A Kansas water utility gets affordability measurement right
And lo, there arose from the Kansas City suburbs a mighty measurement
Recently we’ve seen progress in affordability measurement, as more water utilities are using better metrics when evaluating affordability.* Last year I published a new methodology for measuring water and sewer utility affordability (AR20and HM), and followed that up with a national assessment using those metrics. AR20 is the Affordability Ratio of basic water and sewer service price divided by disposable income at the 20th percentile household income. HM is basic water and sewer service expressed in Hours of labor at Minimum wage.These metrics seek to capture the trade-offs that low-income households must make in paying for water and sewer services. Utilities have begun to use these and other improved metrics, which is encouraging!
The main objection I’ve seen to the real-world use of AR20 is that it can seem too complicated. You need to know the community’s 20th percentile income and essential non-water/sewer costs of living in order to calculate AR20. But there’s no convenient, off-the-shelf source for those numbers. You have to think about economic conditions in your community.
I usually include housing, health care, taxes, food,and home energy as essential non-water/sewer costs, and I use statistical models to estimate those expenses.† Statistical models are important in my research because I’m analyzing affordability across hundreds of communities. Apparently that’s led some to think that regression models of consumer data are the only way to estimate AR20, which can seem impossibly difficult.
Fortunately, it’s not really that hard. Since publishing my 2018 article, I’ve heard from folks in utilities large and small about efforts to use these metrics exactly as they were intended: adapting AR20 to fit local needs, calculating it with local data, and using it to shape local decisions.
WaterOne’s excellent measurement adventure
An especially encouraging case is WaterOne, a special district that provides drinking water to a population of about 425,000 in the Johnson County suburbs southwest of Kansas City. As in plenty of other utilities, WaterOne’s leaders have long been interested in the affordability of their service, but had also long used the conventional 2%MHI to gauge affordability. Dissatisfied with that nonsensical number, WaterOne’s financial planning team decided to use AR20 to assess affordability and help guide policy for their own system.
Making AR20 work for WaterOne required adapting it to local preferences and conditions in a few ways. First, the original AR20 was calculated for water and sewer combined; since WaterOne provides only drinking water, its AR20 calculation included only water rates, not sewer rates. Second, WaterOne analyzed its own customer data and decided that 45 gallons per capita per day and a 2.6-person household were the appropriate basic water consumption level for its customers (my published studies assume a 4-person household at 50 gpcd). Third, WaterOne chose to exclude home energy from their calculation of essential non-water/sewer costs. Rather than constructing an econometric model to estimate essential non-water costs, WaterOne’s finance team used available data and guidelines from the Census, IRS, USDA, and Bureau of Labor Statistics to estimate appropriate costs for its service area.
The result was a WaterOne-specific AR20 that showed the remarkable difference between the conventional %MHI method and the more meaningful AR20. After they’d done all that work, WaterOne staff contacted me to ask for feedback. We had a terrific phone call with WaterOne managers where I offered some comments on their execution, but I didn’t have much of a critique to give—they pretty much got it right.
From analysis to decision
The results were reported with the district’s 2019 budget and written up in a white paper for WaterOne’s governing board. Crucially, the paper uses the affordability metrics to frame a discussion of goals and guidelines, not to declare WaterOne’s rates “affordable” or “unaffordable” according to some arbitrary threshold. They also warned against comparing AR20 values to my published works and to other systems’ AR20 values, since WaterOne’s AR20 is based on different assumptions and WaterOne’s values may not align with others.’
Measurement principles in practice
Complexity isn’t an excuse for crummy measurement; it’s a reason to be careful with measurement. A modicum of creativity can get you there. Want to know what low-income families pay for health insurance locally? Go to healthcare.gov. Need an estimate for local low-income housing costs? Check craigslist.org. Ask local charitable organizations what low-income families pay for food or home energy. You don’t need a PhD or advanced econometric skill to do sound affordability analysis.
WaterOne answered the affordability measurement challenge with a thoughtful, nuanced analysis that applied community values to the best available data. Adapting AR20 for WaterOne—WOAR20?—is a fine example of how utilities can put measurement principles into practice.
*The conventional approach to water affordability measurement (average bill as a percentage of Median Household Income (%MHI) is deeply flawed, as I’ve blogged previously. Despite its well-document problems,use of %MHI remains widespread, mainly because it’s easy and familiar.
