Elasticity of the price of water

In the early 2000s, there was a study in a Ukrainian city that considered the predictable water demand as part of a master plan for renovating and upgrading the existing water and wastewater systems. To date, this study is the one that best illustrates, in my mind, the considerable elasticity of the price of water.

In this city, there were two different kinds of water consumers:

1. mostly individual homes, some with yards, where the water consumed was measured by a meter, and where consumption was around 150 liters/capita/day (lcd)
2. mostly apartments in condominium buildings, where the water was charged on a per-person basis, and where consumption was around 250 lcd (there was a meter at the foot of the building)

It stands to reason that a house with a yard would require more water (per capita) than an apartment, and in fact this is verified elsewhere. However, the study observed that apartment dwellers were consuming significantly more that house dwellers, despite being mostly poorer.

The city undertook to install individual meters in the apartment complexes, so that each family would be billed according to its actual consumption, rather than a flat per-person fee. The anticipated behavioral evolution was almost immediate. Without delay, the consumption of apartment dwellers dipped to about 150 lcd. Leaks were fixed, faucets turned off, showers shortened, etc... and nobody was worse off.

In fact, everyone was better off, because the reduced future (expected) water demand led to planning for smaller, and cheaper infrastructure.

Detroit, the mystery thickens

This July 13th article provides further information regarding the ongoing crisis affecting the Detroit Water and Sewerage Department (DWSD). Interestingly, the numbers provided do not quite make sense with respect to  those in recent (June 22nd) articles discussed here. 

Specifically, delinquent accounts dropped from 150,000 to 90,000, total outstanding debt from US$118M to US$90M. These numbers are extremely impressive, given that only 21 days have passed. 

The most recent article gives information on the efficiency of the DWSD's investigations of water theft (not the same as delinquent accounts). Specifically, we can see that DWSD employees can investigate about 60 suspected accounts per day. Unless there is another team inside DWSD dedicated to resolving delinquent accounts, or the DWSD is using automated or analytical methods, it is hard to imagine how 60,000 accounts could have been dealt with in 21 days, at a rate of 2857 accounts per day. This would seem worth mentioning or explaining in the article.

My point here is not so much to criticize, without full information, the DWSD or the reporting. Rather, it is to point out some inconsistencies in the reporting of this human and financial crisis. These inconsistencies have real consequences, and they detract from:

• the optimal flow of information needed to keep stakeholders abreast of each other, and 
• the necessary and healthy debate needed to resolve this ongoing crisis

Access to accurate and timely information about the technical and financial status of a public utility is paramount to ensure that it is adequately run and regulated. Transparency is crucial to building and maintaining trust between those who run the water and sanitation utilities, those who consume their products, those who protest their alleged anti-social or anti-environmental policies, those who regulate their activities, those who write the laws that define their operational framework, etc... And that trust is the basis for crisis resolution.

Unfortunately, transparency has not historically been a strong suit for water and sanitation utilities, and this can partly explain the suspicions that surround the business (whether the utility is public or private). I will discuss this further in another post, and in particular how the utility must organize itself to be capable of sharing information with stakeholders.

Detroit

If the numbers provided in recent articles (here & here) are to be believed, the Detroit Water & Sewerage Department (DWSD) is in dire financial straits. 

This is completely understandable as the population of the city has been dropping, leaving ever fewer people to pay the fixed depreciation and increasing maintenance costs of past capital investments. Over-sized infrastructure is a major drain on any utility, and it is one of the most legitimate reasons to aggressively price water services in order to encourage conservation.

Another major issue appears to be delinquent accounts (150,806 out of 323,900 - 48,4%), with an average debt of roughly US$780, for a total of US$118M. Shockingly, this represents only a fraction of the total US$5 billion in debt that the utility has accrued. 

The average monthly water bill is US$75, which means that the utility is grossing US$24.3M per month, US$11.3M of which is going straight into accounts receivables. With the US$13M left over, DWSD has to pay salaries, other operational costs, etc. not to mention the US$5 billion (!) in debt. Looked at it another way, the debt represents 32 years' worth of collected sales.

This calls into question activists' accusations that DWSD is undertaking this campaign to ready itself for privatization. It is hard to imagine a private utility that would take a second look at the DWSD without significant public assistance in cleaning up the debt situation - even with 100% collection rate. Given Detroit's otherwise disastrous debt situation, this is very unlikely.

