is going to require contributions by lots of people from lots of angles.

It’s crucial to keep the goal in mind: essential water and sewer affordability for low income households. That’s the goal. That’s the purpose. That’s the subject of this conference.

It’s NOT about utilities or governments—this isn’t about whether utilities have the financial capacity to pay for capital and operations. It’s NOT median or average customers—in all but the smallest, most desperately poor communities, the median customer doesn’t really have an affordability problem. It’s about the working-class individuals and families who may receive little or no public assistance, but nonetheless still struggle to make ends meet. It’s also NOT about all water service—We’re not here to address the affordability of filling a private swimming pool or irrigating a half-acre lawn. It’s about essential use for drinking, cooking, and sanitation.

How do we get there?

The causal chain

It’s a complex path, which brings us to what the planning committee called “the causal chain.” Lots of things affect affordability, and so lots of individuals and institutions are involved in addressing affordability.

Any link on this chain can help or hurt affordability

The most immediate and obvious are utilities, which directly serve and bill the customer. Rate design is the most important and obvious factor affecting affordability. Forbearance, and direct customer assistance programs funded or operated by the utilities themselves also affect low-income households. But rates and other utility programs are a function of a utility’s capital and operating costs. Factors that affect costs can flow through to low-income households. Critically, cost reduction or efficiency improvements at the utility level do not necessarily improve affordability at the customer level, at least not for all customer in the same way. Customers experience those costs through their rates; increased costs can hurt affordability, but not necessarily. Reduced costs or increased efficiency can help affordability, but they do not necessarily. A dollar-per-customer of reduced operating cost doesn’t necessarily mean a dollar-per-customer reduced bill. We should bear in mind that there are a couple of links on the causal chain between utility costs and customer affordability.

Then there are state & federal policies that can affect utility costs. Regulations, infrastructure funding, research, training, and technical assistance by state and federal agencies can increase or reduce costs for utilities. But those increased or decreased costs don’t necessarily flow through dollar-for-dollar to low-income households. Let’s say a state regulator changes a rule in a way that increases treatment costs. Utilities absorb those costs, but can do so more or less efficiently. They can then recover those costs in a variety of ways through their rate structures, in ways that might or might not affect low-income affordability. In the same way, a federal grant or loan program can reduce a utility’s operating costs, but that grant doesn’t necessarily help low-income affordability. The point is that there are a lot of links on the causal chain that connects federal water policy to low-income customers. It depends on how the utility manages the grant, and how that grant funding is used to offset various kinds of rate revenue.

On the other hand, state and federal governments might have programs aimed directly at customers, such as fixture rebates or assistance programs meant to subsidize utility costs. A great example from the energy sector is LIHEAP, which provides direct assistance to low-income customers to pay for home energy. That kind of policy connects state and federal governments directly to low-income customers.

There are also nonprofit and social service organizations that affect customer-level affordability through direct assistance. Federal government and utilities can also reach customers indirectly in cooperation with social service and nonprofit organizations.

All of these pieces operate simultaneously. In the end, what matters is how they converge to affect affordability for low-income households. It’s important to keep the eye on that ball—that orange box at the right-hand side of the slide is what matters. That’s a big, messy picture—but each piece can contribute to or alleviate the problem of affordability. Each piece can help or hurt utilities’ public health missions, too. We hope this figure will be a touchstone as we move through today and tomorrow, reminding us how all the pieces fit together, where each of us fits in the big picture, and most of all, keep us focused on that orange box at the right.

Finally—and this is crucial—we have to keep in mind that that those low-income households are people. They’re individuals and families. They’re citizens, not subjects. At each step of the way, it’s important to understand the lived experiences of people who live paycheck-to-paycheck, and how decisions on each link of that causal chain shape those lived experiences.

The path ahead

It’s a complicated problem, and it’s going to require creativity and leadership to solve. This symposium is an exciting step toward meeting the challenge. End of lecture!

My turn to sit down and enjoy some affordable tap water.

Political Decoupling

A California Surprise, Part 2

More drought porn (this is used to be Folsom Lake)

How private implementation separates public policies from their political costs.

Warning: this post contains hardcore wonkery.

In 2015 the California State Water Resources Control Board (SWRCB) ordered drinking water utilities to reduce water usage by 25% statewide. As my last post described, something surprising happened: compared with local governments, the state’s private, investor-owned utilities imposed stricter water use regulations, were nearly twice as likely to comply with the state mandate, and conserved significantly more water overall.

Though counterintuitive, this difference in public and private sector water conservation follows rationally from the political institutions that govern water in America generally and California specifically. The keys to this conundrum are money and politics.

Financial risks of conservation

American water utilities operate on a fee-for-service basis; typically, customers pay a fixed monthly charge, plus a charge for each unit of water. Faced with resource scarcity or some other environmental problem, it may make sense to curb water consumption—say, in response to a drought. But reduced consumption reduces revenue. For utilities that rely on rate revenue to fund their operations (and, in the case, of private utilities, to pay their shareholders), conservation can be environmentally good but financially bad.

