By Vanessa Waller (Raftelis) & Ford Moriarty (Raftelis)
Affordability of service, one of the most important considerations for water and sewer utilities, has become more and more important with each passing year, and is especially visible now that utility customers are recovering from the COVID-19 pandemic and its economic impacts.
Like most industries, the water and sewer utility industry has been forced to adapt to the economic stagnation caused by the pandemic, which led to higher levels of delinquent utility bills and lower revenues as businesses were forced to shut down. Utilities are faced with the difficult task of setting rates that are sufficient to support ongoing maintenance costs and sometimes overdue capital expenditures, while ensuring that customers can still afford the vital service of clean water. Fortunately, several resources are available to address this challenge. First, the utility industry has adopted conceptual guidelines that can inform the rate-setting process; these include revised 2021 EPA Affordability Guidance metrics, rate-setting approaches, and data-driven approaches to benchmark affordability. Second, utilities can learn from the experience of peers who were forced to adapt quickly to the COVID-19 pandemic, a situation that put a strain on even the most robust affordability initiatives. Finally, federal assistance has recently become available to utilities across the country through the newly adopted Low Income Household Water Assistance Program (LIHWAP) and the American Rescue Plan Act (ARPA). Each of these resources can support decision making for municipal utilities as they recover from the pandemic and look toward the future.
Industry Guidelines: The 2021 Financial Capability Assessment Guidance
Affordability has come to the forefront of the industry as increasing utility rates have continued to outpace the rate of inflation over the last 20 years. These trends have incentivized utilities across the US to look at the impacts of their rates on their customers and communities.
The industry standard for assessing affordability has come from the EPA’s 1997 Financial Capability Assessment Guidance, which specified that 2% of Median Household Income was a threshold for affordable utility bills. The 1997 Guidance, published as part of the EPA’s paper titled “Combined Sewer Overflows Guidance for Financial Capability Assessment and Schedule Development,” can be found on the EPA’s website. In January 2021, the EPA published a drafted update to the 1997 Guidance that provided more options and flexibility to utilities assessing affordability of service on their communities. While many utilities are adopting this updated Guidance, it is still a draft, and more changes are expected to be made by the current Administration.
The 2021 Guidance sets forth two alternatives for utilities to use in affordability assessments. The first alternative is an expansion of the 1997 Guidance. In the 1997 Guidance, the EPA provided two tests: the Residential Indicator (RI), which looked at cost as a percent of Median Household Income; and the Permittee Indicator, which looked at several different metrics to assess the overall financial health of the utility. The 2021 Guidance expands on these two tests and adds the Lowest Quintile Residential Indicator (LQRI), which looks at cost as a percent of the lowest quintile income, or the 20th percentile income level. The 2021 Guidance also adds five new metrics that consider the financial health of the community. The metrics are compared to the national average and assessed a score that is referred to as the Poverty Indicator (PI) to determine a level of burden on the community.
The second alternative allows utilities to assess long-term rate impacts using a financial planning and rate model. By creating a rate model, utilities can determine future rate impacts on customers, and factor in the unique characteristics of a utility and how they affect the cost to residential customers; thus allowing us to develop a more “typical” residential customer bill that is then used in the RI and LQRI calculations.
Creating the LQRI represented the EPA’s shift in philosophy from looking at the cost to a median or average customer, to the customers at the lowest income levels. The reason behind this is that the RI, while useful for getting a general sense of our community, may hide the impacts to customers who are truly at risk, specifically those customers with the lowest income levels. The new LQRI analysis directs the focus on the most distressed customers and the burden placed on them.
Affordability Messages:Rate Structures to Customer Assistance Programs
Once a utility has completed its affordability assessment, there are many options it can look at to assist struggling customers. The key is finding the tool that provides the right message about affordability to the community.
Before setting up a customer assistance program, a utility can review its own rate structure. How a utility designs its rate structure allows customers to manage their own bill, and therefore the rate structure can either enhance a pro affordability message or undermine it. We can think about the affordability of a rate structure as a spectrum as shown in Figure 2.
If a utility wants to convey a more affordability-friendly structure, it can look at options such as lifeline rates, which discount the initial increment of usage to recover only the base costs of providing water. Moreover, it can place more emphasis on variable charges, which allow customers to reduce their bills by conserving. On the other side, less friendly structures such as high fixed charges, while being a steady source of revenue, do not allow customers to control their bill through conservation. Similarly, minimum charges may force customers to pay for services they do not actually use.