Whether the disconnection strategy will yield results remains to be seen. While the utility is right to seek redress from bad payers, outright disconnection effectively reduces the customer base, without providing a solution to sponge up the accounts receivables mess. Disconnecting customers is also costly, to wit:

3000 disconnections per week are 600 disconnections per day, 5 days a week. Depending on the efficiency of technicians, the opposition of residents, the distance between disconnections, etc., we can conservatively assume that this will require 75 technicians (1 disconnection per hour per technician, 8 hr/d). Assuming that a technician's yearly salary is about US$35,000, the monthly cost of the disconnection program is at least US$218K, or about 2% of uncollected monthly sales, not including management costs, gas, depreciation of vehicles, etc...

In other words, this disconnection operations makes sense only if it results in at least a 2% monthly improvement in collected sales. If customers are not paying their bills for lack of money, this seems like an unattainably ambitious goal. If they are failing to pay for lack of discipline or any other non-financial reason, this program might just work.

Innovation in a conservative industry

Water and sanitation is the ultimate conservative industry. In the Western world, where 24/7/365 water is taken for granted, the human, financial, and political consequences of failure are dire.

Utilities, both public and private, understandably spend significant time planning for service breakdowns and make repairs as fast as possible. In fact, it is with a sense of rightful pride that technicians regale with tales of burst pipes fixed in the dead of night under whipping rain and howling winds.

Sadly, the overwhelming importance and focus on sustained services negatively impacts the speed an scope of innovation. The "if it ain't broke, don't fix it" principle, as one might call it, radically discourages innovation, and nowhere is it more prevalent than in the water and sanitation industry. Interestingly, other industries with equally high safety requirements (airplanes come to mind) still manage to innovate over time. To be fair, there have been innovations in the watsan sector, particularly for water and wastewater treatment, but industry-transforming innovation, such as is currently underway at SAUR with the advent of the CPOs, has been rare and limited.

A few causes can be identified, not all of which apply in every case, of course :

• systems that work - the advent of widespread (in rich countries) home-based water and sanitation services is one of the truly great achievements of the last 100 years
• an emphasis on investment over operations - it is much more satisfying to build new (and safely well-tested) infrastructure than to look for ways to optimize operations.
• a fractured market, with few industry leaders with the wherewithal to embark on transformative innovation - most single-city utilities have trouble benchmarking their performance with others, in part because local conditions are so important.
• a few very large players with a history of self-satisfaction and complacency - funding agencies, private firms, consultants, etc. (disclaimer : I worked in this world for several years and participated in the enforcement of the status quo)
• extremely profitable markets - in some countries, water utilities have historically enjoyed very comfortable monopolistic financial positions, reducing the incentive to innovate to reduce costs and protect margins.
• extremely unprofitable markets - in other countries, water utilities barely survive financially and have neither the human nor financial resources to innovate.
• strict regulatory environment and/or labor laws that discourage risk-taking and restrict labor engagement in tranformative change
• political pressure - avoid technical failure at all costs and preserve social peace with labor unions
• long operations contracts - while contract durations are getting shorter, contracts with >5 year duration that do not explicitly require innovative solutions effectively stifle it.
• limited public sector desire for innovation - civil servants who either award private contracts and/or regulate public utilities seldom require technological or organizational breakthroughs from service providers (contractors, consultants, utilities, etc...) with the notable exception of treatment facilities
• self-selection of people who favor safety over risk : because of the conservative nature of the industry, the people drawn to water/sanitation are not typically the free-thinkers and innovators drawn to other, historically more dynamic, industries.

To further that last point, it is worth noting that some of the most innovative solutions currently 'shaking up' the industry come from people who are not watsan engineers, but rather data scientists, software engineer, etc.

The status quo is being challenged, and rightly so, by the advent of Big Data and the Internet of Things, and by new entrants in the various markets. Whether the current players (equipment providers, operators, consultants, finance players, etc.) are best suited to rise to the challenge remains to be seen, even though some are clearly trying to.

The determining factors will be whether (a) their diagnosis of the changing landscape around them is accurate, and (b) they can share this diagnosis and rally their staff behind a common, desirable target that 'makes sense' from the human and technical points of view.

Managing change and the Internet of Water Networks

Appearances can be deceiving. Drinking water is an industrial product, and networks comprising plants, pipes, valves, meters, sensors, etc... are very much machines. That said, delivering water service is first and foremost a people kind of job. The operation of machines is still, to a large extent, the work of humans who make decisions based on their often extensive knowledge of specific, local conditions, and often with limited access to information. 

It is my experience that, around the world, water/wastewater operators care deeply about their work, and develop intimate relationships with the networks or plants in their care. They are proud, highly specialized, and locally focused professionals who know a great deal about the specific infrastructure that they manage. This knowledge is often informal, rooted in experience rather than science or design, and leads to decision-making based on 'what works' rather than 'what the book/engineer says to do'.

