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Why Affordability is the New Challenge for Water and Sewer Utility Owners

July 20, 2010

It’s not that affordability hasn’t always been a concern, but a recent look at some important data now suggests that affordability has become a major concern for providers of water and sewer utility services in the US.  For the first time since the 1950′s, personal income in the United States has experienced negative annual growth – meaning personal income has actually fallen in real terms for the first time in almost 60 years.  That may come as no surprise to those who read the daily news and understand the recession’s deepening hold on the US economy, but utility providers may want to pay special attention because while water and sewer rate increases were never popular, they are even less so when family income is declining instead of increasing.

This decrease in personal income comes at a time when the water and sewer industries are also in great need for capital investment.  Aging infrastructure for water and sewer systems cause major service disruptions and damage to local residences, businesses, and even damage to local waterways.  The US Conference of Mayors recently released a report showing that capital spending on water and sewer infrastructure could quadruple  from current levels.

Of course, affordability means different things to different people.  The EPA version of affordability is that a utility bill is unaffordable if it exceeds 2.5% of the median household income.  Income is unevenly distributed in the economy though and one thing that often goes overlooked in rate setting is the difference in water usage between newer, presumably more affluent homes, and older neighborhoods with presumably lower incomes.  The argument is often made that affluence equates to higher water usage, and this has been one  rationale used to argue for increasing unit prices for increased usage levels (i.e. inclining block rates).  However, that argument is many times based on a false premise.  In Milwaukee, for example, research found that water usage was highest in older neighborhoods and found an inverse correlation between household income and water usage, the lowest incomes had the highest usage (Mikwaukee Wisconsin Journal Sentinel, July 17, 2010).   High usage in older neighborhoods is very much a possibility in every community due to newer homes being constructed under newer building codes with more stringent plumbing requirements that tend to conserve water; older homes were not subject to those codes and have older plumbing fixtures that tend to use more water (including more sewage thanks to older toilets and sinks).

So, while there is increasing pressure to increase water and sewer rates to pay for very expensive infrastructure replacements, the burden on customers is also becoming more severe in relative terms as their own personal incomes decline.  Older neighborhoods with lower household incomes could actually be using more water than originally thought, and therefore the impact on those customers’ bills is even more pronounced.  It is very possible that affordability in  your community may be a more difficult thing to measure than just comparing the average utility bill to the median household income (the method the EPA uses).  A more detailed analysis might show that affordability in your community’s most economically disadvantaged neighborhoods is a real problem.

By developing methods for tracking important metrics like affordability, utility managers can stay on top of these issues and proactively manage them.  Financial planning tools from StepWise can provide tracking of key metrics.  A good financial plan should be as valuable a tool to your organization as any master plan and adopting management goals for key metrics allows managers to quantify financial results that matter to all stakeholders, including ratepayers, bondholders, employees, regulators, and any other party with a stake in the utility’s success.  StepWise can prepare a simple monitoring dashboard that, when integrated to a comprehensive financial plan, can give you a simple and effective way to measure affordability  (or other metrics) as your plans and budgets change in the future.

Links Related to This Blog Entry:

2006 EPA Report on Household Affordability

StepWise’s Credit Rating Scorecard

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The Value of Simple Rates Cannot be Overstated

September 4, 2009

Intricate rate designs can be helpful in reaching certain community goals, but elected officials in particular should never underestimate the value of simplicity. In this example from Frankfort, KY (http://bit.ly/11h0OB) we see how customers can become easily confused with their utility bills and how that confusion can increase when multiple utilities are billed together. In this case too, each of the utilities implemented rate increases at the same time, further compounding the issue. Simplicity is not only valuable, but it is also many times the best rate structure alternative as discussed in a presentation we made at the American Water Works Association earlier this year.

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