CLOSUP-MML Webinar with Manny Teodoro on Water Affordability

January 29, 2019 0:51:38
Kaltura Video

This webinar was jointly hosted by CLOSUP and the Michigan Municipal League.  The webinar features Professor Manny Teodoro from Texas A&M University, speaking on water and sewer system finance and policy, including how to measure affordability, and policy options for rate structures and related issues.


Manny Teodoro

is indeed one of the leading experts in
the nation water and sewer system finance

and policy as well as a variety of other
policy domain whose research focuses

on U.S. environmental policy examining
the ways in which human capital management

practices and political institutions
interact around the implementation

of federal environmental regulations among
other research she does apply policy

research water utility finance and
management and develop new methods for

assessing great equity and affordability
is working Salman's private and

public utility management as well
as public private partnerships and

to conduct analysis of racial ethnic and
income disparity and

environmental compliance and Forstmann
doctor tomorrow is associate professor of

political science and director of policy
and politics program at Texas A and M.

University and we're proud to
know that he received his Ph D.

in political science from
University Michigan in 2000.

So with that brief introduction now
turned over to Professor Theodore Thanks

a lot Tom us this is a real delight to
be with you virtually if not literally

this morning I understand we had a we had
to improvise a little bit given the plunge

in temperatures a good it's in the style
Jik coming back to Ann Arbor but

also a reminder that sometimes
it's pleasant to live in Texas.

Have to at least observe the the weather
pattern because this happened today is

near and dear to me a water board ability
is something I've been working on off and

on and in for
the last 40 years in a concentrated way or

more than a dozen years.

Many ways Michigan is ground 0 for

water issues water infrastructure and with
those issues of water affordability and

so although I've been crisscrossing
the country talking about this issue for

the last year and a half or so it takes on
a special meaning here special relevance

I think it was a significant part of the
been a tutorial election last year or so

issues and Detroit went elsewhere
on the on water infrastructure and

affordability very very important salient
stuff in the Great Lakes state so

my remarks today I want to do 4 things
it's going to be a lot of measurement but

I want to talk about the a conventional
method of measuring affordability for

water and sewer services and why it's a
bad approach I'm going to introduce a pair

of new meaningful metrics for measuring
household level of portability and

then I'm going to use those metrics
to paint a national affordability

picture give you a sense of what what it
kinda looks like across the country and

then finally in the provide some initial
impure of evidence on the correlates of

affordability of how the my guide
communities to craft solutions to

the affordability challenges now or we're
all improvising a little bit here today

want one of the things that was
in the promotional email for

this this morning's event was
that I would talk a little bit

about public private partnerships and I'm
not going to make that part of my formal

presentation if they want to talk about
that later that I'm happy to talk about

utility ownership and public private
partnerships what they might be good or

not so good for
happy to tackle that during you and a.

So you can see the title on my slide here
is water for debility measurement meaning

and as I said a lot of what you're going
to hear about today is going to be

a measurement but it's it's I think
that has a pretty clear implications for

policy in practice the details for
everything I'm going to talk about today

are available in journal A W W A It's
an article I published a year ago there's

a forthcoming paper that gets it that
looks more data please check that out

if you want all the gory details you can
see that at turn from the end of the W.A.

or the papers also available on my website
you're welcome to download it there

the empirical analyses I'm going to show
you are also all on my website as well.

If you want to get in get into all the
detail I'm going to skip most of that and

just get the gist of it is get to the
important findings I also will know that I

blog on these issues that whenever I can
so that if you ever want to see the latest

greatest that's usually on my blog months
before it's published anywhere else so

here's where I'm going I'm
going to start by talking about

the Terrible Horrible No they're very
bad measurements and then how to do

better I'm going to introduce 2 metrics
for affordability there they are the or

build a bridge and then measuring things
and with hours a minimal wage with

that I will show you what those numbers
look like cross the country and

then and by discussing how you
apply these measurements and

findings you know policy setting but
I want to start by talking for

just a few minutes about the conventional
approach to measuring water and

sewer affordability or
what I more accurately like to

call a Terrible Horrible No Good Very Bad

the most widely applied measure method of
measuring affordability is to calculate

the average residential bill or
given utility.

By the as a percentage of
the community's median household and.

