California utility regulators lead the way with comprehensive affordability assessment

Between a global pandemic and a presidential election, you might have missed it, but late last summer the California Public Utilities Commission (CPUC) did something fairly momentous for the utility world.

In a little-noticed decision, the CPUC adopted a standard methodology for measuring affordability for water, electricity, gas, and telecommunications—individually and as a bundle.* Late last month the CPUC issued the first fruits of that initiative when it published the first annual statewide affordability report.

In taking up affordability across services and measuring rigorously, the CPUC’s methodology and report are game-changers for the water sector specifically and the utilities industry generally.

The Bundle

With regulatory jurisdiction over the Golden State’s investor-owned utilities, the CPUC assesses affordability for water, electricity, gas, and home broadband and telephone service (collectively, “telecom”). Water, energy, and telecom are all necessities of modern life, so the affordability of each service depends in part on the prices of the others, and their collective affordability involves the household resources available to pay for all of them.

From a public policy and regulatory standpoint, concerns about affordability are not so much about average or median prices, but rather the prices of essential residential services. It isn’t a public policy problem if people can’t “afford” to water a half-acre lawn or run decorative outdoor gas fires. So the CPUC methodology calculates prices at modest volumes and levels of service. For each household monthly, essential service is defined as:

The Metrics

The CPUC methodology uses three metrics; I’m delighted to report that my very own Affordability Ratio at the 20^th income percentile (AR₂₀) and Hours at Minimum Wage (HM) are two of the three! AR₂₀ is the share of income that a household at the 20^th income percentile must pay for essential utility service after paying for other essential goods (like housing, taxes, and health care). HM is the price of essential service expressed in hours of labor at the local minimum wage. The CPUC took my metrics a step further by extending the analysis beyond water and sewer to include energy and telecom.

The Data

Developed and written by CPUC staff, the statewide affordability report is a remarkable piece of research. I had a couple of phone calls with CPUC staff during the early stages of their methodological development, but I was not involved in creating the report. The report provides detailed AR₂₀ and HM calculations for all of the state’s regulated utilities across all four services, and it depicts them in a variety of interesting ways.

The full report is well worth reading in detail for folks thinking about and working on affordability. I’m going to share a few interesting highlights.

Looking at the right things. The report is a powerful illustration of why it’s important to focus affordability discussions on low-income households instead of averages or medians. California is pretty prosperous, so it shouldn’t be surprising that the median bundled value (AR50) is pretty low—it’s less than 10% across all four services just about everywhere. Look at that nice green map on the left!

Things look a lot different when we shift to a working-class assessment with the AR20. As the map on the right shows, bundled AR values jump significantly.Most communities end up in the 10-35% range, but it approaches 100 in some places.

Unbundling. Unbundling the analysis also yields some interesting insights about what drives affordability challenges for each service. 

Perhaps unsurprisingly, the most consistent driver of utility affordability across all four services is income. Utility regulators don’t make macroeconomic policy, so they can’t do very much about the denominators. But sound policy and management can help do something about the numerators in these affordability calculations, so this kind of research can point us in helpful directions.

What's next?

There are some clear lessons here about affordability assessment. The CPUC report is a landmark and its bundled essential service methodology is well worth emulating.*

Another thing the CPUC report gets right is that it generally avoids cross-utility comparisons, and instead describes the 2019 study as a baseline. For regulators and managers, the best way to use affordability metrics is comparing within communities or utilities over time. When designing rate structures and reviewing rate cases, the relevant question is: is affordability getting better or worse in a given community?

The CPUC report also points us to a deeper question: What is affordable?† What sacrifices should low-income households have to make in order to pay for water? Those are tough questions that the CPUC’s methodology and report don’t address. These are not empirical questions—they’re questions about values.

Metrics are not thresholds. Metrics tell us about what is; thresholds tell us about what ought to be. Good metrics can guide us to good choices, but those choices ultimately depend on the affordability targets we set. That means deliberating on and articulating our values.

It’s time for the utilities community to start that harder conversation.

* The effort to develop A bundled approach to affordability assessment has been in the works for a couple years now.

** Naturally, the report isn’t perfect; I have a few gripes here and there. But overall it’s fine work.

† Despite what you may have heard, there is no EPA affordability standard.