Flawed Analysis Muddies the Water on Water Affordability

The reliability of the nation’s water and wastewater infrastructure has received much attention in the past year. From Toledo to Flint to communities throughout California, the availability and quality of drinking water has become a significant issue for many. What’s more, the cost of water and wastewater service has been rising at about twice the rate of inflation for the last 15 years, while incomes for many low and moderate income households have remained essentially flat. Against this backdrop, it is all the more important that new plans to reinvest in our water and wastewater systems should consider the financial impact on those with limited income, to keep essential uses of water affordable for all.

Local residents and businesses today fund the vast majority of water and wastewater systems’ expenses through their utility bills. In assessing a community’s “financial capability” to pay for wastewater infrastructure improvements, the US EPA has long considered the local cost of sewer service—measured as a share of median household income—to be an important consideration. Although EPA’s Clean Water Act guidance refers only to costs of sewer service, household costs for drinking water also factor in to discussions about the affordability of urban water infrastructure investments. Under EPA’s framework, if costs for typical (or “median”) customers are considered high, this can be grounds for extending deadlines for a utility to to reduce raw sewage overflows and sewer backups, repair broken or undersized sewer pipes, upgrade sewage treatment plants, or meet other Clean Water Act requirements that protect public health and the environment.

But is consideration of the cost of service on median customers sufficient, when the impacts on low-income customers could be quite different? This is an important question, worthy of serious inquiry. Utilities have recently sought to poke holes in EPA’s concept, suggesting that the agency’s affordability guidance is flawed and that broader regulatory relief from environmental laws is justified when the financial needs of low-income customers are factored in. In contrast, we view affordability as an important goal in its own right, worthy of targeted attention and on-point solutions, rather than serving as an excuse for further foot-dragging by utilities that have failed to meet drinking water requirements or clean water goals.

Conference of Mayors Report: A Swing and a Miss

In April of this year, a Senate hearing on water affordability provided the occasion to advance the notion that current affordability guidance should be discarded. The US Conference of Mayors’ testimony highlighted a report they first released in 2014 to help make the case. The report, Public Water Cost per Household: Assessing Financial Impacts of EPA Affordability Criteria in California Cities, examined data from 35 water systems in Southern California. 

The report points out that median household income (MHI) is an imperfect point of reference for the affordability of water and sewer service. We can certainly agree that this is an important issue worthy of careful analysis. The report correctly notes that MHI says nothing about the relationship of water and sewer charges to the portion of the population with lower-than-median income levels. Unfortunately, the Conference of Mayors report itself says nothing about the water and sewer bills actually paid by lower-than-median income households. Nor does it document how lower-than-median income households who are not direct customers of water utilities—such as renters living in apartment buildings—are impacted by changes in water and sewer utility charges. And it says nothing about ways that water and sewer utilities can ameliorate burdens on low-income customers—ensuring they have equitable access to basic water and sewer services—even while generating the rate revenues needed for critical infrastructure investments. These three shortcomings lead the reader down several blind alleys.

How do the bills paid by low-income customers compare with the average bill for all customers?

In presenting data from a selection of California communities (mostly in Los Angeles County), the report rightfully notes that many of these communities have significant numbers of low income households. However, the report systematically makes an erroneous comparison between the incomes of low income households in a community and the average water and sewer charges paid by all customers in that community, not specifically low-income customers.    

That flawed comparison almost certainly overstates the share of income represented by the water and sewer bills paid by low-income customers.  It has long been recognized that higher-income households tend to use more water. The landmark AWWRF Residential End Use of Water Study (1999) documented this effect empirically in its survey of over 1,100 single-family homes in twelve communities in the US and Canada. It found that most indoor uses (except leakage) were positively influenced by income, and that outdoor use was strongly influenced by the square footage of the residence. Income effects are also noted in industry manuals, such as AWWA’s Manual M50 - Water Resources Planning. In Los Angeles, the strong relationship between neighborhood income and water use was found by UCLA researchers, characterized by distinct clustering in water use and income across the city, with high water users located in the census tracts near the Santa Monica Mountains and in the warmer northern sections of the city, while low water users are situated in less affluent areas.