I'm bringing this up because this
approach to measuring affordability is so

common that if you're ever discussing
affordability if you're in the process of

doing a rate study or revising by
the actual planning your utility

is likely that someone is going to bring
up this measure this metric typically

the percentages compared with a set
affordability standard it's usually 2

percent for water maybe another 2 percent
pursuers or you're doing a combine 2 or.

Combined water and
sewer analysis it might be $44.00 and

a half percent will happen as
people look at this number and

then if the number is less than

double if it's greater than 2 percent
it declared an affordable now lots of

very well meaning people who use this
measure and this standard of affordability

when evaluating rates and economic
conditions just merit of this approach

is that it's simple you can do this on the
back of an envelope with easily accessible

data takes a few minutes with a calculator
or with greater do this calculation

it's not difficult at all it has some
intuitive appeal sense it relates

cost to income at least or an entire
utility as a whole and it has something

of the veneer of a legitimacy because
it is loosely connected to an E.P.A.

regulatory guideline and
I'm a return to that in a moment but

mostly people use this method because
it's familiar they've been doing it for

him it's been common for
about 20 years and people like to use it

because lots of other people like to
use it however despite the widespread

use of this metric this percentage median
household income approach is deeply and

seriously lot I could go on for
an hour about why this is a terrible

orrible no good very bad metric but
if you remember nothing else.

Remember this the main problem with this
measure of affordability is that it does

not measure affordability at least not for
the low income households where it

ought to matter most there are a number
of reasons for that the 1st of all

the conventional median household income
metric and the accompanying 2 percent or 4

percent standard developed by U.P.A. were
never intended to measure household level

affordability they were intended as a
gauge of community financial capacity for

purposes of the go shooting things
like consent decrees compliance

regulatory compliance the idea that
this number would be a measure

of financial capacity can be traced
back to at least 184000 internally

documents the 1st time it shows up as
anything like a standard appears in

as a measure of utility level financial
capability this number is not crazy but

it is an awful way to measure household
level affordability unfortunately a lot of

people will use this metric as a way
to measure household or ability and

then they'll claim all this is an E.P.A.
standard that is simply back fully

incorrect and if so some whatever
a consultant a community member

of an elected official tells
you of those of the E.P.A.

standards or ability they're
wrong it simply is not the case.

Seconding problem with this metric is that
the conventional approach puts average

bill in the numerator average bill divided
by median household income the trouble

is that an awful lot of what drives
average water demand is not water for

basic health needs as a matter of public
policy we're probably not interested

in the affordability of irrigating
somebody is happy girl on we're probably

not interested in the affordability
of filling a swimming pool or

washing a car what we're
really talking about in

affordability discussion is basic
health needs drinking water water for

cooking cleaning sanitation those things
that are important for human health needs

method metric does not account for

other possibility now water is really
important and I don't argue maybe the most

essential thing that people need day
to day but food health care housing and

on a day like today a reminder home
energy are also essential costs and

these costs can vary widely
from place to place and

from time to time the conventional method
that percentage median household income is

completely insensitive to these
costs finally and maybe most

egregiously the conventional metrics
focused on the median income misses

the main point of affordability Now
look there are some desperately poor

communities in the United States but in
all but the most desperately poor places

median household generally don't have an
affordability problem affordability is not

a problem for people in the middle of
the income distribution for water and

sewer it's not median incomes it's low
income households low income households

may have to make really difficult economic
decisions based on water bills but

the conventional metric doesn't focus
on low income households it focuses on

the media that's preposterous right
on its face so we need to do better.

I'm going to start by plainly stating
the principles that underlie my approach

to measuring affordability Goodwater or
debility metric ought to do at least

basic water demands

from a public policy perspective as I
mentioned we're not really worried about.

The affordability of your getting your
yard we're worried about the affordability

of water needs for human health 2nd
a good metric should account for

the real tradeoffs that households have
to make and so we need to account for

other essential living costs and then
finally we want to focus on low income

customers people who face the most serious
economic tradeoffs when they pay for

water service not not at the middle or
the top end of the distribution the whole

distribution we want to look at the low
end of the income distribution so

these principles in my eyes develop
a double barreled metric the 2

approaches a 2 in 2 numbers are called the

together these 2 metrics give a great
complementary perspective on affordability

So they're really meant to be used
together with a start of the affordability

ratio for debility ratio is a it
takes the same basic concept

as the the conventional method but make
some refinements that make it a lot more

valid mathematically So this is this
the idea is that it's the basic water and

sewer cost as a percent
of disposable income so

that the 2 critical differences
between the conventional approach and

this approach that we're looking at basic
water service water sewer service cost not

average and we're looking at
disposable income not not total income.

