By Ann Bui, Mike Orth & Bruce Allender
The U.S. water industry has worked hard in recent years to remind people that potable water is not free. Procuring, treating, and distributing water is costly, and utilities need to cover their costs to make sure customers have safe drinking water, delivered at adequate pressure for on-demand needs at affordable prices. But what is “affordable?” The COVID-19 pandemic has challenged what we all view as normal and taken water planning and standard practices to new levels.
For water utilities, financial impacts depend on customer demographics (split of residential and non-residential customers), poverty level (whether affordability is a large problem), and delinquency rates (tied to customer affordability). The impact due to no-shutoff moratoriums depends on these problems. For some utilities, the increase in residential consumption due to stay-at-home orders is enough to offset the loss from non-residential accounts. However, most large utilities are all digging into their reserves. For many, the pandemic has challenged reserves, how rates are structured and how customer services and operations are managed.
Time will bring the extent of COVID-19’s financial implications on the water industry into sharper focus. Meanwhile, Black & Veatch’s survey of nearly 300 water industry stakeholders for the company’s 2020 Strategic Directions: Water Report yielded insight about the elusive value of water, including how survey respondents address customer affordability.
Getting a Handle on Affordability
Figure 1
When asked what water affordability means to them, approximately two-thirds (67 percent) of the nearly 300 stakeholders surveyed by Black & Veatch chose “charging enough to serve customers and make improvements.” The majority recognize that rates must cover other expenses such as funding capital improvements, giving a nod to the industry’s vexing issue of aging infrastructure. Nearly one-quarter of respondents (24 percent) define affordability as “providing a basic level of water service at an affordable price to all customers.” A scant 4 percent identified affordability as keeping rates as low as possible or discounting the charge to fixed- or low-income customers (Figure 1).
The industry’s prevailing, expanded definition of affordability shows foresight, but it must be effectively explained to ratepayers. It’s essential to educate the public that there is more involved in setting rates than simply charging for water that flows through the tap and the infrastructure to manage used water. Another important education goal is associated with the needed funding for infrastructure upgrades — often influenced by city councils, boards, or other civic or regulatory overseers who approve rate increases through the prism of election cycles.
Figure 2
Despite industry education efforts, one-third of the survey respondents said their customers probably don’t understand what it takes to supply them with potable water or wastewater and stormwater services. And one in five respondents don’t think that their customers have the baseline knowledge about the service they receive (Figure 2).
Bridging that education divide helps utilities make a case for modest rate increases to underwrite long-overdue upgrades of increasingly strained infrastructure — or to save for when that infrastructure fails. In the fallout of the COVID-19 outbreak, many expect significant pressures to further defer rate increases until the economy recovers and millions of jobs are returned.
Helping Water Customers — and Providers
Because the online survey for this report was conducted during a three-week span ending on March 30, 2020 — during which the COVID-19 pandemic was still picking up speed — it’s difficult to discern how much of an impact that global outbreak had on the responses. Specifically, this survey didn’t encompass the extent to which utilities have since broadened their customer service when it comes to offering discounts to customers in need.
At the time of the survey, 40 percent respondents said they’re not compelled by regulators to offer rate-discount programs to seniors or others, so they don’t. A similar proportion of respondents (38 percent) reported that despite the absence of regulatory guidance, they have such programs. Just 11 percent of the survey participants responded that they are required to offer discounts or customer aid (Figure 3).
Figure 3
One reason why so many utilities that aren’t required to offer rate-discount programs choose not to do so is because of the administrative work associated with such programs. Defining who qualifies and then vetting eligible customers is burdensome. Many water utilities try to piggy-back on what electric/gas utilities have already done to minimize the effort. But the larger issue is determining who most needs discounts. Nor is it clear that adding this level of complexity makes sense. After all, water is already relatively cheap, and subsidizing one customer class means that someone else must pay more to make up the difference. Cross-subsidization is a tough discussion topic.
