Inoculation & Therapy

Yeah this stinks kid, but it beats smallpox

Why rate structures, not assistance programs, offer the most promising path to water affordability

When discussions of water and sewer affordability turn to policy solutions, they typically focus on Customer Assistance Programs (CAPs). But a focus on CAPs bypasses a much more direct, effective, and efficient means of improving affordability: rate design. To see what I mean, consider the way we combat infectious diseases.

Therapy vs Inoculation

Clinical therapy and inoculation are both ways to fight infectious diseases. Each approach can improve health, neither is perfect, and some combination of both is useful in practice. But for the most serious diseases, inoculation is far superior to therapy.

Not cheap

Clinical therapy is costly. For therapy to cure a disease, a patient must recognize that (s)he is sick, be aware that treatment is available, seek treatment, and then follow a course of treatment and hope that it works. For health care providers, therapy requires highly skilled employees, careful diagnostic procedures, and treatment that can involve expensive drugs and equipment. Meanwhile, the broader community bears the costs of people who go untreated or carry the disease without symptoms.

Inoculation is comparatively inexpensive. Inoculation requires little time or sophistication from patients, and it is quick and easy for health care providers. A tiny minority might suffer adverse effects, but the community benefits from widespread immunization, which can sometimes effectively eradicate a disease from an entire population.

Customer assistance programs as clinical therapy

CAPs seek to ameliorate affordability problems caused in part by water and sewer rates. CAPs come in lots of shapes and sizes. Some are as simple as shut-off forbearance and budget billing; others involve income-qualified rate discounts or bill forgiveness plans; still others provide high-efficiency fixtures or appliances for low-income households.

Like clinical therapy, CAPs are costly. CAPs have obvious direct costs to the utility, like revenue lost through discounts or the direct cost of installing retrofits. CAPs can also have significant administrative costs: someone must determine which customers qualify, keep records of who receives or is denied assistance, and keep track of those who lose eligibility over time. Utilities sometimes coordinate assistance with other agencies to administer these programs more efficiently, but that only reduces administrative costs, it doesn’t avoid them. CAPs can be politically and legally risky, too, since they are explicit transfers from one group to another. In many states utilities are legally constrained from such transfers.

Less obviously, CAPs are also costly for their recipients. In order to participate in a CAP, a water customer must:

  1. Learn that the program exists;
  2. Find out if (s)he is eligible;
  3. Apply for the program; and
  4. Follow up with program administrators as necessary to maintain eligibility.

Each of these steps imposes a transaction cost of time and effort on working-class families. If participation requires an in-person visit, then transportation and child care add to those costs. Language barriers and distrust of government can raise transaction costs even further. There are good reasons to believe that many people who are eligible for and badly need CAPs never apply for them.

Rate design as inoculation

Some key elements of rate design can improve affordability directly, without the need for CAPs, by maintaining low prices for essential household water and sanitation. Specifically, affordability-friendly rate structures feature:

  • Low fixed charges;
  • Volumetric sewer prices based on indoor flows;
  • Low volumetric water prices for essential household water use; and
  • Steeply escalating volumetric prices for demand beyond essential use.

Such rate structures are a big part of why water and sewer remain reasonably affordable in water-scarce cities like Phoenix and San Antonio.

Like inoculation, rate design is a solution with low administrative burdens. Affordability-friendly rate designs create no additional transaction costs for utilities or customers. Since rate structures apply to everyone, there’s no need to determine or track income eligibility, and there’s no worry that eligible customers are failing to sign up. Customers do not need to learn about, apply for, or document their eligibility. Rate design isn’t an affordability cure-all, but it can go an awfully long way toward immunizing a population against unaffordable water and sewer service.

So why don’t more utilities use rate design to address affordability?

Ordinary organizational inertia is one reason, of course. There’s also a widespread misperception in ratemaking circles that affordability contravenes goals like cost-of-service equity, full-cost pricing, and/or conservation. Happily, affordability-friendly rate design can exist in harmony with all of these principles—I’ll tackle that topic in a future post.

But the greatest barrier to more affordability-through-rate design is probably revenue stability. High fixed charges generate revenue reliably. Revenue from volumetric charges fluctuate with water sales, which 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. That can leave the utility in tough financial shape, because the utility’s capital and operating costs are mostly fixed. Some utilities have responded to falling average water demand by raising their fixed charges, in large part to manage revenue volatility. That’s bad news for affordability.

So a key to more affordable rate design is developing mechanisms that manage utilities’ revenue risks. Adequately insulated from those risks, utilities can price water more equitably, efficiently, and affordably.

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