Understanding progressive & regressive water pricing
By Antonio & Manny Teodoro
How do utilities distribute the costs of drinking water systems to their customers in their rate structures?
The answer is surprisingly complicated, and water utility pricing is often weird. There are lots of other wrinkles and variations, but the vast majority of utilities use one of three basic rate structures:
- Uniform, where customers pay the same price for every unit of water that they consume;
- Inclining block, which charge higher prices as volume increases; and
- Declining block, which charge lower prices as volume increases.
It’s easy to see that these different rate structures distribute costs differently, but how much differently isn’t immediately obvious. How do a utility’s rates apply to low-volume customers compared with high-volume customers?
The answer is important because it carries significant implications for affordability and conservation. It also speaks to risk tolerance and questions about fairness. Water is an unusual consumer good because its use is very different at different volumes. For residential customers, low volumes are mostly used for basic needs like drinking, cooking, cleaning and sanitation. Higher volumes are usually for more discretionary uses like lawn irrigation and car washing.Studies of water rate structures typically put them into the three main categories (uniform, inclining, and declining), which is fine, but can mask some important variation within the inclining and declining blocks. Consider four imaginary rate structures:
A and B are both inclining block rates, but A is more progressive than B because prices increase sharply for A as volume increases. Similarly, C and D are both declining block structures, but C is more regressive than D because C discounts higher volumes much more than D.
David Switzer developed a way to measure water rate progressivity to reflect that variation, and published a paper last year that uses regression slopes to measure relative progressivity. It’s a creative, rigorous, and smart methodology, but it’s pretty sophisticated and not the easiest approach for communicating with the general public.
In search of a valid but more intuitive way to communicate the idea of progressivity, we struck upon the idea of comparing average unit costs of water at relatively conservative and very high benchmark volumes. What would be appropriate comparative volumes? And how could we frame the measurement in an engaging way?
Enter Amy Poehler
Amy Poehler was a particularly profligate water customer. In the summer of 2015, while drought ravaged the Golden State, the Parks & Recreation star’s Beverly Hills home used 85,000 gallons a month. Meanwhile, a family of four that is fairly conservative with water uses something like 6,000 gallons per month for drinking, cooking, and sanitation.* In other words, Poehler’s home consumed in about two days enough water to comfortably supply a family of four for a month.
Shaming celebrities for bad environmental behavior is now something of a ritual in America, and it’s not clear whether exposing excess actually helps. But Poehler’s water consumption provides a convenient benchmark for excess.
The Amy Poehler Index
So to measure progressivity we calculate the total monthly water and sewer bill—including both fixed and volumetric charges—for a customer at 6,000 gallons (a conservative family) and at 85,000 gallons (Amy Poehler’s family), then divide that price by each customer’s total volume. These are average unit costs. The ratio of the two unit prices is the Amy Poehler Index (API). A value of 1.0 means that Amy Poehler and the conservative family pay exactly the same unit price for water. Values less than 1.0 indicate regressive rates (Amy Poehler pays less than a conservative family), and values greater than 1.0 indicate progressive rates (Amy Poehler pays more than a conservative family).
Let’s look at how this works for a couple of large U.S. city water systems under their 2019 rates:
In 2019 Tampa’s fixed monthly charge for water was just $1.50, with no fixed charge at all for sewer. Under Tampa’s inclined five-block rate structure, Amy Poehler would pay $617.82 monthly, while our conservative family would pay just $19.29. On a unit cost basis, those prices equal $7.27 and $3.22 per thousand gallons, respectively. The resulting API is a progressive 2.26.Meanwhile, in 2019 Philadelphia charged its customers a fixed $5.12 for water and $7.04 for sewer each month. The City of Brotherly Love then applied declining block water rates that would have charged Amy Poehler $455.69 monthly, and the conservative household $41.10—more than twice the Tampa bill for the same volume. The resulting unit costs turn out to be $5.36 for Amy Poehler and $6.85 for our conservative family, for a regressive API of .78.
The National Progressivity Picture
We used data from the Teodoro & Saywitz 2019 affordability update to calculate API for a nationally representative sample of 399 U.S. water and sewer systems. Average combined water and sewer rates were slightly regressive at .88, but ranged widely from .07 in Anchorage, AK to 3.81 in Phoenix, AZ.
API isn’t as precise as Switzer’s progressivity coefficient, but in our national dataset the two metrics correlate pretty well (ρ=.71). More importantly, the API offers an easy way to understand and improve the ways that communities distribute costs through their rate structures. That seems like the sort of thing Leslie Knope would probably dig.