It’s unclear whether the COVID-19 pandemic will dramatically influence more water utilities to offer discounted services beyond pandemic drivers. Many water utilities — often at the behest of their states or municipalities — are giving customers financially strapped by outbreak-forced layoffs a break by maintaining service to those behind in payments. Some utilities are required to go a step further and return service where shutoffs have occurred. Unfortunately, shutoffs are one of the few enforcement tools utilities can use to collect on past-due accounts.
An assessment commissioned by the American Water Works Association and the Association of Metropolitan Water Agencies, released in April 2020, indicated an aggregate financial impact of COVID-19 on drinking water utilities of approximately $13.9 billion, representing an overall 16.9 percent financial toll. (Some have since reported greater losses.) Wastewater utilities were expected to lose an estimated $16.8 billion in lost revenues, along with the costs of maintaining sewer access. The National Association of Clean Water Agencies warned that without taxpayer help, the revenue loss from forgiving customer debts and providing services without payment during the pandemic ultimately would be passed on to water customers in subsequent years and lead to future rate increases.
In early August, a Circle of Blue investigation revealed that “more than 1.5 million households in 12 major U.S. cities with publicly operated water utilities owe $1.1 billion in past-due water bills.” On January 14, a SPUR (a nonprofit public policy organization in the San Francisco Bay Area) report described the need to mitigate the water-debt impact when the California governor’s COVID-19-related moratorium on water shutoffs for nonpayment expires and offers recommendations for water-customer assistance.
The recently released Fiscal Year 2021 Consolidated Appropriations bill includes a provision to create the first Low-Income Household Drinking Water and Wastewater Emergency Assistance Program with $638 million in appropriations. Although it’s the first appropriation of its kind for water assistance, the aid package provides only temporary relief as a stop-gap measure. The personal checks provided to some individuals could potentially free up household budgets to pay down any delinquent accounts. Money flowing to local governments also will provide some relief but likely only delay the need for revenue increases for another year. It is not enough money to get mid-size utilities to move ahead with infrastructure projects and other necessary improvements. Many of the larger utilities have curbed CIP spending — bidding designs that are underway or already completed but delaying or suspending new construction.
Figure 4
Often saddled with the costly need to upgrade their chronically aging infrastructure but constrained in doing so by the rates they can charge, utilities generally aren’t considered to be flush with cash. But slightly more than half of the survey respondents suggested they had enough on hand to weather a setback: 51 percent reported substantial cash reserves to withstand an adverse, isolated event. Less than one third (30 percent) said that a major event would be detrimental to their cash reserves (Figure 4). Left in question is how they define “substantial” and whether somewhat optimistic expectations still hold in a pandemic that has lasted longer than most people ever imagined.
COVID-19 and its financial fallout have yet to be fully accounted for. Like flooding and droughts, pandemics have become another vulnerability to consider and risk to plan for in building financial and other resilience. Optimizing asset management can provide better insight into where to spend precious investment dollars, in good times and bad, to ensure that limited funds are invested to yield the highest returns.
Many utility leaders will use this pandemic as a learning opportunity by strengthening cash reserves — at least enough to cover four to six months of costs, with perhaps a line of credit on standby. The need for innovative approaches to address affordability and develop strategies and programs to assist those in need will continue to be an ongoing concern.
This piece was developed from information included in Black & Veatch’s 2020 Strategic Directions: Water Report section on water affordability.
Ann Bui is a managing director who leads Black & Veatch Management Consulting Group’s water market business. She provides clients with strategic financial management strategies and drives growth and innovation to water utilities.
Mike Orth is executive vice president and executive managing director of Black & Veatch’s water business in the Americas. He guides the company in the delivery of water projects to meet clients’ needs.
Bruce Allender is chief operating officer of infraManagement Group, a wholly-owned subsidiary of Black & Veatch. His individual and teamwork experience in water and wastewater include design-build and P3s in North America, Australia and Asia Pacific.
