Customer Assistance Programs Integrated Into Business Processes Can Help Struggling Ratepayers Stay Afloat
By Neil Grigg
Rate increases by water utilities are needed to sustain high quality services, but their impacts on low-income customers are a major cause of concern.
In some communities, these concerns can fly under the radar, but in others they can spark social unrest. While the general issue is not new, concerns about the impacts of rising costs on affordability of water service are becoming more intense. Within the water community, there is consensus that utilities should operate as businesses, but they will also be confronted by affordability issues for low-income customers.
Here, we’ll focus on affordability issues of water supply services, but wastewater and stormwater utilities face similar issues. The discussion clarifies the difference between the community criteria published by U.S. EPA and individual affordability issues of low-income customers who are often trapped in poverty and subjected to hardship. We’ll review the information published during the last two decades about customer assistance programs in utilities and, drawing from this, examine suggestions to address the dual concerns of system needs and affordability for low-income residents.
Given the legacy water infrastructure in many communities, cost pressures seem likely to continue and rates seem certain to rise. The most recent Black & Veatch Management Consulting survey showed that water rate increases outpaced the consumer price index for urban consumers by 5.9 percent to 2.1 percent from 2001-2015. In addition to infrastructure, operational costs, regulatory requirements and resilience, the report cites scarce capital funding for water projects due to tightening financing requirements for long-term debt that require utilities to finance projects through cash reserves and rate increases.
At the same time that costs are increasing, people are struggling to make ends meet and are deeply concerned about how government is responding to their needs for more security and opportunities. These concerns were evident in the run up to the 2016 presidential election, especially in the widespread support shown to the candidacy of Sen. Bernie Sanders. Further evidence of the concerns is in social protest movements that have been sparked by high rates, water shutoffs and water quality problems such as those experienced in Flint, Mich. Another signal about public opinion came back in 2014 when the U.S. Conference of Mayors called EPA water affordability criteria evidence of “class-based environmental injustice.”
Concerns about water rates are an international phenomenon. Protests about U.S. water services and rates led to an investigative visit in 2011 by the United Nations Special Rapporteur for Water and Sanitation, Catarina de Albuquerque. Her report outlined a list of water management and financial reforms that she advocated for the United States. Organization of a national campaign for affordable water in 2014 followed social protests about water shutoffs in Detroit and a hearing about U.S. water services was scheduled in 2015 by the Inter-American Commission on Human Rights. These actions may seem minor compared to the disruption that can happen in other countries, such as when protests over water rates and privatization in Bolivia overturned the government during the Cochabamba Water War in 2000.
The EPA has published criteria for affordability of water supply services, but it addresses community affordability. The situation for individual customers is different. EPA’s criteria are about average conditions in a community and are based on a comparison of average annual cost of household water services to the median household income. This definition evolved from concerns about bond indebtedness and impacts on communities of meeting water quality standards.
The Congressional Budget Office (CBO) has noted that EPA has not adopted a measure of how much a household can pay for water services before they are unaffordable. EPA’s criteria were extended to drinking water by the 1996 Amendments to the Safe Drinking Water Act, which allowed small water systems to use less effective technologies when designated technologies to achieve compliance were not affordable. The CBO labeled the criteria as subjective, as EPA initially set a 2 percent of median household income affordability level for water supply by comparing its cost to expenditures such as alcohol, tobacco and energy. Two percent was also close to the cost of household water treatment devices or bottled water and EPA’s subsequent increase to 2.5 percent allowed it to designate point-of-use treatment as in compliance.
The EPA has published criteria for affordability of water supply services, but it addresses community affordability. The situation for individual customers is different. EPA’s criteria are about average conditions in a community and are based on a comparison of average annual cost of household water services to the median household income.
Although affordability definitions did not originally address individual low-income customers, utilities took it on themselves to address them with customer assistance programs (CAPs) and, as a result of several research projects, a great deal of information has been published about them. Currently, a Water Research Foundation (WRF) project is studying how utilities can finance CAPs from current revenues. The researchers explained how income distribution can vary widely across different districts and hardship can be concentrated in a few neighborhoods. Addressing social issues of this kind is important to create healthy communities, but assistance programs for water bills can be a challenge because some 40 percent of customers live in single or multi-family rental buildings or public housing and pay for water through rent or a home maintenance fee. Four-fifths of these customers live in multi-family buildings and many are out-of-reach for conventional utility assistance programs. They are likely to be in poverty, have a disability, speak English as a second language and have lower-than-average education levels. Even if they pay less than others for water services, their costs are high as a percentage of income.