Mathematically it looks like this if
the cost a basic per capita water sewer

service multiplied by a household and
then we divide it by

the household income less other
essential expenses besides water and

sewer so
things like taxes housing health care and

home energy for
the purposes of today's calculations

are going to show you later those are the
other the non water essential expenses

taxes housing health care food home energy
reasonable people can disagree about what

other kinds of things might belong in that
other essential expenses category don't

get too hung up on that you can always
change whatever goes into that calculation

I met with some folks last week in
California they want to put child care for

example into that metric or perhaps
transportation like commuting costs and

that's perfectly reasonable to be a little
bit more conservative in our metrics we're

going to use these 55 categories today but
you can put anything you want into

that category so finally because
we're not interested in the middle of

the distribution we're going to focus
on the 20th income percentile so

the affordability ratio at
the 20th income percentile or

A R 20 again is nothing magic about the

going to use that is that in welfare
economics the 20th percentile

the traditional cutoff for
the middle class it's the you

can think of people as the 20th then
percentile of something like the working

poor these are folks who Pretty have
very limited financial resources but

maybe have too high an income to qualify
for a lot of public assistance programs so

these are these are people who struggle
to make ends meet each month but but

but still do not necessarily get

a lot in the way a public space.

If you can nail down this measure is
a very good way to assess support billet

However one thing about the A R 20 is
it's a bit abstract so I have another

metric that puts things in more tangible
terms and also provides a nice kind of

analytical backstop in case something goes
weird with the A R 20 and that's simply to

calculate water sewer costs in terms
of hours of labor at minimum wage.

Mathematically it's very simple it's
because the basic per capita water

sewer service again multiply by household
size just like we saw before and

now we're just going to divide by the
hourly minimum wage wherever you happen to

be now this is not as good a metric as
they are 20 it's not sensitive to other

essential costs not sense of
this other possible living but

it is easy to calculate and
it's wonderfully into it when I talk to

different audiences about this this double
barreled metric it's one of the economists

much prefer the A R 20 and so the rate
great piece like that politicians really

like ours minimum wage community
activists really like ours and

minimal wage it's got a real visceral
appeal and for those of us who have

worked at minimum wage to some point in
our lives and I certainly have that really

mean something you get a sense of
just how much value you're put in for

the other nice thing is incidentally
that's always a useful touchstone for

making international comparisons when
you think about how much time people in

the developing world spend
trying to get water this is

a really nice reminder yeah that
maybe they're spending several hours

a day trying to get water and

I can't stress enough as imperfect
inaccurate as this metric is on its own it

is far better than the conventional
approach and pretty much every way and

it does represent the economic tradeoffs
that people make in order to pay for

our water and sewer service so we're
turning to our principles of measurement.

We can see that these metrics together
satisfy all 3 of the principals better for

driving for base volume where counting for
other sense living costs and

we're focusing on low income customers and
surely a very quickly an example of what

this looks like from these rates
from Dallas Texas in $27.00 teams

how you calculate this stuff 2017 basic
monthly in water and sewer service

of demand that that in that implies for

a family a family of 450
gallons per capita per day now

again a number that you shouldn't get
too hung up on if your community.

If basic water use is higher or lower you
can adjust that number we use 50 gallon

for capita per day because that's
a very typical indoor design standard

People are figuring out how much
sewer flow to expect from a household

they calculate that usually 50 gallons
per capita per day it's also the indoor

efficiency standard for both California
and Texas maybe other places too but

it's a useful number for that for
that purpose however in some communities

where water use is very conservative they
might choose something more like 40 or

go higher we're going to use 50 for

purposes of our calculations today so

anyway in Dallas that cost $5092.00
per month that's our numerator

monthly income of the 20th percentile
in Dallas 2017 was $1548.75

we estimate monthly essential
expenses at 864 dollars $0.11 but

we did that with a regression model using
the consumer expenditure survey but

you certainly don't have to do that and

I've worked with communities who have
done things like look at Craigslist.

