No, EPA did not propose affordability guidelines for municipal utilities
Late last week the EPA published in the Federal Register some proposed new guidelines for evaluating sewer utilities’ financial strength. In press releases and public comments, water sector and local government organizations lauded the proposal as an important action on “affordability,” and a few news outlets dutifully reported on the EPA’s new water "affordability" guidance. Likely most people would think that means lower water bills for low-income households.
But the EPA’s proposed guidelines have little to do with affordability as most of us think about that word—the guidelines are not about ensuring that low-income Americans can pay for water. Rather, the proposal is about whether communities have sufficient resources to pay for water pollution controls required under federal law. In practical terms, the new guidelines are about whether sewer utilities have to comply with the Clean Water Act in a timely manner.
Understanding what’s going on here requires understanding a bit about sewers, the Clean Water Act, and why utility managers think about “affordability” differently from the rest of us.
Clean Water Act and local economics
Municipal sewer systems must meet a variety of pollution control rules under the federal Clean Water Act. Many of these rules require major investments in infrastructure and ongoing operational and maintenance costs. Often these costs can be quite high, especially in older communities that operate combined sewers that suffer significant sewage overflows during rainstorms. Overflows can cause raw sewage to run into rivers, lakes, and coastal waters, with attendant damage to health and environmental quality. The Clean Water Act aims to reduce, mitigate, and eventually eliminate such pollution. Recognizing that pollution controls are expensive, Congress built into the law provisions that a allow sewer utility to delay compliance with water pollution controls if compliance would outstrip its “economic capability.”
With few exceptions, sanitary sewer utilities in the U.S. are owned and operated by local governments. In practice, then, when sewer systems face significant Clean Water Act compliance costs, local officials sometimes try to negotiate delayed compliance with EPA or state environmental regulators by arguing that their communities have insufficient economic resources to comply with the law.
To evaluate these claims, EPA conducts a Financial Capability Assessment (FCA)—an appraisal of water pollution control costs relative to a community’s overall economic resources. This appraisal is supposed to be holistic, capturing a range of economic indicators. Since 1997, a key element of EPA’s assessment methodology has been the residential indicator, which is intended to reflect the impact of sewer system costs on rate payers. The residential indicator is the average sewer bill as a percentage of the community’s median household income (%MHI). When that value exceeds 2.0%, EPA considers pollution control costs to be “high” and potentially eligible for delayed compliance.
This approach isn’t great, but it’s not a crazy way to evaluate community-level financial capability.* Still, the residential indicator has been much-maligned in the water sector and was the subject of a comprehensive critique from the National Academy of Public Administration three years ago. Last year AWWA, WEF, and NACWA joined forces to advance a new analytical framework to guide FCA instead of %MHI. The AWWA/WEF/NACWA methodology incorporated local poverty levels and sought to evaluate Clean Water Act compliance costs in terms of their potential impacts on household sewer bills at the 20th percentile income.
What EPA is proposing
Still with me? Great. The proposal that EPA released last week is a revision to the FCA guidelines with two broad alternatives. Much of the proposal aligns wiht the methodology favored by AWWA/WEF/NACWA. Under the Alternative 1, EPA retains the traditional %MHI residential indicator and the suite of economic indicators in its existing methodology, but would add assessments of local poverty prevalence and potential rate impacts on 20th percentile income households. Alternative 2 would allow utilities to use a “dynamic financial and rate model” to evaluate the impacts of Clean Water Act compliance costs on customers.** At the heart of the new proposal are a pair of tables that integrate the old and new methodologies:
Recognizing the underlying distribution of economic conditions by accounting for poverty and 20th percentile incomes is an important advancement. Under either alternative, these guidelines are marked improvements on the status quo in that they provide a more complete, nuanced economic picture of the communities that sewer utilities serve.
Still, it’s important to keep the purpose of all this analysis in mind: under either alternative, the FCA would inform EPA’s negotiations with sewer utilities over compliance schedules. The point of these guidelines is to determine whether and how much sewer utilities ought to delay compliance with the Clean Water Act. Compared with current practices, the proposed guidelines are more flexible and could in some instances lead to more permissive regulation.