The advent of the Internet of Water Networks, which I mentioned previously, will dramatically change the nature of the relationships that operators have developed with their networks. Indeed, the influx of operational data will threaten the status of the senior operator as the 'wise guru' who has traditionally passed on his knowledge to younger apprentices (an anecdote tells that, in Naples, technicians handed their sons their notebooks as a way of guaranteeing employment by the water utility).

With accurate, real-time monitoring and Big Data backed decision-making algorithms entering the field, local operators, particularly the more senior ones, will see their stock decrease. If a computer can accurately predict which electrical switch is likely to fail next, then the operator's intricate, unwritten knowledge looses value and he looses status within the organisation.

The repercussions of this loss of status can be catastrophic to the individual, but also to the utility. Both have an incentive to ensure that the coming revolution will be a win-win transformation, where the individual can continue to be dignified through his work, and the utility retains the specific, local knowledge that is only learned in the field. 

The solution, it seems, it to introduce the coming Internet of Water Networks as a desirable target for the utility, and therefore for its constituent individuals. Only when there is a shared desire for change can the challenge posed by this sea change in operational practices be successful. Not all individuals will buy into this proposition, but at least they'll have a choice.

To achieve this shared vision of a mutually beneficial future, the utility's management must explain why outside pressures are forcing a change, and propose an appealing target for this change. It must also be willing to increase the scope of the target to address the reservations and desires of the staff. Once everyone agrees on an ambitious objective, it is much easier for all to conclude that the Internet of Water Networks is necessary to achieve this objective.

No rugby player runs faster just because he's got new shoes; he uses the new shoes to run faster only if he wants to score more tries, if he wants to win. The assumption that operators will gladly adopt new technology "because it's cool" has proven wrong in the past. In addition, no competent person likes being told that the way they've been doing things is outdated, or wrong - especially if the management is not often seen in the trenches. 

The Internet of Water Networks is coming, and it will change what operators do, and the way they do it, but more importantly, it will threaten the status of the skilled and knowledgeable technician who has been a pillar of the utility for decades. Perhaps even more so than a technical challenge, the deployment of connected objects along water networks is a personnel challenge. 

Fixing leaks and the Internet of Things

In a previous post, I wrote about when it makes sense the fix leaks (or not) depending on local conditions. Unstated but looming large in that post are some important questions (non-exhaustive list) : 

• where are the leaks?
• how big is each leak?
• what is each leaks' financial cost?
• what is each leak's environmental cost?

I'll now discuss briefly the issue of finding leaks. Traditionally, we have looked for leaks using a combination of sound, gas, and modeling methods. Today, connected objects offer new opportunities.

Sound and gas methods basically involve surveying the water network to listen for leaks or detect leaking tracer gas. Fixed or mobile listening devices can help triangulate a leaks' location, and tracer gas will leak (or not) downstream of where it has been injected - so the search can be optimized. These methods either reveal little information about the size of the leak, or are limited in physical reach. 

Hydraulic modeling makes it possible to focus the search for leaks. However, hydraulic models need field data to be reliable. Unfortunately, it is very difficult to take an instantaneous picture of a water network unless one has a significant number of sensors that are well-calibrated, functioning, and transmitting all at once. As a result, hydraulic models, while sometimes very precise, do not provide instantaneous information about the location and volume of leaks.

Enter a number of companies (i.e.: Visenti) that have combined the power of connected sensors with Big Data to monitor water networks in real-time to identify leaks and bursts as they happen. Connected water networks can update centralized control centers like SAUR's CPO to make it possible to prioritize leaks and react accordingly. We will shortly see the proliferation of connected objects along water networks, from sensors to meters to valves, in step with the capital campaigns of water utilities. 

Water network sensors must be placed at critical points in physically extensive systems (100s to 1000s of km), often in wet, buried, or even corrosive environments. Changing batteries is expensive, and power is not always available. Sensors therefore must be highly energy efficient and resilient, and their communication protocols must be able to overcome specific challenges. Because utilities are often strapped for cash, a major challenge is establishing an appropriate price point and clearly spelling out the ROI of these investments.   

That said, the Internet of Things, and in particular the Internet of Water Networks, is clearly the way of the future for leakage management - and other aspects of water management too. It will provide that elusive instantaneous picture of what is happening on the network, and allow engineers and technicians to increase their efficiency in reducing leakage rates. 

In a future post, I'll discuss why it's not enough to deploy sensors: utilities have to learn how to use them and transform themselves correspondingly. 

Should you reduce that leakage rate?