To see what housing costs go
down to the supermarket and

see what food costs and they've calculated
these things on an ad hoc basis for

their own communities that certainly
perfectly acceptable in any case you get

a disposable monthly income
of $684.64 to the Buy had

to buy $684.00 and you get an A R 20 value

of 8.74 percent So
that is the affordability ratio for

Dallas minimum wage the hours minimum
wage very straightforward calculation

the same $5982.00 divided by the hourly
minimum wage in Dallas which is

$725.00 we only go with the federal
minimum wage down Texas and

we end up with hours minimum wage of $8.00

our set of labor to pay for
basic monthly water and

sewer costs that measurement
approach in mind

allows me today some data upon
you the article at the post

last year developed these metrics for
the top 25 U.S. cities.

Today I'm going to show you some new
analysis based on a national sample

of hundreds of utilities this is all
in an article that should be published

later in the spring there's an advanced
version of this paper on my website so

again if you like
the details it's there but

we do is we calculated affordability
metrics for a randomized stratified sample

of utilities from across the country
it's a balance to be as closely

as close to perfectly representative as
possible within our data constraints after

we live in a case of missing data we
ended up with 329 usable cases for

analysis now there are tens of thousands
of water systems in America so

it's a very carefully

designed highly representative sample I
learned how to do survey methodology here

at the University of Michigan so
I really know what I'm doing I believe

that this is the most representative
analytically reliable water and sewer

rates survey to date as a quick aside and
that state is one of the few places in

the developed world where we don't have
good national data on water rates so

pretty much everything we
do have to be collected.

Ad hoc and I'm happy to talk about all of
warring methodological details if you want

right now I want to get the interesting
results here's what we found.

This is the distribution of A R 20
across the country remember that A R 20

is a share of supposable income that
a family of 4 at the 20th income

percentile have to pay for water and sewer
service basic water and sewer service you

see about 2 thirds are under 10 we've
got this kind of skewed distribution.

That the national average She is 9.7
percent of the way to think about this

in substantive terms is that households
at the 20th income percentile spend

less than 10 percent of their disposable
income on water sewer service and

about 2 thirds of the country and
you can see how it sort of

spreads out to the right hand
side most fall under 20 percent

less than one percent pay more than
that we have a R 20 values greater than

there and I want to be careful about

the inferences where you want to generally
be careful about inferences on those very

high numbers 25 and up usually that says
more about local economic conditions

than it says anything about water sewer
rates we're talking about it places where

the bottom end of the disk the income
distribution is just very very low

years affordability measured
in hours at minimum wage

as we expect there's a somewhat
similar overall distribution about 45

percent fall under 8 hours I think I 8
hours is a useful touchstone because

it's one working day what about half of
America's utilities base of water and

sewer service for a family or cost
about a day's labor at middleweight or

less another half or so or
close to half or between $8.16 hours and

again you've got a handful of systems that
are out way up there and because these

things are measured in hours of minimum
wage you can really infer something about

the rate structure with a high numbers
here that's just places where water and

sewer service is really expensive
national average about 9.6

hours so
that's nicely representative data set we

can start doing some interesting things
like identifying the empirical correlates

of affordability so I am going
to talk about just a few of them

today I want to start with science.

It turns out there is a pretty strong
relationship between the size of

the utility and
the affordability of its rates this is

this is a regression the result
of a regression model where we

predicted a R 20 value on the well
as a function of the utility size.

What you've got here on the on the
vertical axis is the error when the value

on the horizontal is the population
by a utility plot of that on

a logarithmic scale so that you can get
a sense of the range of utilities out

there and then remember now low
numbers are good as like golf so

you want you want to small number 2 to
make water and sewer service portable and

on average you see there's a pretty steep
the explosive there is a pretty strong

relationship and in general affordability
improves as systems get larger

here's the same model this time we're
looking at hours minimum wage in the same

relationship the that the affordability
improves with larger systems

this is just more evidence we see more
evidence all the time that small systems

struggle small water systems struggle a
lot of ways and that system consolidation

of regionalization is probably a pretty
good idea for purposes of affordability

I think there's going to come back to this
later but I think there's a tendency for

more people to assume well this is this
is a story of a con of the scale and

that's true it's certainly true that
we're looking at economies of scale

from a capital perspective but there are
also some important economies of scale for

financial purposes and I'll talk
about that later on another finding

a frequent interest is investor owned
versus in local government utilities

there's the average affordability numbers
the A R 20 values aren't blew up.

