Affordability in America, 2023 | Part 2

An odd thing about water compared with most other things we buy is that residential water demand represents qualitatively different uses of water at different volumes. For most customers, the first few thousand gallons of water reflect essential uses like drinking, cooking, cleaning, and sanitation. Higher volumes typically reflect discretionary uses like car washing, swimming pools, and especially lawn irrigation. The ways that utilities structure their prices distribute system costs to different customers in different ways, depending on how households use water.

This is the second in a series of three posts that analyze nationally representative water/sewer rates data collected biennially from 2017-2023. The first post showed how much water and sewer prices changed over that period. Average water and sewer service prices have been rising across the United States, but focusing on average prices obscures another important trend: water and sewer rate structures have also been changing. This post will show that water/sewer prices have become more regressive over time—in ways that exacerbate the country’s affordability challenges.

Rocks and hard places

America’s water and sewer utilities find themselves stuck between two long-term economic pressures: rising costs and falling demand. Long-deferred capital costs and increasing regulatory costs are driving up the water sector’s revenue needs. At the same time, U.S. residential water consumption has been in a long, steady decline, even as the country’s population and economy grow. That's a good thing for resource sustainability! But the combination of rising costs and declining demand creates a revenue problem for water utilities: the average price of water and sewer services must increase steeply in order to generate needed revenue. This problem is especially acute in small communities or places with stagnant or shrinking populations.

Resource economists have for decades advocated progressive rate structures that charge relatively low prices for low water use and steeply higher marginal prices for high volume use, along with volumetric charges for sewer services. Progressive pricing also improves low-income affordability. The trouble is that progressive pricing increases utilities’ revenue risk. Volumetric revenue tends to fluctuate seasonally depending on weather conditions. A heavy reliance on volumetric charges can leave a utility in tough financial shape if it rains all summer (or, ironically, if there’s a severe drought) customers might stop watering their lawns. Increasingly, utilities respond to these combined pressures—rising costs, falling demand, and revenue risk—by collecting more of their money through fixed and low-volume charges that generate more stable, reliable revenue. I first observed this trend back in 2019; the data show that it’s accelerating.

Squeezing harder

The regressive pricing trend is visible in several ways. The first and most obvious is a change in the share of monthly residential bills that comes from fixed versus volumetric charges. Here are biennial average residential monthly water and sewer bills at 6,200 gallons from 2017-2023, broken down by fixed and volumetric components:

The increase in total prices is clear. Less obviously, the mix of fixed and volumetric prices has shifted dramatically: from 2017-2023, average combined fixed water and sewer bills rose more than 45%. Over the same period of time, average combined volumetric price actually declined by 8%. That change is due almost entirely to a shift away from volumetric and toward fixed sewer prices across the country.

First gallon price is another useful way to think about the progressivity or regressivity of utility rates. The first gallon price is the price a customer pays for using any water at all: any fixed charges plus the price of the first unit of water or sewer service. For example, if there is a $25 monthly fixed charge for water service and the first thousand gallons of water is $3.00, then the first gallon price for water service is $28.00. Here are combined water/sewer first gallon prices and 6,200 gallon prices from 2017-2023:

Total water/sewer prices at 6,200 gallons a month are up more than 20% over this six-year period, but average first gallon prices rose by around 55% over the same period. In practical terms, that trend means that customers have less control over their bills and that increasing overall prices hit conservative customers harder than high-volume customers. To see what I mean, consider the national average Amy Poehler Index* over the same period of time:

The Poehler Index captures the unit prices that utilities charge to very high-volume residential customers relative to unit prices charged to moderate-volume customers. Values greater than 1.0 reflect progressive rates that charge higher unit prices of water to customers that use 85,000 gallons a month, while values lower than 1.0 indicate regressive rates that charge lower unit prices to those extremely high-volume customers. From 2017-2023, the national average Poehler Index fell from .87 to .71, with the biggest drop coming between 2019 and 2021. While there are plenty of exceptions, the national trend is clear: utilities are easing up on their water hogs.

Bearing the brunt

No matter which way you look at it, it’s clear that, in aggregate, American water and sewer utilities are balancing their budgets on the backs of their conservative and moderate-volume customers. This trend toward more regressive rates carries troubling implications for low-income customers, since ample evidence shows that progressive pricing improve affordability.^† In Part 3 of this series we’ll see just how troubling those implications are.

*I’ve yet to find an editor who will let me publish the Poehler Index in an official outlet. *sigh*

^† Skeptics will object that low-income customers aren’t necessarily low-volume customers. Although that’s true in the literal sense and anecdotal accounts abound, there’s ample empirical evidence that discretionary water consumption correlates positively with income in the United States (see for example this study, this study, this study, and this study). Despite a mountain of data showing that the rich use more water the poor, many folks cling to an image of big, impoverished households that need huge volumes of water for sustenance. Dickensian myths are tough to kill.