By Bart Kreps & Joe Crea
Utilities across the country are faced with a myriad of challenges to manage and overcome on a regular basis: rehabilitation and replacement of water utility infrastructure, sanitary and combined sewer overflows, water resource planning, and nutrient removal are just a few of the items that dominate the top spots on our capital to-do lists.
As we wrestle to fund our growing capital needs, we are also pressed to control overall costs and keep customer rates low, which has become increasingly more difficult in the face of declining per capita water sales. The inevitable result is a looming water infrastructure emergency assets at or near the end of their useful lives, under-funded asset management programs, and an oblivious public that takes safe, reliable drinking water for granted.
It is the responsibility of water professionals to educate elected officials, customers and other stakeholders on the critical nature of the water industry in providing for public health, economic development and environmental stewardship. Hopefully, there will come a time in the near future when the rising costs of providing these exceptional benefits to our communities will be an accepted and appreciated investment. However, even if general acceptance of the value of the water industry correlates with greater acceptance of higher customer costs, there will still be a portion of most utilities customers that cannot afford their water and sewer bills. In fact, this is true today for most utilities. This column will discuss various customer assistance programs (CAPs) including key areas for consideration associated with program design that can be explored by utility managers to help mitigate the impact on customers struggling to afford the cost of water utility services.
The affordability of customer bills is a common consideration in a rate analysis. While there are various methods used to determine what is affordable for customers, and utility and stakeholder perspectives may differ on the subject, in our experience, as a general rule, one of the most commonly cited reference is guidance provided by the Environmental Protection Agency (EPA) in its 1997 publication, “Combined Sewer Overflows” Guidance for Financial Capability Assessment and Schedule Development.
It is the responsibility of water professionals to educate elected officials, customers and other stakeholders on the critical nature of the water industry in providing for public health, economic development and environmental stewardship.
Despite an approach that has been criticized by many organizations, including the National Association of Clean Water Agencies (NACWA), the United States Conference of Mayors (USCM), the American Water Works Association (AWWA), and the Water Environment Federation (WEF), the EPA standard of the residential share of costs relative to the community’s median household income (MHI) continues to be a widely used measure of customer affordability. According to the EPA guidance, annual customer costs in excess of 2.0 percent (4.0 percent for combined water and sewer) of MHI, typically represents a high burden.
Addressing affordability concerns with a CAP requires examination of several key areas, including:
1. Structure and scope Determining the depth and breadth of the CAP and the specifics of the program structure.
2. Level of support and program cost Identifying a targeted level of assistance for qualifying customers with estimated program costs.
3. Funding source Identifying program funding source(s).
4. Administration Defining a structure for program administration and assessing the ease of implementation.
5. EligibilityDeveloping customer eligibility criteria and qualification requirements.
6. Legal requirements Assessing compliance with all relevant local and state legal statutes.
Structure and Scope
There are a number of approaches that can be used when evaluating a CAP structure and scope. The primary determinant will be the type of assistance to be provided. A utility can provide direct bill assistance through discounts, payment plans or bill forgiveness. They could also address assistance with rate structure mechanisms, such as lifeline rates or discounted rate classes. Since most utilities charge customers, at least to some extent, based on the quantity of water consumed, another approach is in promoting water efficiency through education and outreach, leak detection/repair, or plumbing improvements (low-flow shower heads, etc.).
Level of Support and Program Costs
Another important issue is the level of support eligible program participants should receive. This is an important consideration because each dollar of support, or subsidization, is a dollar of lost revenue that must be made up through other sources. While on the surface it might seem CAPs are expensive, based on our experience, and as a point of reference, the cost of affordability programs typically range between 1 to 5 percent of total utility revenue. CAP participation rates can be limited due to social constraints, administrative requirements, and large populations of renters that are not direct customers of the utility system. Regardless, it is critical for any utility considering a CAP to develop some evaluation of the potential cost of a program based on program structure, anticipated enrollment, and utilization of the assistance.
Funding Source
Determining the most appropriate funding source for a CAP is critical. Although CAPs can be funded from a variety of sources funding will ultimately depend on the utility’s local circumstances and legal constraints. For example, many utilities are prohibited from providing service at discounted rates by state law or rate covenants for long-term debt. When funding constraints are not an issue, direct funding from the utility enterprise fund provides stable and consistent support and often associated with affordability programs embedded within the rate structure. General fund monies or sources outside of the enterprise fund can also be used and may serve as an acceptable alternative if there are legal concerns with ratepayer subsidization.
Administration
A CAP can be administered internally, externally by an outside program administrator, or a combination of both. An internally administered program can be costly for a utility since it requires more of the utility’s resources, both human and fixed capital. Outside program administration is certainly more cost effective, but the utility may not control or influence who receives assistance and how much assistance they receive. Outside programs frequently “piggyback” on an existing program to provide participant identification and eligibility determination.
Eligibility
Determining the eligibility criteria for qualifying customers is another important consideration. Eligibility criteria may include factors such as personal identification, residency, income level, household size, property ownership, type of account, etc. Many CAPs that utilize a “piggy-back” structure will adopt the affordability criteria of the partner organization. However, additional criteria beyond those of the partner agency may be considered.
Legal Requirements
As mentioned earlier, determining if your utility has the legal authority to provide certain customer assistance is paramount and depends largely on state and local legislative requirements. If a utility is unable to provide direct assistance to its customers, it may be able to develop a relationship with a local organization (the United Way, Red Cross, etc.) and provide referrals to them. It can also explore establishing a bill round-up program, or other voluntary customer assistance programs to provide funding.
For many utilities, implementing a water and wastewater CAP for economically-disadvantaged customers will complement the utility’s overall service. A well-structured CAP can provide meaningful help to customers needing assistance and play a central role in facilitating continued access to water service, regardless of personal economic circumstances.
Bart Kreps has been with Raftelis Financial Consultants since 2002 and specializes in financial planning, rate and capital financing studies. He has an MBA from the University of Tennessee in finance and environmental management and is a registered municipal advisor.
Joe Crea has worked with Raftelis since 2007 and specializes in financial planning and affordability analyses. He is a graduate of Clemson University and is a registered municipal advisor.