Financial Capability ≠ Affordability
EPA did not propose guidelines on affordability for low-income water or sewer customers. Under the proposal, EPA could consider low-income customer assistance programs (CAPs) as part of its overall assessment, but nothing in the proposed guidelines requires or even encourages CAPs. The proposed guidelines would not oblige utilities to structure rates in ways that constrain prices for conservative or low-income customers. Indeed, a utility that was looking for ways to delay investments would actually have an incentive to set more regressive prices: high fixed charges and declining block rates would make FCA metrics look worse, and so help justify compliance control delays.
So despite the rhetoric in headlines and press releases, these guidelines really aren’t about affordability in the way that most of us understand the term. Sure, delayed Clean Water Act compliance will reduce a sewer utility’s revenue needs. But EPA doesn’t regulate rates under the Clean Water Act, and so there’s no guarantee that financial savings from Clean Water Act noncompliance will accrue to low-income customers. In short, these guidelines are not about low-income affordability, they’re about utility finances and water pollution.
Don’t blame EPA for this confusion—they’ve been scrupulously clear and consistent that their guidelines are about financial capability. Regrettably, the industry press releases and news stories have been waving an affordability banner where it doesn’t quite belong.
Can communities afford clean water?
All this confusion over terminology invites reflection on what affordability really means. When municipal sewer utility leaders declare that they can’t “afford” to comply with the Clean Water Act, they’re making a political judgment that spending on other things or keeping taxes and service rates low is preferable to following water pollution rules. That is the prerogative of local policymakers. Communities need to pay for many important things, and clean water is just one of them. The democratic process is meant to help us sort out our collective priorities.
That’s why there’s more at stake here than pedantry. In expanding the meaning of “financial capability” to recognize the distribution of incomes in communities, these guidelines invite us to think about the distribution of environmental conditions in the same communities. The proposed guidelines don’t contemplate whether foregoing water pollution control in the name of “affordability” really helps or hurts low-income households. Do working class folks benefit when a city has low utility bills, but faces frequent and ongoing sewer overflows? Who suffers when raw sewage flows into rivers, lakes, and harbors because utilities can’t “afford” Clean Water Act compliance?
Using the right words compels us to confront these uncomfortable questions, and focuses our attention to what FCA guidelines mean where the sewage meets the street.
*%MHI is, however, terrible, horrible, no-good, very bad way to measure low-income household affordability.
**This alternative is going make rate consultants happy.
About that water affordability study
in The Guardian...
The Guardian recently published a big story on water utility affordability in the United States. The headline was shocking: “Millions of Americans Can't Afford Water, as Bills Rise 80% in a Decade,” and “Analysis of U.S. cities shows emergency on affordability of running water amid COVID-19 pandemic.” The story was based on a study that The Guardian commissioned from Boston-area attorney Roger Colton. Colton’s report—which The Guardian called “the first nationwide research of its kind”* —was the basis for the story’s claims.
The Colton report sets out to do three things:
1) “examine whether the affordability of water is common in the U.S. today”;
2) examine whether “water affordability has changed in recent years;” and
3) “examine the extent to which… reasonable projections of water rate increases will affect water affordability in the near future.”
Put simply, the report aims to measure the level of water affordability in the U.S., past affordability trends, and projected future affordability.
Unfortunately, the Colton report is deeply flawed. Not just flawed in some narrow, technical sense; it’s flawed in ways that grossly misrepresent the state of water affordability in the U.S. and point to the wrong approaches to addressing the issue.
I really didn’t want to write this post. It’s heartening when mainstream journalists pay attention to the oft-neglect water sector, especially on matters of affordability, so I hate to be negative about it. I'm also painfully aware of Brandolini’s Law, and any time spent counteracting bad research is time not spent on my own research.
But over the past month I’ve fielded several inquiries about The Guardian article asking whether the Colton report is valid. The short answer is no.
The long answer requires wading into the tall methodological grass. So grab your weed eater and follow me.
Although The Guardian article’s claims are national in scope, the underlying analysis is limited to twelve cities. The dozen were not selected at random, nor are they the twelve largest. Rather, they were selected by Guardian staff, supposedly “to provide a diversity of geographic regions… population sizes… and poverty.” All inferences from the Colton report come from this hand-picked, non-representative sample of systems that collectively serve a little more than 2% of the U.S. population.
