U.S. water utilities are shifting costs to low-volume customers—good for revenue stability, but bad for affordability
Rising water and sewer prices linked to increasing capital and operating costs are driving affordability concerns across the United States, and with good reason. Studies of water rates typically measure prices at benchmark volumes that are meant to reflect “average” residential customers.* But for purposes of low-income affordability, how a utility structures its prices across levels of demand is as important as what it charges an average customer or how much total revenue it pulls in.
Over the past year I’ve been working with Texas A&M graduate student Robin Saywitz to analyze 2019 water and sewer rates data.† Among other things, we’re comparing our recent dataset with similar data from 2017. Although it’s difficult to infer trends from just two time periods, we’re seeing a troubling pattern in U.S. water and sewer rates: not only are prices increasing overall, average prices are rising much faster for low volumes than for high volumes.
That’s very bad news for affordability. Why are utilities squeezing their low-volume customers with higher prices?
The answer starts with two broad water sector trends that have converged to drive water prices to their present point. First, long-deferred capital maintenance and upgrade costs are finally coming due, and long-deferred water and sewer revenue needs are rising accordingly. Utilities need more money to pay for pipes and people. Emerging challenges like lead service line replacement and new contaminants like PFAS only make things more expensive.
At the same time, average urban water demands have been falling steadily over the past twenty years. Back in the 1990s when I first got into the water business it was an article of faith that long-term water demand increased with economic and demographic growth, and long-term supply adequacy was a paramount concern in many parts of the U.S. The water sector responded with a widespread push for conservation. Thanks to organizations like the Alliance for Water Efficiency, we’ve seen an astonishing decline in average water demand—especially for essential indoor use. For the first time, America has seen sustained urban growth with steady or even declining overall water consumption. That’s an extraordinary accomplishment, and it’s rightfully celebrated.
But the combination of rising costs with declining average demand creates a revenue problem for water utilities. Declining total demand means that the average price of water must increase steeply in order to generate needed revenue.
Perils of progressive pricing
For years, utilities have been pushing for progressive water rate structures to distribute costs equitably and to encourage conservation. Indeed, progressive pricing is part of why we’ve seen declining demand. As I’ve observed before, water service is unusual in that its use varies considerably at different levels of demand. For residential customers, low volumes reflect essential uses like drinking, cooking, cleaning, and sanitation. Higher volumes are typically associated with discretionary uses like car washing and outdoor lawn irrigation. So progressive rate structures that charge relatively low prices for low water use, steeply higher marginal prices for high volume use, and volumetric sewer charges generally result in better affordability. What’s more, good rate design helps affordability without the transaction costs, administrative burdens, and social stigma that come with means-tested assistance programs.
But progressive rate structures raise utilities’ revenue risk. Revenues from volumetric charges fluctuate vary seasonally and can skyrocket or plummet depending on the weather. A utility doesn’t sell much high-priced, high-volume water if it rains all summer and nobody waters their lawn. Even worse, sales can fall sharply during drought emergencies when customers conserve water. That can leave the utility in tough financial shape, because the utility’s capital and operating costs are mostly fixed. Progressive pricing can put the squeeze on utilities’ revenue needs.
So utilities are, in turn, putting the squeeze on their most conservative customers with more regressive pricing.
The first gallon price of water and sewer service is a useful touchstone to understand the real impact of rate structure changes.
The first gallon price is the price a customer pays for using any water at all: any fixed charges plus the price of the first unit of water or sewer service. For example, if there is a $20 monthly fixed charge for water service and the first thousand gallons of water is $2.00, then the first gallon price for water service is $22.00. Here are the weighted average prices of water and sewer service in 2017 and 2019 at one gallon, 6,000 gallons, 12,000 gallons, and 20,000 gallons:
Unsurprisingly, the first gallon price increased from $35.80 to $40.89 over the two-year period, and average prices went up at each volume level. If prices were simply going up across-the-board, we’d see roughly equal increases in prices at every volume. But the 2019 data show that price increases were uneven in percentage terms:
At 20,000 gallons monthly, average prices went up by 8%, but the first gallon price increased by more than 14%. As prices have increased, low-volume customers have on average borne a much larger share of utilities’ rising revenue burdens than their more profligate neighbors.
The financial challenges associated with equitable, affordable, progressive pricing are real: utilities can’t survive without revenue, and falling or fluctuating demand creates real risks for sustainable utility management. But there are better ways to manage risk than squeezing the most conservative customers.
