The case for rate-funded water affordability
Warning: this post contains hardcore wonkery.
One of the most trenchant questions that emerged during the recent California State Water Resources Control Board affordability symposium (pursuant to California AB-401) was whether low-income water bill assistance should be funded through taxes or rate revenue. That is, who should pay for affordability programs: taxpayers or ratepayers?
A couple caveats before addressing that question. First, utilities can do a great deal to reduce rates for many low-income customers without explicitly redistributive programs. For example, small systems might consolidate for economies of scale, and cost-of-service rate design can distribute more system costs to the high-peak customers who drive capacity needs. Utilities ought to exhaust those options before turning to redistributive assistance. Second, states vary widely in the degree to which utilities are legally permitted to fund low-income assistance through rates. In this post I skirt these practical and legal considerations, and instead focus on the more fundamental issue of…
Public goods, private goods, and government revenue
In public finance, the traditional rationale for whether something should be funded through taxes or fees is whether the something is a public good. In economese, public goods are non-excludable and non-rival in consumption. “Non-excludable” means that, once the good is created, no one can be excluded from its benefits. “Non-rival” means that no one’s consumption of the good diminishes the quality of anyone else’s consumption of the same good. Lighthouses and missile defense systems are classic examples of public goods. We typically rely on governments to provide public goods because it is difficult or impossible for private firms to capture revenue for those goods. Instead, governments levy taxes in order to pay for them.
When governments provide private goods—and much of what American governments do is private good provision—it uses some mix of tax and service fees to generate revenue. State universities are good examples: the people of Texas help pay for Texas A&M University through their taxes, and Aggies contribute through their tuition payments.
Drinking water and sewer service as public goods
Environmental protection is another classic public good: everyone benefits from clean air, soil, and water. It’s little wonder, then, that sewers traditionally were financed through taxes. Everyone benefits from sanitary sewer systems that keep raw sewage out of our streets and waterways. Today sewers in America are paid for primarily through service fees, sometimes in some combination with tax funding.
Drinking water is trickier. The vast majority of American water systems today rely on volumetric service rates to generate revenue. In a conventional sense, drinking water isn’t a public good: it’s possible to exclude people from a drinking water system, and two people can’t drink the same glass of water. Drinking water affordability is a problem precisely because it is excludable and rival in consumption: customers can be disconnected for nonpayment and can’t simply free-ride on their neighbors’ water service.
But there is an argument for drinking water as a public good insofar as it has positive externalities–benefits to the community beyond the household using the water. Lush lawns and car washing may not be public goods, but disease control is. Basic water use for drinking, cooking, and sanitation reduces disease and overall health system costs. People who have access to safe, reliable drinking water at home are healthier and more productive. Some basic, universal provision of potable water could be considered a public good. If we think of a drinking water utility as a collective enterprise that provides a collective public health good, then a basic level of service (say, 35-50 gallons per person per day) can be thought of as a public good.
So it’s reasonable to conclude that water assistance programs should be funded through taxes. But tax-funded assistance programs are politically unpopular. When established, tax-funded assistance programs also tend to be under-funded and perpetually threatened with reduction or elimination when hard times come—which is exactly when assistance is needed most.
Fire & Water: The case for rate-funded affordability programs
But there’s a sound rationale for funding basic drinking water service at an affordable price, using rate revenue, under existing cost-of-service principles. The clues to the logic of affordability-through-rates is in the way we fund fire protection through water rates.
Firefighting is a public good. When a building catches fire, it is clearly a loss to that building’s owner. It is also a threat to all of the other people whose homes and businesses might potentially catch fire. So everyone in a community benefits from effective firefighting.
Communities pay for firefighting mainly through taxes, which pay for the buildings, equipment, and staffing needed to fight fires. Less obviously, most communities also pay for fire protection through their water rates, because firefighting relies on a water system to provide large volumes of water at high pressure through hydrants. Consequently, some portion of any city’s water utility capacity is built simply to fight fires. Communities pay for that capacity through water rates.