The financial risks of conservation are especially severe for utilities due to their very high fixed costs. As I’ve observed before, whether a utility delivers one gallon or ten million gallons, the costs of constructing, maintaining, and operating reservoirs, treatment plants, and distribution pipes are the same. A drop in water sales doesn’t bring a matching drop in costs to the utility, so reduced consumption threatens financial sustainability (for government utilities) and profitability (for investor-owned utilities).

Utilities are natural monopolies, and so could charge customers exorbitant prices if they were allowed to set prices any way they like. For that reason, utilities are subject to government price regulation. But the institutions that govern private and public utilities are different, and present them with very different incentives to comply with state conservation rules.

Price regulation & decoupling

Let’s start with private utilities.

Governments regulate private utility pricing through state Public Utilities Commissions (PUCs); in California the PUC is composed of five appointed commissioners. The PUC process is technocratic and legalistic, usually drawing scant media attention. PUC price regulation proceeds under the cost of service principle: companies are limited to recovering the actual cost of providing service, plus a legally-sanctioned rate of return.

It only looks Soviet

Decades ago, the conflict between conservation and profitability for private utilities led environmentalists to develop rate decoupling: the separation of a firm’s revenues from the volume of product it sells. If conservation causes revenue shortfalls, decoupling provides for automatic rate increases to make up the loss. In that way, decoupling shifts the financial risks of conservation from utilities’ investors to their customers, eliminating the incentive for utilities to sell more and more energy, water, or whatever. Decoupling can work in situations where private utilities operate under PUC regulation, and has generally been successful in stimulating conservation in the energy sector. Today about half of US states use rate decoupling for electrical utilities.

In 2008, California became one of just two states (the other is New York) to adopt decoupling for water utilities when it introduced the Water Revenue Adjustment Mechanism (WRAM). Private utilities take advantage of this provision when conservation causes a loss of sales revenue: financial losses associated with reduced sales volumes are recovered in future rate increases through WRAM. PUC records show that by Spring 2018, at least 39 of the 62 investor-owned utilities subject to California’s conservation mandate had invoked WRAM and raised rates following the drought. Decoupling irritates customers, who understandably grumble about paying more for water they didn’t use—the paradox of conservation. But those grumbles are largely impotent, as the PUC’s technocratic process allows WRAM under state law.

Water rate politics & the conservation paradox

And then there are local governments.

Governments (including counties, municipalities, and special districts) that own drinking water utilities are essentially self-regulated with respect to pricing; their rates are set by city councils and district boards. Public water rates are thus subject to the political calculations of local elected officials. Water customers are also voters who prefer lower rates, and so raising rates can have bad electoral consequences for politicians. Unlike the technocratic PUC process, rate-setting for government utilities can be a contentious affair. In California the political risks are especially pronounced, since public water rates are subject to Proposition 218.

California local government utilities can raise rates when conservation measures cause revenue shortfalls; they need not seek permission from the PUC. But raising rates is politically risky for local officials. Whatever their attitudes toward sustainability, citizen-customers of government utilities are just as irritated as customers of private utilities when they use less but pay more. Government managers and elected officials are wary of angering their voting water customers if revenue losses force rate increases.

Attendance at the Redlands city council meeting on water rates was robust. Photo: informedredlands.com

Consider the politics of water conservation in the City of Redlands. California’s 2015-2016 emergency rules assigned the city a 33% conservation standard. The city responded with a series of conservation measures, but met its conservation standard in just two out of twelve months and achieved only 11.3% conservation overall. Still, reduced water sales caused a city revenue loss of about $2 million. When utility staff recommended a 19% rate increase to cover the shortfall, more than 3,000 citizens filed protests against the increase in advance of a raucous, five-hour City Council meeting on the subject. Drought-related rate increases prompted similar protests and/or legal challenges in Alameda County Water District, East Bay MUD, Hillsborough, Los Angeles, Pleasanton, and Yorba Linda.

Political decoupling

When combined with rate decoupling, private water provision shifts to private firms the political risk that discourages conservation by governments. The unelected PUC absorbs those political risks instead. In this way, investor-owned water utilities provided a kind of political decoupling during California’s drought: private implementation of conservation rules separated a controversial environmental policy from its political costs, and helped make private firms more effective conduits of environmental policy than were government agencies. Youlang ZhangDavid Switzer, and I develop the idea of political decoupling and its broader implications in a forthcoming article.

Of course, decoupling conservation from its political costs does not eliminate those costs so much as place them beyond the reach of ordinary citizens. That might make for effective drought response, but it weakens democratic local governance.

 

A California Surprise, Part 3 will discuss what happened after the SWRCB dropped the conservation mandate.

Zombie Metrics

This guy measures water affordability as (Avg bill ÷ MHI)<2.0%

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.

And yet.

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:

C’mon man

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.

Et tu, EFC?

 

Easy metrics die hard, it seems.

Breaking habits

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.