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.

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.