The hours a minimum wage
that green checkered bars

Ranger bars as you can see the Nationwide
there is not all that much difference

between private special district and
municipal utilities in terms of a R 20

those blue bars are really pretty
similar in terms of hours of

minimum wage the investor owned utilities
are significantly higher than units for

utilities by Szell districts or
somewhere in between

so we're back to we're
back to ownership here and

as I was saying there there's a pretty
significant difference between investor

owned utilities on hours of minimum
wage but not necessarily be a are 20.

Now I want to turn to rate this time and
how it informs affordability

much of the debate over public debate over
water affordability both nationally and

here in Michigan both this is
on assistance programs and

how they might help low income households
are struggling with their bills and that's

important to talk about that a little bit
but 1st most important thing that drives

affordability conditions is rates so let's
look at some aspects of rate design and

how they might relate to affordability
again looking at lots of net data across

the country allows us to look empirically
the relationship between affordability and

rate structure let's start
with volumetric rate structure

most utilities cross country charge for
water service with a combination of fixed

periodic rates each with a fixed monthly
or bi monthly charge plus a volume

metric rate that varies according to
the amount of water that household uses

let's look at the 3 most common races

Here's a inclining declining and last rate
when in climbing block rate structure is

rate structure where you pay increasing
cost as you use more water so

maybe you pay $2.00 per 1000 gallons for

the 1st 5000 gallons and then maybe you
pay $3.00 for the next 5000 gallons and

then you pay maybe $5.00 per 1000 gallons
if you use more than 10000 gallons

that would be an example of inclining
block rate structure the utilities

use declining block what actually goes
the other way you pay higher prices for

the 1st few 1000 gallons of water and
then you pay lower prices

as you use more like you get a volume
discount and then there are many utilities

that use flat rates where you just pay
the same amount no matter same amount for

a 1000 gallons no matter how much you use
and you see the relationship here remember

small numbers are good as which see here
is that incline block rates utilities and

climbing block rates generally
generate lower portability score so

the affordability is better where
utilities are using inclining block

rates that is an important lesson here
declining Well that's a before you

get that declining block by
rates are about the same but

they have on average significantly worse
affordability an important lesson here as

I think that there is a common narrative
out there that conservation oriented

rates structures create affordability
problems but these results suggest On

the contrary conservation oriented rates
can be the most of portability friendly.

I think another useful way to think about
a great design when you're developing

rates for your communities or looking
at the rates charged by your community

is to look at the price of the 1st gallon
to the 1st gallon price is simply a fixed

charge plus the 1st volume metric unit and
that's a useful touchstone

because this is the amount of data that
a household has to pay no matter what

if you use any water at all this is what
you're going to have to pay each month

let's look at the relationship
between the 1st gallon price and

affordability is as you'd expect there's
a pretty steep relationship there.

The 1st gallon prices really the 1st
round gallon price an A R $20.00 the same

thing with hours of minimum wage so
again the significance

of rate design here is lower fixed
charges and lower fixed charges and

low prices for the 1st volume metric
unit strongly predict affordability So

that's a lot of numbers I could show you a
lot more but I want to kind of get to what

it all means when I talk about this stuff
people invariably ask me OK Professor if

you know a lot of numbers lots and lots of
numbers what is that all me what do we do

with all of that number what's affordable
health lease tell us what's affordable

well when confronting the portability
questions utility leaders and

policy makers are really asking not what's
affordable what they're really asking

is how much is it reasonable to expect
households of limited means to pay for

an essential service something
that literally keeps them alive

what act economic sacrifices
are reasonable to expect

a low income households make in
order to pay for their water bill.

These are fundamentally normative
questions one of the problems with

the conventional approach to war debility
measurement that I didn't talk about

earlier is the completely arbitrary
nature of the 2 percent or 4 percent drop

it's as if a prophet descended from the
mountain top with a stone tablet that said

is an affordable and that's just

silly no metric in itself can define what
is affordable This is a normative question

it's a question of morality and ethics and
there is no scientific answer to what

is fundamentally a philosophical question
question what sacrifices should I have and

low income households have to
make the pay the water bill and

democratic societies are these
questions are inevitably political and

good measurement can help
facilitate good decisions but

measurement cannot replace decision making
so I'm going to draft up by talking

briefly about what it means in practice
and how communities are beginning to use

these metrics to set policy I'm
going to start with Phoenix So

Phoenix Arizona is going magine water
is a big deal in Phoenix Unix's utility

was under pressure recently to address
affordability as they were planning for

a rate increase last year and they were
in the process of developing planning for

rate increases going into
effect this year 2019.