The principles of cost-of-service water ratemaking are codified in AWWA’s Manual M1, which identifies public fire protection as a reasonable functional cost. That means that utilities across America are already funding a public good—fire protection—through water rates consistent with cost-of-service principles.
To the extent that drinking water for basic health and sanitation are public goods, there also is a solid rationale for development of a cost-of-service rate methodology that provides for a basic level of indoor potable water use. A modification to M1 would—and should—articulate this logic, and so provide a pathway for rate-funded affordability initiatives.
Can declaring a human right to water help address affordability?
Something extraordinary is unfolding in California.
In 2012, to great fanfare, California governor Jerry Brown signed into law Assembly Bill 685, which amended the state’s water code to declare that: “every human being has the right to safe, clean, affordable, and accessible water adequate for human consumption, cooking, and sanitary purposes.” The move was lauded by environmental justice advocates. One United Nations official gushed that AB685 would “…be an inspiration not only for other states within the USA, but equally for many other countries in the world.”
The declaration drew little notice among America’s water utility managers.
Thing is, California isn’t the first state to declare a human right to water in law. Pennsylvania and Massachusetts enshrined a right to water in their state Constitutions—in 1971 and 1972, respectively. Those declarations of rights didn’t translate into safe, clean, and affordable water for all the citizens of those states. I’ve always been a bit uneasy about declarations of a human right to water. That’s not because I have any philosophical objection to the idea, but because declaring rights is a lot easier than making those rights meaningful to real people in real communities.
Game theorists sometimes use “signaling models” to describe political behavior. In these models, people signal their intentions to other people. When those signals are costless to send and non-binding to the sender, the signals are “cheap talk.” When players learn that political words are meaningless, they can fall into a babbling equilibrium, in which political actors simply talk past each other, knowing that no one else’s words mean anything.
The trouble with cheap talk is that it doesn’t advance constructive public policy. Worse yet, it breeds cynicism. Their constitutional right to “pure water” is little solace to the people of rural Pennsylvania whose drinking water has been contaminated by hydrofracking. Utility managers are unlikely to take seriously mere rhetorical flourishes.
Is there any reason to think things will be different in California? Maybe.
Game theory also hints at when political signals augur meaningful policy changes: when political signals are costly to send and are accompanied by binding conditions, they indicate that real changes are likely to follow. That’s why the really exciting development isn’t AB685’s declaration of a human right to water, but rather AB401. This decidedly less sexy 2015 law ordered the California State Water Resources Control Board (SWRCB) to craft a statewide water affordability rate assistance program. That’s a first step—but a meaningful one—on the road to a comprehensive affordability policy. It’s not an affordability solution, but it is a costly signal.
The magic combination of vision with resources recalls the 1972 Clean Water Act, which combined the lofty goal of fishable and swimmable American waters by 1983 with a comprehensive regulatory regime and tens of billions of dollars in federal funding to support construction of wastewater systems. While far from perfect, the Clean Water Act has been enormously successful in cleaning the nation’s waters—because Congressional aspirations were matched with administrative authority and ample funding. The Clean Water Act didn’t emerge fully-formed from Earth Day 1970; it was the culmination of years of development.
“Campaign in poetry, govern in prose.” –Mario Cuomo
The unglamorous task of making AB685’s rhetoric into reality falls to the bureaucracy. The SWRCB has been working to craft policies to assess and address water affordability pursuant to AB401. To that end, tomorrow I’ll be in Sacramento to participate in a SWRCB symposium on water affordability—an early step in the state’s effort to turn the poetry of rights into the prose of guidelines, analysis, rules, regulations, and programs. I’m excited to be a part of this extraordinary effort to put a compelling affordability plan in front of the legislature.
*This post was inspired in part by an interesting twitter exchange with Mike Antos, Laura Feinstein, and Mark Lubell.