Water Affordability’s Golden Numbers

Not actually in the book of Numbers

Terrible, horrible, no good, very bad measurement, part 3

As my last couple of posts explain, the conventional method of measuring household-level water affordability is to divide a utility’s average residential bill by its community’s Median Household Income (MHI). If the resulting percentage is less than 2.0 or 2.5 (4.0 or 4.5 for water and sewer combined), then water is deemed “affordable;” if it’s greater, then water is “unaffordable.”

This post explains the fourth, and in my view most serious, problem with the conventional approach: the arbitrary threshold that it uses to define affordability.

An arbitrary standard

I’ve never—and I mean never—seen a theoretical or empirical rationale for a water/sewer affordability standard as a function of %MHI. Apparently the 2%MHI threshold emerged from the mists of federal regulatory history in a 1970s-era USDA rural grant program. At some point EPA began using the metric as part of its regulatory enforcement program. Despite those strange and ill-fitting origins, the 2.0 (or 2.5) %MHI affordability threshold is now held up as a definitive measure of household-level affordability, apparently for no other reason than convention.

The affordability of anything is rarely a strictly yes/no phenomenon—things are more or less affordable relative to the costs of other things and the resources available to pay for them. But rather than deal with those nuances, analysts simply cite precedent and invoke average-bill-as-%MHI as an EPA “standard” (though as I’ve noted before, it’s not an actual EPA standard, and the agency never intended %MHI to be a measure of household-level affordability).

Golden numbers

The 2% or 4%MHI threshold has become what organizational theorists call a golden number. Golden numbers are standards that have no basis in theory or evidence, but are so widespread that they take on independent importance simply by virtue of their familiarity. The trouble with golden numbers like 2%MHI is that they preempt or short-circuit serious deliberation over values. Managers of a utility that satisfies the %MHI threshold can use the standard as an excuse dismiss affordability concern, even if many of its customers struggle to pay their bills.

Worse yet, a golden number like 2%MHI that has a tangential relationship to an EPA guideline puts a veneer of legitimacy on what is ultimately an arbitrary norm. Performance metrics reflect an organization’s values and help guide management toward decisions consistent with those values. In that regard, the golden number that predominates water rate analysis fails fundamentally.

Communities and their elected leaders should set affordability standards consistent with their values. Average bill <2%MHI distorts the affordability picture and distracts from meaningful consideration of the issue.

Looking at the Wrong Things

Terrible, horrible, no good, very bad measurement, part 2

As my last post explained, the conventional method of measuring household-level water affordability is to divide a utility’s average residential bill by its community’s Median Household Income (MHI). If the resulting percentage is less than 2.0 or 2.5 (4.0 or 4.5 for water and sewer combined), then water is deemed “affordable;” if it’s greater, then water is “unaffordable.”

There are at least four fundamental problems with average bill ÷ MHI as a measure of household-level affordability. This post will address the first three; I’ll address the fourth problem in my next post.

Problem #1: median vs. low income

In America, water and sewer utilities are inexpensive relative to what most of us pay for energy, to say nothing of cell phones, Internet, or espresso. In all but the smallest or desperately poor communities, the median-income household doesn’t have a water or sewer affordability problem.

The most frequent criticism of the conventional metric is that a focus on median income misses the real subject of affordability concerns: poor households. For low-income families, water and sewer services may force important economic tradeoffs. Measuring affordability as a function of an entire community’s median household income obscures the impacts of rate setting on low-income customers. As income stratification in a community increases, the degree to which %MHI masks affordability problems increases.

Problem #2: average vs. essential use

Average residential demand is a poor basis for affordability analysis. For most American utilities, average residential water consumption is considerably higher than its median, because a minority of high-volume customers drives up the average. Moreover, most utilities exhibit significantly greater demand during summers due to discretionary use for things like lawn care, car washing, and swimming pools. A great deal of a utility’s average water bill pays for non-essential water uses.

Most people who are worried about water and sewer affordability aren’t much concerned with the cost of maintaining large lawns. Rather, worries about affordability are about customers’ abilities to pay for water and sewer service to meet their essential needs for drinking, cooking, cleaning, health, and sanitation. In most cases evaluating affordability as a function of average consumption implies an unduly high demand.