But the Colton study’s deepest problems are about measurement, not sampling. Answering the questions that the study raises requires four things:
a) prices for water service in the United States
b) household resources available to pay for water
c) projected future prices and resources
d) defining affordability
You can think of those as the numerator, the denominator, the forecast, and the judgment. All of them flawed in ways that compound and confound.
A study of water and sewer affordability should start with the price of water and sewer service, right? Strangely, the Colton study didn’t collect any rates data or calculate prices. Instead, Colton got price data from Circle of Blue’s annual reports on water prices in 30 U.S. cities. Circle of Blue calculates prices at three benchmark volumes, representing demand for a family of four at 50 gallons per capita per day (gpcd), 100 gpcd, and 150 gpcd. That works out to roughly 6,000, 12,000, and 18,000 gallons per month. Nationally, residential indoor water demand averages around 50-60 gpcd and has been falling steadily for the past twenty years. This indoor demand represents basic needs for drinking, cooking, cleaning, and sanitation. That’s the main public policy concern for affordability—from a public health standpoint we don’t really care about the affordability of lawn watering or car washing.
But the Colton report used Circle of Blue’s 12,000 gallon monthly price as the basis for its numerator. So The Guardian’s startling graphs reflect the prices for for very high volumes of water.
Next Colton used the 12,000 gallon monthly price to “derive estimated bills given average household sizes for each Census Tract,” according to a footnote on page 6. How Colton derived the prices is a complete mystery; he never explains the procedure, and the footnote is the only mention of how he calculated prices.† A simple table of monthly prices is strangely absent from the 88-page report.
Claims about the affordability of anything implies some relationship between costs and resources. Colton’s sole measure of resource affordability is the Federal Poverty Level (FPL). The FPL’s quirky origin story is fascinating—it’s based on 1962 food costs—and the problems with FPL are well-documented in voluminous research. Despite its quirks and flaws, FPL remains a touchstone in policy discussions nonetheless, mainly because it’s familiar and easily available from the US Census Bureau.
The main problem with FPL for purposes of assessing water and sewer affordability is that it’s insensitive to local costs of living. FPLS also a one-size-fits-all number national number (hence, “federal”): whether you live in pricey San Francisco or cheap Buffalo, the denominator is the same. Home energy, health care, taxes, and especially housing varies wildly across the country, but FPL is insensitive to those costs. Efforts like United Way’s ALICE are aimed at providing a more realistic assessment of cost of living by accounting for that variation.
Colton’s study projected affordability through 2030, which involved forecasting both numerators (price) and denominators (FPL). Once again, the report is vague about how it made those projections. A footnote on p.33 indicates that Colton used inflation rates from a 2017 U.S. Department of Energy’s report, which calculated 2008-2016 increases in water/sewer prices for selected U.S. cities based on average volumetric rate. It’s not clear whether Colton used city-specific projections for his twelve cities, or a 4.71% annual inflation rate, which a footnote in a DOE study says was the “national average annual price increase for water and sewerage maintenance” from 1996-2016. It’s impossible to know exactly how Colton projected prices because price projections never appear in the report. To project the denominator, Colton uses 2010-2018 increase in FPL and assumes that the same growth will continue through 2030.
It appears likely that Colton used straightline projection to forecast an already-inflated numerator using with either an eight- or twenty-year retrospective rate of change (it’s not clear which), either nationally or regionally (again not clear). He projected the FPL denominator using a different eight years of national FPL escalation.
All of this culminates in a declarations of how many people or what percentage of the population suffers from “unaffordable” water. Those conclusions fuel The Guardian headlines, but require a binary definition of what is affordable. So how did the Colton report define affordability?
“In assessing whether a water bill was ‘affordable,’ the base level of affordability was set at 4% of income,” says the report (p.8). That 4% threshold is the main definition of affordability in both the Colton report and The Guardian stories. The Colton report goes on to set “Affordable Burdens” for various income ranges.
Where did these affordability burden thresholds come from?
