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There’s a growing perception that there’s a water affordability crisis in California, but as with most water issues, the reality is more complex. PPIC Water Policy Center founder and senior fellow Ellen Hanak sat down for a conversation with PPIC adjunct fellow and water economist David Mitchell to learn more.
First, how do we determine whether water is affordable?
There are various definitions of affordability. Almost all of them stem from informal guidance issued by the Environmental Protection Agency in the mid-‘90s. The agency looked at how to determine whether sewer-related mandates and drinking water regulations might result in undue economic hardship for people served by small water systems. They identified a cost threshold of roughly 2% and 2.5% of an area’s median household income for sewer and water service, respectively. These metrics were specific to small systems serving less than 10,000 people and referred to average household impact. Of course, if the average impact is 2% or 2.5%, the impact will be much larger or smaller for some households. Regardless, the idea that there is a threshold above which service becomes unaffordable—and that affordability can be assessed as a ratio of a bill to household income—took root in the water utility sector, and it took on a life of its own. It’s been the benchmark ever since.
Is there a water affordability issue in the state right now—and if so, what’s causing it?
Water rates have been rising faster than inflation for a long time now. In the late 1980s, observers lamented how crazy cheap water service was, because a lot of the costs around procuring and delivering water were not reflected in water bills. That’s changed now, which is partly why water service costs have risen. Also, there are now many more drinking water quality requirements and environmental safeguards associated with producing water, and these requirements contribute to rising costs. Other cost drivers include the need to update aging infrastructure—such as thousands of miles of underground pipes—while also investing in solutions that keep water supplies resilient in the face of a warming, increasingly volatile climate.
So water service was dirt cheap, you could use as much as you wanted, and you wouldn’t get hit with a big bill. Now, water is still pretty inexpensive: highly reliable, high-quality water comes out of your tap for the cost of about $75 per month, or $2.50 a day. Although people are noticing the increases, for most households this is not terribly expensive. Of course, some low-income households struggle to pay their water bills, just as they struggle to meet other expenses.
Affordability is tricky to measure, but clearly some low-income households find paying for water hard. What kinds of policy fixes might help ease the stress on California residents?
My number one policy fix is to build more housing. It’s the only affordability issue that truly matters in California. Recent data from the Legislative Analyst’s Office (LAO) highlights the problem: in June of this year, a mid-tier home in California cost nearly $6,000 a month, more than double the national average. Even homes in the bottom tier are pricier here—$3,600 per month, a third more than nationally. Whether your water bill is $50 or $75 a month just doesn’t matter if your mortgage or rental cost is thousands of dollars a month. The only way to drive down shelter costs in this state is to build more housing. We have to increase the housing supply to decrease living costs; everything else is rearranging deck chairs on the Titanic.
In water policy circles, there’s been a lot of recent effort to promote state or federal subsidies to reduce water bills for low-income households. What’s your thought about this kind of approach, versus putting more funds into general income support, like the Earned Income Tax Credit (EITC)?
Today, many larger urban utilities have local subsidy programs for their low-income customers. But Proposition 218, a 1996 constitutional amendment, makes it hard for public water agencies to expand these programs using their own revenues. This restriction has led to a push to create broader rate subsidy programs, funded by state or federal tax dollars. I’m not a strong proponent of creating new programs to subsidize the water bill. Subsidies tend to be clunky, requiring additional bureaucracy. Also, many low-income households don’t receive a water bill directly, making it difficult to target financial assistance through a rate subsidy.
We have other, more effective ways of transferring income, like the state and federal EITCs, which provide general income support to low-income households. We should improve and extend existing transfer platforms like this.
Of course, part of the affordability equation also relates to keeping down the costs of water service. What roles do federal, state, and local agencies have in doing things as cost-effectively as possible?
Local utilities need to better understand key cost drivers, by doing more cost-of-service studies. These studies are difficult, time-consuming, and often expensive, but it’s money well spent. Is it labor? Infrastructure renewal? Water quality and treatment? Reporting and regulation? That’s the only way to understand where to find cost savings. As Peter Drucker famously advised: it’s difficult to manage what you don’t measure.
And at the state and federal levels, we need to be more skeptical and vigilant in terms of the regulations we pass for water systems. Not all are necessary, and none are free. Better understanding the tradeoffs involved is going to become increasingly important down the road.