Recent articles in the French press have reported that 20% of all drinking water is lost to leakage in France. Although it hides significant local variability, this large a number warrants attention, in particular as France misguidedly set a 15% national target in  2010 (as part of Grenelle II). 

Water is the only industrial product intended for human consumption that is delivered 24/7/365 to all homes in France (and in developing countries in general). Drinking water cannot be economically shipped over large distances, and so is most often consumed close to its production site. For a given city or area, the cost of producing and delivering water depends significantly on geography and topography, and on the quality of available water sources - it is very much a local variable.  

Drinking water production and consumption represents (on average) a small percentage of the total water consumed in any given area. Most water is used for industry (including energy) and agriculture. However, this average can be different in places where there is neither industry nor agriculture, and where drinking water outtakes represent a significant proportion of water extraction from the environment. 

Repairing leaks is a significant expense for many water utilities. Finding leaks can be tricky and repairing them typically involves digging out old pipes - and usually replacing them. Instead of applying a uniform target leakage rate, it makes sense to optimize decision-making to local conditions. We see from above that there are two main 'costs' to consider: 

• The financial cost of drinking water production and delivery is lower :  
• in a densely populated region 
• in a region with nearby, plentiful, and clean water supplies
• in a region with favorable topography (water flows downhill for free !) 
• The environmental cost of drinking water production and delivery is lower: 
• in a region where it represents a small percentage of the total water extracted from the environment. (waste water effluent doesn't count because leaked water is 'clean'.)
• in a region where it requires less treatment and/or pumping (environmental impact of shipping and using chemicals and energy).

To decide whether or not to pursue an aggressive leak reduction strategy, we can use a simple heuristic:

	Low financial cost	High financial cost
Low environmental cost	Fix only biggest leaks - tolerate relatively high leakage rate	Prioritize leaks according to financial costs
High environmental cost	Prioritize leaks according to environmental costs	Aim for low leakage rate - prioritize with financial & environmental costs

This heuristic is better than the traditional approach, which is to consider the diminishing marginal value of leak reduction (the more leaks you fix, the smaller the marginal value of each fix), because it considers the value of the environmental impact of water leak as well as their financial impacts. It is up to each regulatory body and utility to decide together on the applicable thresholds between 'low' and 'high' costs. Most importantly, it should be done at the most local level possible to ensure that specific conditions can be taken into consideration in setting the most appropriate target leakage rate.

A fair price for water - a radical proposal

The problem

Water utilities around the world are struggling to make ends meet, particularly in the developing world, and as a result have trouble providing basic services to ever growing populations.

The price of water is a highly political and emotional subject and some people will argue in the same breath for free or cheap water for all on the one hand, and for environmental conservation on the other.

I intend to show that this position is both illogical and irresponsible, and to propose a solution to make water affordable to all to ensure access and expensive to all to ensure conservation.

Before going any further, it is important to point out that one rarely pays for water itself, but rather for water service. The distinction is important: you pay for the convenience of having water come to your taps (hopefully 24/7/365), not for the resource itself, which is not for sale. In some cases, the government applies a water tax or levy that is meant to compensate the state/community for the uptake of raw water - this is a good idea that promotes conservation, but it is a tax, and not a fee levied by the service provider, be they public or private.

The reasons behind the problem

In a previous post, I discussed the technical elements of a water/wastewater system. In theory, the price of water/wastewater, as paid by consumers, should reflect the expense of constructing/replacing, maintaining, and operating a water/wastewater system on a per volume basis over the long term. This is to say that each consumer should pay according to the amount of water consumed, and to the amount of pollution produced. This has the following advantages:

• transparency: it is clear what the water tariff pays for
• water service pays for water service: there are no subsidies and water/wastewater service operator is encouraged to be efficient, both technically and financially.
• polluter-pays principle: applies to wastewater and states that each should pay according to the level of damage done to the environment (a brewery does not pollute like a house)

Unfortunately, in the real world, this is not what happens.Water service regulators put customers into categories (domestic, industrial, institutional, etc...) and apply different tariffs to different categories, sometimes using one to subsidize the other for political gain. Politicians also subsidize the construction of infrastructure, or even (gasp!) the operations of utility companies so that they can keep tariffs artificially low - again for short-term political gain and at the expense of long-term management best-practices. Sometimes, they'll even take what little cash has been collected by the utility to fund other projects (nobody's ever taken a publicity photo in front a buried pipe) - particularly if the utility operates as a city department rather than as a company (public or private).

It gets worse...

With artificially low prices, consumers are encouraged to over-consume, which in turns leads to the construction of needlessly large (and expensive) new infrastructure. Starved for revenue, the utility does not have the resources to maintain its growing infrastructure, which slowly falls apart. This negative cycle is completed when service quality is reduced, leading to the impossibility of raising tariffs to right the situation. This is something that I have observed first-hand in countless places around the world.