†My estimates use publicly-available Consumer Expenditure Survey data and Ordinary Least Squares regression. They’re not especially sophisticated.
Devils (and angels) in the details, Part 5
In early January the California Water Board (SWRCB) published its long-anticipated draft proposal for a statewide low-income water bill assistance program. I’ve blogged about it over the past few weeks*; in this final (I think) post on the proposal, I’ll look at how the SWRCB proposes to pay for the estimated $606 million annual program.
How to raise 600 million dollars
The SWRCB recommends paying for the new water assistance program through “progressive revenue sources… in order not to burden some of the residents that the program seeks to serve.” To that laudable end, the proposal calls for two new taxes:
- A .25% tax on personal incomes over $1 million; and
- A sales tax on bottled water.
The income tax would generate an estimated $466 million annually, while the bottled water tax would generate $154 million. Under California’s Byzantine pubic finance laws both taxes would require supermajorities in the state legislature. The bottled water tax would also have to pass a ballot referendum.
Progressive taxation is crucial to any low-income assistance program, since the whole point is to transfer resources to people who are short on them. A millionaire’s tax makes sense from that perspective; a person whose income tops $1 million annually likely has little difficulty paying his/her water bill, and it’s doubtful that an additional 0.25% tax will much constrain productivity or lifestyle for people with seven-figure incomes.
The bottled water tax is thornier.
It’s common for those of us who work on American drinking water issues to think of bottled water as a luxury good. Bottled water is orders of magnitude more expensive than tap water, after all. It also carries some severe negative externalities: it’s lightly regulated, uses lots of energy to produce and transport, and empty bottles create a huge solid waste problem. For all those reasons, taxing bottled water would be progressive, in theory.
In practice, the progressivity of a bottled water tax isn’t so clear. Counterintuitively, in America bottled water consumption is negatively correlated with income—that is, poor and working-class Americans drink much more bottled water than do middle-class and wealthier Americans. Study after study after study show that low-income people and members of racial/ethnic minorities are much more likely to drink bottled water.
Why do lower-income people pay orders of magnitude more for bottled water, when affordable tap water is available? From a health and efficiency perspective, that isn’t rational behavior. It might be cultural, it might be taste/odor preferences, it might be about distrust in government, or it might be something else entirely. In some cases, people served by the smallest, poorest communities that suffer from poor water quality might need bottled drinking water. Raising the cost of bottled water might have the perverse effect of pushing low-income households to drink more soda and sugary beverages.
Whatever the reason for the income-bottled water relationship, the distributional effect of the SWRCB’s proposed tax is clear: the poor will bear a disproportionate burden of any bottled water tax. When you consider that a significant proportion of eligible households will never actually participate in the assistance program, a bottled water tax becomes doubly regressive.
So where do we get the other $150 million?
There’s an intuitive political appeal to using a water-related tax to raise money for water bill assistance.† What kinds of water taxes could be progressive? Here are a couple of half-baked ideas (I don’t have the time or data to bake ’em).
- A tax on “luxury” bottled water. Poor folks aren’t buying $5.00 bottles of FijiWater; they’re buying $9.99 cases of Ozarka at Walmart. A sales tax on water that retails for more than $1.00 per liter would spare the lowest-income households, and probably wouldn’t push them into drinking sugary beverages.
- A tax on residential tap water consumption over 12,000 gallons per month. At 50 gallons per capita per day (reasonably efficient indoor use), a family of four uses about 6,000 gallons per month. In the vast majority of situations, residential water consumption beyond 12,000 gallons a month is for discretionary outdoor use. A main drawback to this kind of tax is that it would irritate water utility managers, who don’t want to act as the state’s tax collectors.
A combination of these two taxes could generate significant revenue without putting the revenue burden of low-income assistance onto the people that it’s intended to help.
*In the past few posts, I’ve summarized the proposal, discussed its potentially perverse incentives for ratemaking, pondered its implications for struggling small systems, and options for administering assistance.
†The SWRCB’s carefully avoids alluding to political appeal, but does note that “fees on bottled water or alcohol would have a nexus to water use.”