So Phoenix used to A R 2010 hours at
minimum wage to assess their current

affordability conditions in their city and
then develop standards using those metrics

that were supposed to be consistent
with the city's community values and so

to aid in that process the city used
a citizens a water rate advisory

committee of the group of volunteers
who came together representing

a wide of the illogical spectrum and
different parts of their from unity and

they their job was to deliberate
over these affordability metrics and

decide what was going to be affordable for
the people of the next I

understand I only met this group one time
I was I'm assuming that this is a before

picture not an after picture because they
also look pretty happy and civil but

I understand that their deliberations
got quite heated at times because we're

talking about questions of values and
trying to decide what does affordability

need to us and included in this group
were community organizing activists and

local Tea Party member or a member of
that sort of Tea Party organization

who had people from across the logical
spectrum debating this I came in and

I showed them how to how
do you these metrics but

I didn't tell them will it was affordable
because that was their job what they ended

up with was using the 2 metrics and
they established standards for

the city of Phoenix A R 20 value
of less than 10 percent and

hours of minimum wage of less than 8.

And those metrics are used in 2 ways
One is that they were used to set of

guidelines for their utility and

said Look water sewer department as
you develop your race proposal for

next year we want you to ensure
that your rates never generate

an A R 20 value over 10 percent keep
that number under 10 percent that's not

a target it's a limit like a guardrail we
don't want you to hit 10 percent we want

you to stay well under 10 percent same
thing with ours at minimum wage that

was to them what represented
the the values of the city of Phoenix and

then the city use those numbers
to set rates they also used

those numbers to help fund determine how
much they needed to fund their assistance

program they out of the bill assistance
program for low income folks and

they combined these guidelines with
the census data that they had for

the city to to get a good estimate for how
much they were going to need to fund their

assistance program future knowing that
essentially they were going to that their

their guideline was
telling us this is what we

need if households are going more
than 8 hours of minimum wage

going over 10 percent of their disposable
income we need to help them out so

that that those those metrics help them
define their their policy goals for

affordability assistance as well.

City of Austin Texas Austin
water did something very similar

they were under orders from city
council to evaluate affordability and

just last month Boston water delivered
a very comprehensive report on its

portability to their city council they
decided on an even more stringent

standard that was best for
their city and they said and

used a R 20 they didn't use hours
minimum wage for these they are 20 and

they set their goal if by percent
combined rate of 5 percent and

they buy as ads in Phoenix they are using
a R 20 to help design both rates and

their assistance program and it's at their
goal 5 percent those cases are great

examples of how measurement and
health sound policy making so

I want to end with with just a couple
of things 1st basic principles

of practice with effect with respect to
measurement and then I would talk about

policy alternatives to have addressed
affordability for them is the principle

for practice number one is to measure
meaningfully select metrics that capture

the things you want to capture
naturally I think my metrics are great

There are however other valid approaches
average bill percent of median household

income is not a valid approach
despite its frequent use

the main things are to provide the basic
volume account for cost of living and

focus on low income households that
can use these metrics to set goals

Vandar guidelines that reflect community
values and priorities measurement

can help you do that but in the end
standard setting means deliberation

means compromise means negotiation that's
what the democratic process is for.

And finally once you set your goals
evaluate affordability over time and

within utilities but
don't compare across utilities

when evaluating a potential rate structure
or change or ability assistance program

these metrics should make sure that rates
are consistent with community values and

goals or at least moving in that
direction comparing across utilities

is a bad idea in others a common
psychologist would tell us in

a human tendency to think about all
performance in comparison with others when

we're little kids we're interested in how
am I faster than the other kids can I jump