To break this cycle, we need a solution that will:

• guarantee that the utility company has the revenue necessary to meet its technical obligations and maintain high-quality service to all
• ensure that everyone can afford to meet their basic water and sanitation needs, including (and in particular) the poorest who tend to consume the least.
• encourages conservation by all members of society, including (and especially) the richest who tend to consume the most

The issue of affordability of water/wastewater services has been extensively researched by the likes of the World Bank. The consensus is that people (and the poorest in particular) can afford to pay up to 4-5% of their income for 24/7 water/wastewater service.

To ensure that the poorest meet their needs, a variety of tools have been imagined, the most common of which are block tariffs, whereby the price of a cubic meter (or gallon) of water increases as consumption increases. In this way, those who consume more water (typically the rich) subsidize those who consumer less (typically the poor).  This is a good-but-not-perfect system that does not guarantee that the very poor will be able to afford water/wastewater or will have an incentive to conserve water.

My proposal

I propose that the tariff each household is charged for water should be on a strict volumetric basis (per cubic meter or gallon) and proportional to this household's taxable income divided by household size. 

This is, I realize, a radical proposal that is sure to anger libertarians will not want a utility having access to their revenue information. However, it is the best way to ensure that each household pays a "fair" price for water/wastewater service, according to its ability to afford it. The volumetric price would be set so that each household would pay 4-5% of their income to meet their basic needs (roughly on the order of 100-150 liters per person and per day), no matter what their income level might be. Any surplus revenue to the water utility could be used to for water conservation or resource protection projects, or paid as tax to the government - other taxes can be lowered as appropriate.

Unlike for many other goods, nothing can substitute for water, and so there is no way for the poor to consumer 'cheaper' water without risking their health. At the same time, the ability of the rich to pay for and use water for non-basic needs is an issue that concerns everyone, not just  those 'wasting water'. We all have a stake in preserving common water resources and in setting prices sufficiently high so that all have an incentive to save water.

There is no inalienable right to consume large amounts of water just because one can afford it. At the same time, it is morally and politically necessary to ensure that even the poorest can consume the water they need.

Because all societies have income disparity, the only way to meet our two objectives (affordability by all and conservation by all) is to index the price of a unit of water on income. In Finland, the penalty for traffic violations is indexed on one's income, and that is where I got this idea.

Why we pay for water.

As an engineer primarily focused on the financial aspects of water service provision, I have developed some knowledge of what it takes - technically and financially - to bring water to your tap and to take sewerage back out again. This first post will address the technical aspects.

To put it briefly, the water part of the system is composed of the following:

• an intake, where raw water is taken from the environment : wells, river or lake intakes, rainwater harvest, etc...
• a water treatment plant, which is more or less sophisticated depending on the quality of the raw water
• a distribution system, which is more or less extensive depending on the size of the city and the density of the population (sometimes 1000s of km for a single city) and almost always includes reservoirs or water towers
• pumping stations, which keep the water pipes under pressure to ensure that pollutants cannot enter the system through leaks - better to waste some water than to allow MTBE (for example) to enter through a cracked pipe - and to move water uphill when needed.
• house or building connections, where meters measure the flow of water into households.

The wastewater part of the system is the mirror image of the water system:

• house connections through which sewerage will flow into the collection network
• a collection network, preferably not under pressure to prevent the occurrence of anaerobic conditions and leaks to the environment
• pumping stations to move waste uphill, when necessary
• a wastewater treatment plant to treat the sewerage - more or less sophisticated depending on the nature of the sewerage, the sensitivity of receiving waters, and the regulatory environment
• an outflow pipe, to discharge the treated wastewater into the environment.

An artists' view of the systems can be found below (credit: Moira Wu)

Obviously, building, maintaining, and operating these infrastructures is very expensive, and they must be operational 24/7. This is both a matter of convenience and public health. In addition, empty water pipes are subject to infiltration from ground pollutants (see above), and you should never drink tap water in a city where supply is not available on a 24/7 basis. Costs are directly linked to the quality of intake water, the required capacity of infrastructure, the required quality of drinking water (up to or beyond WHO guidelines), the terrain, and the required quality of treated effluent.

In principle, the burden for recovering the cost of investment, maintenance, and operations should be born by consumers, according to how much they consume and how much they pollute (industries pollute water more than toilets, usually). In practice, costs can greatly exceed the population's ability to pay and regulations around the world vary greatly so that this rule is not always applied.

Next post: how much you should pay for water.