From Consolidation

Rapid Relief

How the federal government might end shutoffs & keep water flowing during the COVID-19 crisis

Can't do this if your water has been shut off.

The COVID-19 crisis has escalated America’s water and sewer affordability challenge into a full-blown health emergency. Many low-income households struggle to pay for these essential services in the best of times, and the specter of shutoffs for non-payment now threatens to worsen the pandemic. It’s hard to wash hands, cook at home, and maintain adequate sanitation without water service.

In response to the fast-moving crisis, scores of utilities are suspending shutoffs and restoring service for the duration of the pandemic. That is a prudent move in this emergency, but suspending shutoffs and restoring service carries significant financial risks for utilities and does not fundamentally solve the affordability problem, even in the short-run. An end to shutoffs does not mean an end to high prices, late fees, or penalties. When the crisis passes, many customers will still have outstanding balances running into the thousands of dollars and once again face the threat of shut-offs. Meanwhile, in plenty of places shutoffs continue even as COVID-19 rages.

Good news: utilities restoring service. Bad news: the bill is still due.

Federal water bill relief?

Last week Congress passed a monumental $2 trillion economic rescue package in response to the COVID-19 crisis sweeping the country. During the helter-skelter Capitol Hill negotiations over the COVID-19 bill, House members proposed $1.5 billion in water assistance relief for low-income households. Modeled after LIHEAP, the federal low-income energy assistance program, the proposal would have provided financial assistance to income-qualified households to help pay for water bills through existing LIHEAP administrative processes. The proposal didn’t make it into the bill that finally reached President Trump’s desk.

Although the water bill assistance would surely have helped many, it would likely have made little difference in the big picture. For starters, while $1.5 billion is a lot of money, means-tested assistance programs are costly to administer and burdensome for customers who need help. This sort of relief can help, but will take time to work its way through administrative processes and into consumers’ accounts to prevent shutoffs. Even at their best, means-tested programs help a small fraction of the eligible population—historically LIHEAP has reached only about 16% of those eligible for assistance. Complicating matters is the extreme fragmentation of the U.S. water sector, with 50,000 mostly small water systems operating across the country. Some of the poorest Americans live in small communities where utilities’ and social service organizations have limited capacity to administer assistance. The need for immediate relief in the face of a pandemic demands faster, farther-reaching action.

Bigger, bolder, faster action*

So what might work better? I’ve long argued that pricing, not assistance programs, is the best way to tackle water affordability. With the pandemic upon us and a massive, emergency need for universal in-home water and sanitation, it’s worth considering a similarly massive, emergency financial response. Here’s an outline of a scheme that could quickly end shutoffs and maximize short-term affordability relief with the lowest management cost to utilities and zero administrative burdens on customers.

The federal government should provide formulaic, conditional grants directly to water utilities. Grants would be awarded as a percentage of each utility’s budgeted 2020 annual rate revenue, with the percentage equal to the community’s poverty rate. For example, Seattle Public Utilities’ 2020 budget calls for $205 million in water revenue and about 12% of its population lives in poverty, so its grant would be $24.6 million. Detroit’s budgeted water rate revenue for 2019-2020 is $131 million and its poverty rate is 33%, so its grant would be $43.2 million.

In exchange for this cash injection, utilities would have to meet simple conditions on pricing and customer administration. Specifically, for the duration of the national COVID-19 pandemic, utilities would:

  • End residential shutoffs for non-payment;
  • Restore service to all occupied residences currently shut off;
  • End residential foreclosures and financial penalties for non-payment or service restoration;
  • Forgive all outstanding penalties, fees, and interest on residential water accounts;
  • Structure prices so that 6,000 gallons of monthly residential water and sewer service costs less than $58 (eight hours of labor at federal minimum wage).

All community water systems that operate on a fee-for-service basis would qualify, including municipal, tribal, special district, and investor-owned systems. Utilities could use the money to offset revenue losses due to COVID-19 crisis, fund assistance programs, or maintain and improve capital.

Federal funds would be channeled from EPA through existing state Drinking Water Revolving Funds directly into utility coffers, requiring very little additional administrative capacity. There would be no administrative burden at all on customers. Administration for very small systems could be managed through state or county governments.

Wonder Twin Powers - ACTIVATE!

With annual water utility revenue totaling something like $70 billion and a national poverty rate of 11.8%, the program would end up costing around $8.5 billion dollars. For another $10 billion we could extend the program to cover sewer revenue, too. Until last week, those would seem like absurdly large sums, but they’re rounding errors in the $2 trillion-dollar package that Congress just approved.

Emergency & aftermath

To be clear, this isn’t a carefully considered, meticulously modeled plan—it’s an idea meant to get water flowing immediately in response to an urgent need. These are big, blunt policy instruments, but the proposal outlined here could be introduced on Monday​, signed into law by Wednesday, and water service restored in communities across the country by Friday. ​In a pandemic every moment matters.

​Lasting, sustainable solutions for the water sector will require more fundamental reforms to the way that we govern, finance, and manage these critical systems. I hope that once the COVID-19 storm fades, a renewed commitment to improving the American water sector is one of its silver linings.


*Thanks to Wendi Wilkes for prompting and helping me think this through via Twitter. She deserves a share of the credit if you like this idea, but no blame if you hate it.

The Plan

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 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.


© 2019 Manny P. Teodoro

Grow to Shrink, Shrink to Grow

​Better Together

Water Sector Reform #1: Consolidation

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 reforms to transform America’s water sector. This is the first in a series of posts outlining five broad proposed reforms.