Colton made them up.
No poll, no Blue-Ribbon Committee, no philosophical inquiry on the meaning of affordability, no analysis of economic tradeoffs. They’re just arbitrary numbers. Every claim about the nation’s water affordability crisis and most of the scary graphs in The Guardian articles boil down to these thresholds. They’re based on nothing.
Does any of this matter? Shouldn’t we just be happy that mainstream publications like The Guardian and Consumer Reports are paying attention to water affordability? Who cares if the methodological details are a bit dodgy, if the overall point—that water prices are rising faster than poor folks’ incomes—is generally fair?
There are at least three big reasons we should care about assessments that are so egregiously inaccurate. First, this study grossly misstates the scope and nature of the problem. It’s good to draw attention, but bad measurement can lead to the wrong inferences about what’s wrong and how to fix it.
The Colton report’s treatment of Austin, Texas is a great example of what’s so pernicious about poor measurement. The Guardian screams that water bills in the Texas capital increased 154% from 2010-2018, and will be unaffordable for 26% of all Austin residents by 2030. The naïve reader could be forgiven for thinking that Austin Water executives are mustache-twirling villains trying to squeeze money out of poor folks. But remember that Colton’s calculations are based 100 gpcd of demand—far higher than basic indoor needs. Austin Water employs a progressive rate structure that’s actually designed to protect affordability for basic needs and curb inefficiently high water use--and the big price increases start at 11,000 gallons monthly. Here’s the Circle of Blue plot of Austin’s water rates from 2010-2018:
At the more reasonable 50 gpcd, Austin’s monthly water prices increased an average of $2.28 annually from 2010-2018—still an increase, to be sure, but not quite the rolling disaster The Guardian describes. Meanwhile, Colton’s 100 gpcd assumption makes Philadelphia’s regressive, declining block rates look relatively affordable, even as the City of Brotherly Love sticks low-volume customers with higher prices than Austin's. Austin’s progressive pricing is exactly the kind of thing that we ought to encourage to help affordability! Bad measurement leads to bad inferences about rate design.
Second, the arbitrary affordability thresholds that create sensational headlines preempt public debate over what affordability really means. Understanding the burdens and economic tradeoffs that low-income households face is critical to tackling the affordability challenge. But what exactly constitutes affordable water ought to be a matter of community values, not an analyst’s arbitrary judgment.
Finally, the (literally) incredible claims in The Guardian undermine legitimate efforts to assess and address the water affordability challenge. Studies that emphasize impact over accuracy risk achieving neither. Over time, slipshod studies can cause officials and the public to become cynical and dismiss an issue as overblown and ideological (see, for example, political discourse on COVID-19 prevention or climate change).
Water affordability is too important to allow to suffer that fate. Important issues demand responsible research.
*Apparently The Guardian missed this study (2015), this study (2017), this study (2018), this study (2019), and this study (2020). Each was peer-reviewed, nationwide in scope, and included far more utilities than the Colton report.
†I’m guessing that Colton did something like multiply 12,000 gallon price to the ratio of average census tract household size and Circle of Blue’s assumed 4-person household. But that’s pure speculation.
The congressional COVID cavalry isn’t coming to save the water sector
The ink was barely dry on a $2 trillion coronavirus response law when Congress started working on a second massive coronavirus relief bill. Water infrastructure was initially high on the congressional priority list for the next phase, with rumors of perhaps hundreds of billions of dollars for water and sewer systems. Structured carefully, a massive infusion of federal funds could help end shutoffs that threaten public health, give immediate relief for utilities reeling from lost revenue, help spur economic recovery through investment in badly-needed infrastructure, and maybe even drive fundamental structural reforms to the water sector. There was palpable excitement in the water sector as legislation was taking shape in April and early May. I even fielded a few inquiries from policymakers looking for guidance on structuring the bill!
On May 15 the House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) bill—an unprecedented $3 trillion package of programs to aid “the economy, public health, state and local governments, individuals, and businesses” in response to the COVID-19 crisis. The bill now sits in the Senate, its final shape and prospects uncertain.
