November 1, 2021

Nicholas Institute Dives into Making Water Services More Affordable

Nicholas Institute for Environmental Policy Solutions
Nicholas Institute Dives into Making Water Services More Affordable

The COVID-19 pandemic has disrupted every part of life across the United States and laid bare long-standing inequities in American society. Water services have been no exception.

During the first few months of the pandemic, states issued utility shut-off moratoria so people who lost their jobs could still get access to clean water, an absolute necessity for public health. Utilities needed federal assistance to make up lost revenue so they could pay their own bills, including debt payments. 

The situation exposed an already growing gap in the affordability of basic water services in communities across the country. For utilities, the costs for providing drinking water, wastewater treatment, and stormwater management have steadily grown as a result of a variety of factors over decades. Meanwhile, the customers who rely on—and pay for—those services have seen their incomes largely remain stagnant.

“It's such a complicated challenge made by hundreds of individual decisions over time to get where we are,” said Lauren Patterson, senior policy associate in the Water Policy Program at Duke University’s Nicholas Institute for Environmental Policy Solutions.

Everyone agrees there is an affordability challenge, but nobody knows the scale or the scope. Over the last year, the Nicholas Institute’s Water Policy Program has dived into exploring the water affordability gap.

Affordability challenges for utilities and their customers

In 2020, the Aspen Institute’s Energy and Environment Program and the Nicholas Institute convened the annual Aspen-Nicholas Water Forum to look at ways to make water services affordable and accessible for everyone while keeping utilities solvent. Over six virtual sessions, participants discussed topics such as long-term water affordability and financial resilience, reflections on the effects of the pandemic, other federally funded assistance programs, and how to advance water priorities in the new Biden-Harris Administration.

The forum offered a chance to reflect on how water affordability challenges have grown in the United States, both for utilities and their individual customers.

As described in the forum report, utilities are facing a series of “compounding problems and challenges” that are outpacing technological and policy innovations. The one that draws the most national attention is the need to replace aging infrastructure to reduce costs from leaks and maintain high-quality water services. In addition, climate change is increasing the costs of providing water services—utilities in the drought-stricken West spend more to procure water supply, while other utilities are dealing with the problems created by more frequent intense precipitation. Another driver of costs is the expense of treating polluted water to safe standards, particularly as we become more aware of emergent contaminants and their potential health implications. 

As costs have risen, federal investment in water infrastructure has declined. In 1977, the federal government paid for 63 percent of capital expenditures; today, local governments account for 90 percent of those costs. The shift to utilities relying more on local customers has meant that as the costs of service rises, so do rates, with rates increasing faster than inflation over the past two decades. With up to $1 trillion in new water infrastructure needed in the next 25 years, the burden on local ratepayers will only increase if business as usual continues.

The increased reliance of local utilities on local rate payers means the financial health of each utility is tied to the financial health of its community. The racial segregation of neighborhoods in the 20th century led to municipalities excluding communities of color from water and sewer services, leaving many underserved to this day. It also created suburban, wealthy utilities, while poor, inner-city utilities lose important sources of revenue, placing an increased burden on the remaining, often low-income, customers. Many of these inequities are baked into the water system and create affordability challenges that vary across and within a utility. For example, most rate structures are designed to charge the same amount for water regardless of the ability to pay, disproportionately affecting lower-income households.

“No matter how much your income is, if you use 6,000 gallons of water, you’re going to pay the same bill because we’ve valued equal payment as being fair vs. equitable payment—where a household pays up to a certain percent of income for basic water use,” Patterson said. 

Shrinking cities, growing bills

Affordability challenges are particularly acute in communities that have experienced significant population declines in recent decades.

These “shrinking cities” are most prevalent in the “Rust Belt” of the Northeast and upper Midwest, where economic globalization, particularly in the manufacturing sector, has shifted jobs elsewhere. As water-intensive industries have shut down, the water systems built to support them have become oversized, leaving the residents who remain to pick up the financial slack.

In 2020, the Water Policy Program, working with graduate students from the Nicholas School of the Environment, authored a pair of reports on shrinking cities, one focused on Pennsylvania and the other on these communities more broadly. Both reports describe a “trilemma” for water utilities as they try to balance ensuring affordable rates for their customers, maintaining high service and quality, and sustaining fiscal viability.

“Because their population is declining, the water utility doesn’t have the resources to fully address all three of those prongs, so tradeoffs exist to how well they can address any one of those at a given time,” said Walker Grimshaw, one of five then-students in the Nicholas School’s Master of Environmental Management (MEM) program who co-authored the Pennsylvania report. 

The broader report in the Journal AWWA says water service providers in shrinking cities will need “innovative and flexible approaches” to address the challenges that they face.

Among the options outlined in the report, water systems could downsize by discontinuing service and connections to abandoned properties and decommissioning unneeded infrastructure, although that often comes with political and financial hurdles. Some water systems have attempted to diversify their revenue streams by using excess capacity to attract new businesses or selling it to a neighboring city or large customer outside the existing service area. Consolidation with other water systems or even privatization can offer the promise of economies of scale, but those options also come with their own challenges.

Understanding the scale of the affordability challenge

Discussions around the Aspen-Nicholas Water Forum also brought to the surface that the scale of water affordability challenges isn’t clear, Patterson said.

“One of the things that makes measuring affordability difficult is that the definition of affordability is values-based,” Patterson said. “For example, household affordability is defined as the ability for a household to pay for basic water services without undue hardship. How much water is enough to meet a household’s needs and what constitutes an undue financial hardship?”

To help provide some clarity, the Water Policy Program launched a dashboard developed by Patterson and a small team of graduate students. (A companion website provides additional context and a tutorial for the dashboard.) By the end of this September, the dashboard featured data from nearly 2,350 utilities in seven states with readily available information on water service area or municipal boundaries.

The dashboard helps users explore four key questions:

•    Who lives in the utility's service boundaries?
•    How much do water services cost?
•    How affordable are water services given the costs and who lives in the utility?
•    How does affordability change with water usage?

Users can gain a deeper understanding of affordability challenges utility by utility through the dashboard’s open, transparent, and repeatable approach that compares several affordability metrics at multiple volumes of water.

One of the striking takeaways from the project is how poverty undermines water affordability for so many households. More than three-quarters of utilities in the first five states added to the dashboard—California, North Carolina, Oregon, Pennsylvania, and Texas—serve communities where more than 20 percent of the population was below 200 percent of the federal poverty level. The team found that, depending on how much water a household uses, between a tenth and a third of households are working more than a day each month (approximately 4.6 percent of their income) just to afford their water bills.

The dashboard was the culmination of months of work for the project team, gathering data from an array of sources and manually entering it. With the hard work for at least seven states done, the Nicholas Institute has made the data and code behind the dashboard open source, enabling others to more easily use it to work toward improved water affordability and equity.

“If we are the exclusive holders of the data, we are a bottleneck,” Patterson said. “We wanted to put it out there and let people ask their own questions.”

Work on shrinking cities and the Water Affordability Dashboard was funded by Spring Point Partners.