Thus, use of community-wide average bills overstates the percentage of income that low income households’ own water and sewer bills represent. Nowhere in the Conference of Mayors report is there a single representation of what any cohort of low-income households actually pays in water and sewer charges. Appendix B of the report states that one city representative “cautioned that the consumption rates for the poorer households might be overestimated.” (p. 52) This caution, however, was not heeded by the authors of the report.

How do bills paid by apartment building owners effect tenants?

The Mayors report also fails to account for differences in water use levels and water billing practices between single-family and multi-family buildings. This is crucial because renter-occupied, multi-family buildings house a major share of lower-income households.      

Household water use is much lower in in multifamily buildings than in single-family homes. Roughly half of all water use in the residential sector in California is outdoor use, primarily landscape irrigation.  Apartment dwellers, with far less yard space per household, have lower levels of household water use than those living in single-family homes. About 45% of all housing units in Los Angeles County are in multi-family buildings.

Additionally, the report does not draw any distinction between all households and the many households that never receive a water or sewer bill. Over half of all housing units in Los Angeles County are renter-occupied, rather than owner-occupied. Most renters are not directly responsible for payment of water and sewer bills. The report implies that billing an apartment building owner has the same effect as billing all the individuals living in that apartment building.  But that is not necessarily the case. The owners of multi-family buildings make many financial decisions, not only about rents but about strategies that can mitigate rising water and sewer bills, such as fixing leaks and installing water-efficient fixtures, appliances, and landscaping. 

To assess the true effects of water and sewer rates on residents of multifamily rental housing, one needs to account for all of the following:

• the tendency of households in multi-family buildings to use less water than those in single-family homes;
• the extent that tenants of multi-family buildings may be individually responsible for water and sewer charges through submetering or billing allocation programs, which remain far from common;
• the relationship of water and sewer charges to rents;
• the willingness of building owners to invest in water efficiency to lower their own bills;
• the temporal dynamic between a revision in rates and a change in rents; and
• the treatment of utility rates in various affordable housing and rent control programs.

Are customer assistance programs available and are water rate structures equitable?

In the larger context of rising costs for water and sewer service, affordability concerns also invite attention to state and local decisions about low-income assistance programs. A recent EPA survey of 795 water and wastewater utilities found that fewer than 30% offered any sort of customer assistance program. But it also documented a wide array of approaches that those 30% are using to ameliorate impacts of rate increases on lower-income households. 

Moreover, cities and utilities facing rising costs should also revisit the fundamentals of their water and sewer rate structures. Well-crafted rates and charges can raise revenue in ways that simultaneously incentivize sustainable water management and equitably allocate costs among all customers. Key rate-making issues include:

• more equitable and efficient rate designs, such as seasonal or tiered rates for water, to charge more fairly for high levels of outdoor use and inefficient water use practices;
• consumption-based fixed charges, which encourage both equity and efficiency by basing the fixed portion of a water bill on the customer’s prior year consumption.
• elimination of flat, non-volumetric charges for sanitary sewer service (common in Los Angeles County outside of the city of Los Angeles), which penalize all customers with below-average levels of usage;
• stormwater fees based on impervious area, to equitably generate revenue for stormwater management (including combined sewer overflow abatement) needs. 

None of these issues was addressed in the Conference of Mayors report.

Let’s face and resolve water affordability issues forthrightly.

NRDC believes strongly that everyone must have access to affordable drinking water and a clean environment. There is a serious question to be addressed regarding the affordability of water and sewer service, made more challenging by an increasing gap between upper income levels and low income households. But the Council of Mayors’ report lacks any documentation of the actual bills of low income households, the impact of water and sewer charges on low income households that do not receive a bill, or the strategies that cities and utilities can use to raise necessary water and sewer revenues without imposing undue burdens on the households least able to afford it. All are necessary for a constructive discussion of this issue.

A more informed assessment will hopefully come from a National Academy of Public Administration (NAPA) study that is just getting underway, in partnership with EPA, to examine issues of affordability regarding municipal Clean Water Act compliance. The study is at the instruction of Congress in the committee report accompanying last year’s appropriation.  

Strategies to promote equity and maintain affordability for essential levels of water and sewer service can, simultaneously, address utilities’ need for financial stability and secure revenues needed for infrastructure reinvestment. NRDC will continue to offer suggestions on these important topics in the months ahead.