Devils (and angels) in the details, Part 4
In early January the California Water Board published its long-anticipated draft proposal for a statewide low-income water bill assistance program. In the past few posts, I’ve summarized the path-breaking proposal, discussed its potentially perverse incentives for ratemaking, and pondered its implications for small system consolidation. In this post, I take up that crucial but oft-overlooked dimension of public policy: administration.
Administering statewide water bill assistance
The draft proposal acknowledges that administering a brand new social welfare transfer program will be costly and complicated. The low-income water rate assistance program will need to be advertised, applications processed, incomes and personal data verified, customers enrolled, and so on. Then the benefits themselves would need to be distributed in some way. Participants will need to renew their eligibility periodically, which will require re-verification. Audit procedures will be needed to guard against fraud and abuse, and appeals processes established to provide recourse to those wrongfully denied benefits.
The draft proposal punts on who exactly would do all that administrative work.
Rather than arguing for a specific administrative arrangement, it lays out four potential approaches to benefit disbursement:
- Water bill credits
- Energy bill credits
- EBT (Electronic Benefits Transfer) cards
- Tax credits
The first option might seem most obvious, but the draft report correctly observes that many benefit-eligible households may not receive water bills directly, because they live in multifamily or rental housing and so pay for water service through their rent. Options #2-4 have the potential to reach more households. Options #3 and #4 most closely approximate the received wisdom of welfare research, which suggests that benefits work best when they are received directly by their beneficiaries.
What about everything else?
But there’s much more to a low-income assistance program than handing out benefits. Conspicuously absent from the draft report is discussion of the many other aspects of administering a new assistance program. Here are some options.
Utility administration. Water systems could administer the program on behalf of the state (several California investor-owned utilities already run assistance programs, for example). Utility organizations are, by and large, unaccustomed to administering social welfare programs. Recently I’ve had the opportunity to study a handful of water utilities that administer low-income assistance programs. I found that, when water utilities get into the low-income assistance game, utility staff become de facto social workers. Water customers who apply for assistance often struggle with multiple health, financial, legal, and perhaps cultural problems. It is impossible not to make a human connection in such cases. Laudably, the utility folks I’ve met who administer water assistance programs work hard to do so humanely and responsibly. But welfare administration is, at best, an uneasy fit for many utility organizations. Moreover, the burden of administering an assistance program would be especially onerous for the very small systems that already suffer disproportionately from high prices and poor water quality.
State administration. The California Water Board (or some new agency) could create a new organization to administer the program. This sort of centralized administration could provide economies of scale and help ensure uniformity and fairness across the state. On the other hand, state administration would involve significant new investments in staffing and other administrative infrastructure, all of which would be subject to the vagaries of state politics.
Nonprofit administration. Water bill assistance could be administered through community-based nonprofit community service organizations like the Salvation Army or St Vincent DePaul Society. In addition to providing direct charitable aid, such organizations often are conduits for government assistance programs like LIHEAP. Many of these nonprofit organizations employ sizable, multilingual staffs that include social workers, nutritionists, lawyers, and other professionals who help low-income individuals and families navigate the often confusing and sometimes humiliating process of applying for benefits. These organizations’ expertise, flexibility, and familiarity with target populations offer perhaps the most promising avenue for administration.
The recipient’s administrative burden
Also missing from the California Water Board’s draft proposal—and most of the broader discussion of low-income water bill assistance—is consideration of the administrative burdens that water customers would have to bear in order to receive benefits. Learning about the assistance program, applying, demonstrating eligibility, ensuring receipt, and reapplying are time-consuming and sometimes humiliating processes. These costs may be especially significant for people with low literacy or limited English proficiency. Potentially eligible people may forego benefits if the application process is too burdensome, if they perceive a social stigma associated with public assistance, or if they do not trust government.
Taken together, administrative costs—to the state, to utilities, and to low-income households—are a big part of why I’ve argued that rate structures, not assistance programs, offer the most promising path to water affordability. Low fixed rates and low prices for essential water use make water affordable for everyone. Unlike assistance programs, affordability through rate design doesn’t create new administrative costs, and doesn’t make customers endure intrusive and burdensome application processes. As policymakers grapple with water affordability in California and beyond, they should consider ways to help encourage utilities to price water more affordably alongside bill assistance efforts.