higher than the other kid that my how
my doing compared to the other kids and

that's you know that comparison
across systems is great for

academic researchers like me and we're
trying to look for patterns in data but

it's not a good idea for
setting policy comparison across

systems distracts from the core issue
of affordability considered this way

if I'm a low income families I'm leading
a low income family in Lansing and

I'm struggling to pay my water bill
the fact that a family in Detroit might

be better off and $1.00 in
Grand Rapids might be worse off and

it's not really very relevant
to me what's relevant to me is

the price of my own water bill not what a
poor person in another city is paying for

their water bill so
setting affordability policy in your state

community by assessing affordability and
other communities is a little bit

like buying shoes by measuring
everybody else's feet utility rates and

affordability programs ought to be based
on local conditions and local goals and

local values not on what other
people are doing all right

if you've got an affordability issue or
you're worried that you might have

an order billet issue
you've got some options

some things that you can
try to do to address them.

One is consolidation regionalization or

that matter just trying to gain
efficiencies elsewhere to drive down basic

costs it's not just about the physical
system but in many ways trying to try and

capture economies of scale at
the organizational level with things like

human capital and operational functions
these these steps can help at the margins

I think we see strong correlations
with affordability less often observed

that a large system not just doesn't
just provide physical economies of

scale it also provides greater financial
stability if you're a small system and

a handful of your customers start to fall
behind on their bills that can create

a financial challenge a larger system
simply by virtue of having a lot

of customers can weather more
financial volatility and

that's important for rate setting to
get you in just a 2nd the next point

rate design we saw earlier rate
design can have a strong effect on

affordability you want to drive down that

the basic cost of service can include
things like a low fixed charge a thin

client lock rate structure maybe include
something like a base volume allowance

one of the reasons that Phoenix Arizona
has such nice affordability measures

is that they're fixed charges very low I
want to say like 15 or $16.00 a month for

water and sewer and
then on top of that it includes the 1st

base charge they don't they

Secondly the 1st 2000 gallons are included
in the base price and then the price

starts to go up after that it's very
steeply inclined if you use a lot of water

if you've got a large lawn in Phoenix
that you want to irrigate that's going

to cost you quite a lot but they said that
basically volume at a very very low price

so low prices for basic volumes between
higher prices for peak volume however.

The real problem with that approach to
rate setting is it does expose a utility

to revenue volatility if it rains
all summer and nobody waters their

lawn then you don't get a lot of that peak
volume where you generate a lot of revenue

at the other extreme if you get into an
extreme drought and the community has to

impose water restrictions you get the same
problem people don't sell any water

system so selling water than they are
therefore they don't make any money and

that can cost financial problems in
the short term and utilities can find

themselves short on revenue in what
is a very high fixed cost business so

to go along and raise designs
who may have to revisit standard

Reserve policy rather than keeping a 30
year 60 or 90 day operating hours or

utilities may think about keeping much
larger cash reserves around to help manage

that revenue volatility unfortunately that
sometimes creates a political problem

because if the utility sitting there and
has got a big bank account.

Policy political leaders
can look at that say well

gosh why do you keep raising
the rates to pay for

new things why don't you spend down that
reserve before you come and ask us for or

more funding and explaining to them
that that's there as a reserve to help.

Shore up revenue volatility or
manage revenue volatility may or

may not be of you know of a compelling
argument however it could be to

helping to manage affordability and then
find them and talk just a little bit about

subsidies assistance programs this is
a tricky thing to do in Michigan and

a handful of other states because state
law restricts the ability of the utilities

to transfer rate revenue from one group
of customers to another but there may

be opportunities for assistance programs
they can be funded in some other ways.

You want to think about the administrative
costs here unfortunately a lot of the jury

affordability problems are in the smallest
utilities which may only have

a handful of them please if you have to
devote employees to managing an assistance

program it might be difficult to
administer such an assistance program and

that's why I think a promising model is to
partner with local social service agencies

I've seen some small utilities do that
successfully to partner with a local

television Army chapter for example to
administer their assistance program and

the last thing is to think about
administrative cost to the customer and

sometimes folks who run utilities forget
about that when if you're asking somebody

who's working on an hourly wage basis
to spend a significant amount of time

gathering documentation going through
an application process that can create

an affordability challenge ironically
at the same time so in the end I think

the way to think about the relationship
between between rate design and assistance

programs is like the relationship between
inoculation and therapy if you want to

have a healthy population you need to be
able to do the right you want to be able

to inoculate a population
against these but

you also want to be able to treat
the people who are sick great design and

help you help inoculate the population
against an affordability problem but

in the cases where people
are still challenge and

assistance programs can help a lot of
treat them the way to clinical there

the would help address disease so
that that's the end of my

reason patients love to chat with me if
there are questions and thank you all for

dialing in and sticking with us as
well as the power went out here.