Problem #3: essential (non-water/sewer) costs of living

Water and sewer services are not the only goods and services that people need to live. Housing, food, health care, home energy, and other essential goods and services also affect water and sewer affordability to the extent that they strain households’ financial capacity. These non-water/sewer costs vary widely across communities. Water bills may be low as a percentage of income, but much higher as a percentage of disposable income if the costs of housing or health care are high, for example. In such cases, water rates that are nominally low may still force serious sacrifices for low-income customers. The conventional affordability metric is insensitive to these differences in costs of living.

 

My next post will take up the fourth, and possibly most pernicious, problem with conventional water affordability metrics.

Terrible, Horrible, No Good, Very Bad Measurement

This officer is not trying to measure statewide alcohol sales

A feral howl on the conventional method of assessing household water affordability, part 1

Recently a colleague asked me how I first got interested in water and sewer affordability. I was tempted to claim that it was pure concern for the welfare of my fellow human being. That’s certainly the main reason. But I think there’s another factor at work: my near-pathological intolerance of bad measurement in public policy.

This is the first in a series of posts in which I advance a critique of rant about the long-standing, widely-applied standard method of measuring water and sewer utility affordability in the United States. The lengthier, formal version of this discussion is in an article published earlier this year in Journal AWWA.

Next week I’ll be in Las Vegas at the AWWA Annual Conference & Exposition, where I’ll present better metrics, show some initial results of a new national study of affordability, and join Kathryn Sorensen in telling the story of how better measurement is helping to shape policy in Phoenix. But in this post I’m just going to rant.

The conventional wisdom foolishness

The most widely applied method of measuring water/sewer utility affordability in the United States is to calculate the average residential bill for a given utility as a percentage of the community’s Median Household Income (%MHI). Usually this percentage is calculated for an entire utility, but sometimes it is calculated for a neighborhood or a census tract. This percentage is then compared with an affordability standard (usually 2.0 or 2.5 percent). A simple binary declaration follows this standard: if a utility’s average bill as %MHI is less than this standard, then it is deemed “affordable;” if it is greater, then it is “unaffordable.” Sometimes these %MHI standards are applied separately to water and sewer rates, other times they are combined water-plus-sewer costs (thus the standard becomes 4.0 or 4.5 %MHI).

This approach has become the default way to measure affordability in both scholarly research and policy analysis, with no other rationale than that it is convenient (a 4th grader could do it on the back of an envelope) and conventional (everybody else does it that way).

The reasonable origins of a silly idea

The %MHI method originated with the EPA, where the metric was first developed as a gauge of a community’s financial capability for purposes of negotiating regulatory compliance by its utilities. The idea of %MHI as a measure of financial capability traces at least to the EPA’s 1984 Financial Capability Guidebook. The idea of identifying specific %MHI thresholds for financial capability apparently come from EPA’s 1995 guidelines on Water Quality Standards (though these documents don’t offer an empirical or theoretical rationale for 1.0, 2.0, or 2.5%MHI standards).

As a measure of utility-level financial capacity (can a utility handle the costs of regulatory compliance?), average bill as %MHI isn’t crazy—it gives a vaguely reasonable sense of the utility’s demands on a community’s financial resources.

Here’s where it fails…

Unfortunately, at some point over the past 20 years, researchers, policy analysts, managers, and rate consultants started using %MHI as a measure of household-level affordability (can a poor family pay its water/sewer bill?). Despite its widespread use, %MHI is seriously, fundamentally, irredeemably flawed as a metric of household affordability.

The main trouble with using average bill ÷ MHI as a measure of affordability is that it does not measure affordability—at least not at the household level, in the way that most people think about affordability. Although EPA has drawn a great deal of criticism for its affordability metrics, this misapplication of %MHI to household-level analysis really isn’t EPA’s fault; the federal government never intended for their utility-level metric to be used in customer-level analysis. Alas, lots of otherwise smart and well-meaning people have done just that.

Over the next few posts I’ll get into the many reasons why average bill ÷ MHI is a terrible, horrible, no good, very bad metric.