Why water utility service can be simultaneously underpriced and unaffordable

Analysis of water and sewer affordability implies a concern that the prices of these critical services might be too high. At the same time, decades of research by resource economists argues that, in much of the United States, water is actually underpriced—that is, people and businesses pay far less than the actual economic value of the water that they use, which can cause inefficiently high water use.

Paradoxically, both can be true: it is possible for water to be simultaneously underpriced and unaffordable. That’s because not all water use is the same.

Water and cheeseburgers

Consider cheeseburgers. There’s really only one reason to buy a cheeseburger: to eat it.

Whether I buy one cheeseburger or ten, they’re really only good for one thing. I can eat them all by myself, I can share them with other people, I can feed them to my dog. Like any other good, cheeseburgers are subject to diminishing marginal benefit, but a cheeseburger’s end use is the same no matter what.*

Water utilities are different. When a utility delivers water to a home, that water can be used for essential needs like drinking, cooking, cleaning, and sanitation. It can also be used for more discretionary needs, such as car washing, filling swimming pools, and irrigating lush lawns. In most of the United States, residential water demand follows a familiar seasonal pattern, which makes it easy to discern, roughly, the relationship between essential and discretionary water use.

Essential water use remains roughly even throughout the year because it is, well, essential. That essential use is also the source of most residential sewage flow. Discretionary water use tends to fluctuate seasonally: car washing, lawn watering, and pool filling happen when the weather is warm and rain is rare. Sure, people might drink or shower a bit more often in the summer, but the real bump in demand comes from these discretionary outdoor uses. That’s also when water is most scarce.

Inexpensive and unaffordable

Unlike cheeseburger demand, residential water demand represents qualitatively different uses of water at different points in the demand curve. People with large lawns and swimming pools complain (often loudly, and to great political effect) when their water bills run to hundreds or thousands of dollars, but public policy discussions about water affordability are generally concerned with essential use.

Thing is, utilities build their supply, storage, treatment, and distribution systems to meet those peak demands. If systems were designed only to meet essential needs, they’d be much smaller and less expensive. The overwhelming majority of the costs of building and maintaining those systems are fixed—the utility incurs the costs whether it delivers a single gallon or 10 million gallons a day. With rare exceptions, American utilities meet residential customers’ essential and discretionary demands through the same meters. Consequently, essential and discretionary water uses both fall under a single price schedule.

Often the result is that discretionary water use is inefficiently underpriced, but essential use is still unaffordable for low-income households.

That’s why rate structures matter so much for both affordability and efficiency. In an era of falling average demand, many utilities are shifting their rate revenue burden away from high volume charges to fixed monthly charges and/or low volumetric charges. That’s good for revenue stability, but can exacerbate the double problem of unaffordable essential water use and inefficient underpricing of discretionary water use.

*If there are alternative productive uses of cheeseburgers, I’m unaware of them.