The first is consolidation and regionalization of water utilities. This is the single most important, badly-needed reform. Without this reform, any major federal investment will be a temporary fix, and the rest of my proposed reforms probably won’t work without it. To understand why, start with a simple observation:

There are WAY too many water systems

One of the things that really surprises newcomers to the American water sector is just how many water systems there are. The energy sector provides a useful comparison. In the United States today there are about 3,200 electrical utilities and about 7,800 gas utilities. There are about 50,000 community water systems.

These systems are highly skewed in size. It turns out that 40,000 of those 50,000 are very small, serving populations fewer than 3,300. These small systems serve less than 10% of the population, but they are 80% of the total systems. A little more than half of the US population gets its water from the largest thousand utilities.

It’s difficult to overstate the effects of this extreme fragmentation. Virtually every aspect of America’s water sector is worse because there are so many tiny systems that lack the capacity to operate effectively.

Small systems, big problems

America’s water problems aren’t only in small systems, but there’s no question that small water systems are disproportionately plagued by poor water quality. Here’s the relationship between system size and violations of the Safe Drinking Water Act’s heath standards:

As you can see, violations are strongly related to system size. In small systems it’s not uncommon for utilities to have multiple violations, year in and year out. This graph is from my own analysis w/David Switzer, but study after study after study after study after study finds this same relationship. Here’s the same plot for sewer treatment plants and NPDES permit noncompliance the Clean Water Act:

High prices, too

Adding insult to injury, water is also more expensive in small systems. Small systems pay more for capital, they have fewer customers to share the fixed costs, and they’re more vulnerable to revenue fluctuations, which limits their flexibility in rate design. Here’s the relationship between the price of basic monthly water and sewer service for a family of four (about 6,000 gallons a month) measured in hours of labor at minimum wage.*

Water and sewer services are most expensive in small systems, and get cheaper as systems grow. So with both quality and price, there’s strong evidence that there are huge economies of scale to the water sector. These economies of scale are well-understood.

Regulatory economies of scale

But there’s another, less obvious and more pernicious problem with all these small systems: all that fragmentation creates practical problems for regulators. Every one of those 50,000 systems has to be managed, monitored, and regulated by the EPA, ​in conjunction with more than a hundred state, territorial, and tribal bureaucracies. 50,000 systems means 50,000 sites to visit, 50,000 files to keep current, and 50,000 records to report. State regulatory offices don’t have legions of workers—let alone the information systems—to handle all that work.

A well-kept secret of the water sector is that small systems are held to much lower standards than larger systems. It’s not just that enforcement is lax with small systems; the agencies that regulate water actually have different enforcement guidelines for small systems, with less stringent standards.

The good intention that paved the way to this particular hell is the recognition that small systems often lack the organizational capacity to comply with the rules. Water regulations are unfunded mandates. So rather than continuously slamming small systems for their violations, regulators move the goalposts, or simply look the other way when violations occur. So the correlation we see between size and SDWA and CWA violations actually grossly understates the real relationship between scale and water quality. Intentionally lax enforcement consigns people served by small systems—often poorer, rural populations—to heightened health risks and poor environmental quality.

Shrink by Growing

These problems are widely recognized. Sure, there are some excellent small systems, and small system operators often achieve remarkable things with limited resources. But the data are clear, and the stakes are high. The ​common sense solution is to reduce the number of systems through consolidation: shrink the number of systems by growing utility organizations. 

Consolidation can happen when multiple systems merge, a bigger utility takes over a smaller one, or when an investor-owned firm buys up small systems. The right consolidation approach will vary from one place to another; we ought to be agnostic with respect to the institutional form. Physically integrated utility systems are best where possible, but small systems can be folded into larger organizations even when they’re physically separate. That is, multiple small systems can be operated by a single organization. Several government and investor-owned utilities already operate under this model.

Recognizing the perils and fragmentation and the promise of consolidation, some state governments, including California and Connecticut, have taken steps to encourage consolidation.

But it’s hard. Consolidation efforts often face fierce political resistance, either from communities who fear losing control or from staff who fear losing jobs. Sometimes it’s difficult to find larger utilities willing to take on the responsibility for a small, failing systems. Consolidation is controversial in the water sector; in certain circles “consolidation” is a dirty word. I’ve heard privately from multiple regulatory officials that they desperately want consolidation, but are afraid even to utter the word “consolidation” in public. Sometimes it’s just hard to navigate the legal and financial complexities of consolidation. Consolidation has been agonizingly slow in Connecticut; four years after passing a law to promote small system consolidation in California, little has happened.

Tastier carrots, bigger sticks

Shrinking the number of systems is the single best thing we can do to improve water infrastructure in America. So my first proposal is to reduce the number of water systems by an order of magnitude—to something like 5,000-10,000 utilities—by 2030. As is often the case in public life, moral appeal and clear empirical evidence have been insufficient to overcome the political barriers to consolidation. That’s where federal leverage can make a difference.

Federal funding for local water, sewer, and stormwater systems must be contingent on consolidation. Let’s spend money to fix failing systems, but only if the fixes put them on a path to self-sufficiency. Low-interest loan programs probably aren’t sufficient to induce consolidation; hundreds of billions in federal grants would be a whole lot more appealing. For small systems, federal grants must be awarded only with consolidation. For larger systems, federal grants should be awarded only to utilities that agree to takeover nearby or adjacent smaller systems. Consolidation can be technically, legally, and financially complicated, so federal funding should also provide technical assistance to support the process.

A key corollary to that federal largesse is a levelling of the regulatory playing field. There must have one rulebook: all water and sewer systems must be held to the same standards. No more loosening the rules for small systems because they lack the organizational capacity to comply with environmental regulations. If systems lack the capacity to comply with the rules, then regulators should be empowered to force consolidation for systems that fail perennially.

Next time I’ll turn to the second major proposal: a change in regulatory transparency aimed at changing the local politics of water infrastructure.

*You can see a bunch more analysis of affordability here.


© 2019 Manny P. Teodoro