This is Tom I have I go I'm going
to go through and try to everybody.

That may or may not work.

If people have questions
in the you doing system

seems not to be working you can put
questions in through the chat system

as well that should be off to the right
hand side of your window there but

I think I think we have people
on mute it is as best we can so

if anyone has any questions now's the time
feel free to just go ahead and speak up.

Through chat or
just directly Hi Dr Theodore all this is

pulling see a moblie can
you hear me if I can right

I have a question regarding inclining
clock rate structure and what you may have

seen in some of your research or whether
you have seen this in your research.

Anecdotally we did an analysis here in
Detroit a brief analysis regarding.

Basic water volume and looking at 3rd
since the strike that would have been

within you know the federal
poverty level that line and

what we found is that many of
the customers had much higher usage and

basic volume and thus inclining
block rate structure potentially.

Of them as are related to affordability

Have you seen any data
like that elsewhere.

The short answer is yes and I think there
might be a couple of things going on here

let me let me ask you a quick follow up
though before I before talk more was that

that high use in the in the lower income
areas that was that high peaking cost or

was that winter time call you know so it
seemed to be I believe it may have been.

More they say meaning that probably
properties that have leased

you know Detroit is different than a lot
of state even that we have a large number

of single family residence structures and
at this point I think about half

of that structure
population is renters and.

Keeping all of that in mind we believe
that there are plumbing issues that

are precipitating the high volume so
we launched as part of our

program that is funded through the Great
Lakes Water Authority the formation of our

lives water for
the rec program we did toilet and

now have all the data from that but
we did the certain customers have

significantly reduced deal even
though that in the right program.

We're able to there's a $1000.00 or the
payment as business as part of that and

a lot of those customers still go down but
I was just curious to see if that data

correlate it potentially elsewhere
sometimes with the lower income customers.

Yes How you this sure answer is yes
it does and so it is you're well

aware Detroit is weird in a lot of ways
when it comes to the water system and

this is just one of the ways in which
Detroit's a little bit of an outlier

Yes Normally when you see the high
volume use is related to peak and

what you just described is is not it's
not unique to Detroit but it Detroit

maybe you have more and this is more of
an intense problem where where you are and

that is yes correct that the you
know a lot of cases Ironically

the low income households may
have higher basic water use

not because their water hogs but
because you know leaks or hide in there or

fixtures old appliances maybe still
got 5 gallon flush toilets yet

they don't you know they don't
have high efficiency fixtures.

And so yeah I mean to your approach
that that sounds like that

the geology taking is the is the one that
I think we see in a lot of cases a lot

of play communities around the country
are trying to do fixture and

appliance retrofits to try to help the low
income households become more efficient.

And I think that that's the approach
as I'm sure you know it's challenging

right and it's and
it's in some guy I know one case where

the utility couldn't even give away the
fixtures and appliances because there was

such distrust between their customers and
the syllabi organization.

They're saying what you want to come into
my home you want to replace my fixtures

in with out that trust it's tough so

yeah I want to be I want to use your
question give me the opportunity to make

an important point here which is when
we see that the relationship between

affordability incline block
rates that is that is true but

it is it has a true correlation but that's
an average that that line represents

an average across thousands of utilities
across the country and individually

solidities may have characteristics like
you just described in Detroit that and

that means that well maybe this
this is an approach that doesn't

really help us the way we'd like it to
because of something unique about the way

our customers our customer blah
base looks Thank you great point.

If anybody else has any questions please
feel free to chime right in through your

phone or microphone or through the chat

OK Well it looks like I think that is
going to cover it for today thank you

all for joining us taking time of your day
thanks to the Michigan municipal week for

partnering with us to close up and
a special thank you to Professor Theodore

for his engagement with local
government officials in general and for

a very informative presentation today
we have recorded this presentation and

we'll have it available soon if you would
like to get a copy please feel free to

e-mail us it's close up that Umesh edu or

you can call 734-647-4091.

Including any any follow a question that
you may have to this would be happy to

pass along again thank you all very much
and we hope to cross paths again by.