The outcome probably won’t matter much for the water sector, however: the HEROES bill passed by the House provides next to nothing for water and sewer systems, and provisions for low-income water bill assistance are structured in a way that will mainly help customers in large utilities with existing assistance programs. That, my friends, is what Stringer Bell would call a 40-degree day.
Aid for utilities?
Back in late March I argued for a formulaic, conditional grant program that would channel $70 billion in federal assistance directly to utilities that agreed to end shutoffs, ensure service to all occupied residences, forgive financial penalties accrued during the pandemic, and restructure prices to maintain affordability. Grants would be based on the poverty rates of utilities’ service areas. The main merits of the conditional grant model are reach and speed: the program would help nearly everyone, minimize administrative costs to utilities, eliminate qualification processes, and get the water flowing fast to stave off a public health emergency. It would also provide an immediate and durable economic stimulus, as utilities could use these funds flexibly to support jobs and capital investment.
Unfortunately, HEROES provisions for water systems are all conditions and no grants. The bill requires water systems that receive HEROES funds to end shutoffs, safely restore service to customers who had been shut off, and forgive penalties ().
And what do water and sewer utilities receive in exchange for giving up the main mechanism they have for ensuring timely payment? Limited subsidies for low-income assistance programs, and a boatload of administrative work ().
That’s it. That’s all. HEROES includes no categorical grants to water or sewer systems.*
Wither customer assistance?
For a few years now, House Democrats have been pushing for a $1.5 billion Low-Income Household Drinking Water and Wastewater Assistance Program (LIWAP?), a LIHEAP-style policy for water bill assistance. I’ve argued before that a LIHEAP-style program isn’t an awful idea but has some pretty severe limitations. Congress apparently heeded that warning, as §190703 retains the LIWAP label but doesn’t build a new LIHEAP-style program. Instead, it would channel funds through state and Tribal governments to utilities to support water and sewer bill reductions for low-income customers.
Allotments to utilities would be based on federal income and poverty guidelines. In addition to ending shutoffs, restoring service, and forgiving nonpayment penalties, utilities that receive bill assistance funds would be subject to audit. To its credit, the House bill seems to acknowledge administrative burdens on customers associated with such programs: §190703(g) requires utilities to “conduct outreach activities designed to ensure that such households are made aware of the rate assistance” and to notify customers of the assistance that they receive. HEROES allows utilities to spend up to 8% of federal funds on support for administrative processes, but participating utilities would also be subject to mandated state audits.The main problem with this approach is that it puts significant administrative obligations on utilities with relatively little payoff. It is difficult to see why small or medium-sized water and sewer utilities would opt to participate in a program that carries such onerous requirements for a program that will in most cases benefit a small, politically weak minority of their customers. Why would utilities with little organizational capacity agree to heavy shackles with so few shekels? Unfortunately, water/sewer affordability is, on average, worse in smaller systems. HEROES is unlikely to do much for the nation’s neediest water customers.
The main beneficiaries of the $1.5 billion HEROES water assistance program will be large systems that already run assistance programs, since their administrative and audit processes are already in place.**
HEROES funding would allow those large utilities to expand or extend benefits, and maybe boost their administrative capacity.
HEROES act? More like ZEROES act, amirite?
I dunno, man. The bill is more than 1,800 pages and funds everything from unemployment insurance to suicide prevention to wildlife biosurveillance. I sure didn’t read the whole thing, and there’s undoubtedly a lot of good stuff in there. The direct cash benefits at the heart of the bill will surely help lots of people. But the HEROES bill that emerged from the House of Representatives does little for water affordability directly, doesn’t help water/sewer systems generally, and certainly does not provide sufficient leverage to achieve more fundamental reforms to the water sector. The bill does give members of Congress the chance to take a position on water affordability and claim credit for tackling shutoffs. Whatever its fate in the Senate, the HEROES bill has accomplished those political goals.
Systemic reforms to the U.S. water sector remain needed and possible, but will likely have to wait until COVID-19 recedes and a new Congress arrives.
*There’s one exception: HEROES allocates $20 million to the Bureau of Indian Affairs to support Tribal water provision, which really need help with capacity. More on this topic coming soon!
**Friends on Capitol Hill tell me that large utilities lobbied for this program.