A good starting point for utilities to find information to help shape their CAPs is the Water Research Foundation’s 1998 report on water affordability programs with descriptions of alternative methods of rate design, billing and collection. The goals in this report were to help utilities enhance revenue and reduce political fallout from service terminations while meeting legal requirements that prohibit unreasonable discrimination in rates.
This information was expanded in a 2010 WRF report that reviewed best practices to assist payment-troubled customers and offered a reference guide for utility management. In 2016, EPA’s Water Infrastructure and Resiliency Finance Center posted a compendium of examples of water and wastewater customer assistance programs. It classifies the programs into five categories (as shown in Figure 1 below) with the descriptions quoted from the report.
The American Water Works Association’s (AWWA) enduring manual of practice on water rates is being revised for 2017 and will include an update on low-income affordability programs. The revision will advise that defining affordability must be done locally and that partnerships and identification of potential funding sources can help with outreach and success of affordability programs.
The convergence of increasing funding requirements and the rising needs of low-income customers indicates that utilities should be proactive in addressing nonpayment problems and customer assistance programs. This does not mean that utilities should become social services agencies; it means that customer assistance should be integrated into business processes. Evidence is that while most utilities report that they will help customers in need, the programs are not always integrated with utility management practices.
Utilities can take advantage of information about customer assistance programs that has been published by the Water Research Foundation and the EPA to develop definite strategies that are integrated with their business processes and lead to revenue enhancement and good business outcomes. How these are developed will depend on the local context and address the needs of groups of customers with recurring payment issues.
While there is a range of methods to address needs of low-income customers, the basic choices are finance by the rate structure, government transfers or public assistance funds. Building the programs into rate structures seems like a good plan if it can be justified without excessive cross-subsidies. Government transfers, whether at the federal, state or local level, are appropriate, especially when they bolster revenues of utilities seeking to meet their increased funding needs. Public assistance funds are also a good strategy, with emphasis on partnerships to address multiple needs of low-income residents, including those not billed directly by utilities.
The legal aspects of customer assistance programs in different states have not been studied extensively, and state statutes range from prohibiting assistance from rates to mandating assistance programs. Also, public- and investor-owned utilities may be treated differently.
Drinking water utilities have recognized the need for assistance for a long time, and AWWA’s policy statements include suggestions for basic approaches. The policy statement on “Discontinuance of Water Service for Nonpayment” asserts the need that “…each customer pays for the services rendered by the utility…” because “…failure on the part of the customer to pay a water bill necessitates that other customers bear the burden of paying for the service.” This is in effect a statement opposing the concept of cross-subsidy. However, AWWA “…recognizes that certain circumstances may require some flexibility because water service is a necessity…” and “…discontinuance of water service for nonpayment is considered a final phase of a collection procedure and should be instituted with sufficient notification when all other reasonable alternatives have been exhausted.” This policy was developed in 1978 and was most recently reaffirmed by the AWWA Board in 2013. AWWA’s Financing, Accounting and Rates Policy Statement says: “Non-cost of service rate-setting practices that achieve public policy goals and utility objectives may be appropriate in some situations.” This opens the door to introduce a range of approaches to respond to needs in particular communities.
Finally, AWWA’s Policy on Public Involvement and Customer Communication notes that “Water providers have a key role in support of the public and the communities they serve. They manage a crucial natural resource that is essential to people’s health, community economies and the fabric of social stability. Water quality and reliability are not solely technical — they are also critical health, lifestyle, economic, social and political issues.”
Ultimately, the need for fair treatment of low-income people and community improvement are global issues, and the water sector can contribute. By implementing definite strategies within their business processes, utilities can provide leadership in addressing important and shared issues in their communities.
Neil Grigg is a professor of civil and environmental engineering at Colorado State University, where he focuses on water infrastructure and management. He is a graduate of the U.S. Military Academy, Auburn University and Colorado State University. He has also been head of the department and director of the Colorado Water Institute. Prior to joining Colorado State, he was assistant secretary for natural resources and director of the Division of Environmental Management for North Carolina, as well as director of the state water institute. His recent books include “Integrated Water Resources Management” (Macmillan, October 2016 release) and “Water and Wastewater Workforce Planning, Design and Action for Organizational Excellence” (AWWA).