A rate structure that provides basic volume allowances at low fixed prices with steeply inclined prices at higher volumes is one good option. As I’ve observed before, consolidation can help maintain progressive pricing because larger customer bases can withstand revenue shocks more easily than small systems. Utilities should also use larger cash reserves to stabilize revenues across seasons and years—and governments should keep their hands off those reserves! More creative approaches could include regional water revenue banks or development of a secondary market for utility revenue risk.
*A lot of studies claim to measure “average bills,” but are really measuring bills at specific volumes that are assumed to reflect an average customer. Studying true average bills across large numbers of utilities is hard because there’s no reliable source of data on average consumption across utilities.
†An initial working paper reports the full methodology and descriptive findings in detail.
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 than we sampled in 2017.
Water Sector Reform #5: Environmental Justice
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 a structural transformation of America’s water sector. This is the last in a series of posts outlining broad proposals 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 was an overhaul of financial regulation; the third was investment in information technology; the fourth was investment in water sector human capital.
My fifth proposal is to build environmental justice into federal water regulations.
Drinking water & environmental justice
It’s difficult to overstate just how much the Flint Water Crisis changed the national conversation on drinking water. As I’ve observed before, Flint’s water contamination wasn’t the first, or worst, or largest drinking water crisis in America in recent years, but for it’s the one that put a spotlight on water infrastructure. Last month a similar lead contamination in Newark grabbed headlines across the country again.
The lead contamination crises in Flint, Newark, and elsewhere turned the spotlight on an uncomfortable reality: America’s water systems problems are not just about infrastructure management, they’re also about institutional politics, race, ethnicity, and poverty. There’s a growing recognition that water infrastructure is an environmental justice issue. That’s expanded the political coalition interested in water infrastructure and raised the stakes in the politics of drinking water.
The color of drinking water
Anecdotes and case studies about drinking water and environmental justice abound. Looking for more rigorous evidence, David Switzer and I conducted the first nation-wide analysis of the relationships between race, ethnicity, socioeconomic status, and Safe Drinking Water Act (SDWA) compliance. Here’s what we found:
The red areas of the graph show high likelihood of drinking water violations, the blue areas show low likelihood. These results provide strong evidence of a systemic injustice in utilities serving low-income communities of color across the United States. In communities with higher populations of black and Hispanic individuals, SDWA health violations are more common. What’s more, race and ethnicity seem to matter most in determining drinking water quality in the poorest of communities. My analysis of public experiences with drinking water service also reveals important disparities by race and income. The racial disparities are far, far worse in Indian Country. My study with Mellie Haider and David Switzer found that Clean Water Act violations are 23% higher and SDWA violations are 59% higher on tribal facilities compared with non-tribal facilities.*
The reasons for these racial, ethnic, and socioeconomic disparities in water quality and utility service are varied and complex. In some cases it’s a familiar tale of urban de-industrialization and white flight; in others it’s a legacy of racial discrimination in housing or infrastructure development programs. Environmental injustices in drinking water aren’t just urban phenomena, either: majority-black and majority-Hispanic communities suffer from poor water quality across vast swaths of rural America—to say nothing of Indian Country.†
Unfortunately, the regulatory response to ongoing water quality problems in poor, minority communities is to loosen regulations or look past violations. Outsiders to the water sector are sometimes surprised to learn that there are no federal laws requiring racial, ethnic, or socioeconomic equity in water quality.
If we are going to pour hundreds of billions of federal dollars into water infrastructure, that money must bring us closer to environmental justice. My final water sector reform proposal, then, is to build environmental justice into federal water regulations. That means, at a minimum:
- Establishing standard metrics to assess racial, ethnic, and socioeconomic equity in environmental conditions and infrastructure investments. I’m working on some new environmental equity metrics that I hope to put into practice soon.
- Utilities must collect and publicly report data on service shutoffs and restorations.
- Regulators must demonstrate racial, ethnic, and socioeconomic equity in inspections and enforcement actions.
Eligibility for all federal infrastructure funding must be contingent on utilities demonstrating equity in conditions, investment, and administration, or adequate progress toward that goal. Extra funding and technical assistance should be targeted at communities that suffer from significant disparities due to historical or structural disadvantages—most obviously tribal systems.
Together with the other systemic reforms I’ve proposed, this commitment to environmental justice can rebuild trust in America’s water systems and build a broad political coalition in support of investment in the nation’s most essential infrastructure.
*We’ve got more research on tribal water issues in the, er, pipeline.
†Environmental injustice in rural America
often come as a surprise to big city folks, who often seem to think that “rural” means “white.” Racial/ethnic disparities in water quality don’t surprise anyone who’s spent time in South Texas, Northern Arizona, or Alabama’s Black Belt.