Where redesigning a rate structure is not enough, Raftelis has assisted setting up many different types of customer assistance programs, such as Payment Agreements, Crisis Assistance, Discount Programs (bills and rates), Plumbing Assistance, and Income-Based Billing, to name a few. There are many available programs for utilities to establish. Again, the key is finding the right tool that fits the community. As utilities set up these programs, it is important to keep in mind considerations such as assessing goals for enrollment, legal authority, funding, administration and whether to partner with other local programs, and how the utility expects to communicate the new programs to its customers.
Learning from Peer Utilities: How Utilities Responded During the Pandemic’s First Year
The COVID-19 pandemic brought increased attention to the topic of utility service affordability, as many customers faced with pandemic-related job loss or other economic hardships were faced with ongoing water and sewer bills they could no longer afford. In the summer of 2020, to better understand how utilities fared during the pandemic, Raftelis conducted a survey, spearheaded by Henrietta Locklear, of more than 60 water and sewer utilities. The survey posed a variety of questions, mostly concerning how customer bill delinquencies changed, how revenue collections were impacted, and how utilities were assisting customers who found themselves suddenly in need. Survey participants came from various service area Median Household Income levels (see Figure 3), and they came from mostly the western (30%) and southern states (48%), with a few from the Midwest (9%) and Northeast (13%).
On average, the surveyed utilities reported a 28% increase in bills that were more than 30 days past due from 2019 to 2020. The 28% increase was just an average; some utilities had even more dramatic changes in delinquency rates. Most surveyed utilities reported a decrease in revenues compared to budget (on average about $3.8M in lost revenues) when comparing 2020 budgets to year-to-date actuals for 2020. In aggregate, surveyed utilities had deficits from budgets amounting to $79 million. However, some utilities gained more revenues than expected. Survey results suggest a wide range of revenue impacts, both favorable and unfavorable: one utility reported a $25 million decrease from budget, while a different utility reporting a $14 million increase from budget. For those that gained revenues, aggregate gains amounted to $36 million (less than half the amount for aggregate losses). One utility that experienced revenues favorable to budget was a popular vacation destination near a major city, and it could have benefited from an influx of new residents moving away from pandemic-related lockdowns in the city.
To cope with losses in revenues and rising bill delinquencies, many utilities turned to short-term adaptation strategies. In addition to moratoriums on shutoffs, many utilities waived late payment penalties and increased their communications to customers. Long-term approaches such as modifying rate increase plans were less popular, perhaps because most utilities were looking for simple solutions to help customers in need as quickly as possible (Figure 4).
Similarly, short-term customer assistance programs, such as payment plans and leak adjustments, were most popular, while longer-term programs such as arrearage forgiveness were
less popular (Figure 5).
While the Raftelis survey only focused on the early stages of the pandemic, affordability concerns related to COVID-19 impacts are ongoing. In addition to customer assistance programs and rate adjustments, utilities can utilize federal funding that has recently become available to help customers in need of bill assistance, discussed in the following section.
Federal Assistance: Utilizing LIHWAP and ARPA Funding
To help utilities recover from the economic impacts of the COVID-19 pandemic, the federal government created two new programs that will benefit municipal utilities. The first arrived in December 2020 with the Consolidated Appropriations Act, which created the Low-Income Household Water Assistance Program (LIHWAP). This program was initially funded with $638 million to be distributed across the country for use by utilities to offset customer bill arrearages and to pay outstanding bills for qualifying applicants.
This $638 million was supplemented just a few months later with the March 2021 American Rescue Plan Act (ARPA), which contributed an additional $500 million to LIHWAP. Remaining ARPA funds, totaling $350 billion, could be used to assist local and state governments in a variety of ways, including water and sewer infrastructure investment. LIHWAP is designed to provide short-term assistance to customers and prevent shut offs, while ARPA is designed for long-term assistance, which can indirectly contribute to lower rates and improve affordability.
LIHWAP distributes funding to states, territories, and local governments, who then set up their own programs to disburse funds to utility customers. Utility customers may then apply for assistance. In North Carolina, the local County Department of Social Services provides funds, while utilities provide data to determine customer eligibility. Table 1, adapted from a LIHWAP webinar hosted by the North Carolina Department of Health and Human Services (NC DHHS), shows the role of the state (grantee), county (subgrantee), and utility (vendor).
As discussed in that same NC DHHS webinar, North Carolina utility customers must meet eligibility requirements before being considered for LIHWAP assistance. At least one of the following criteria must be met: income must be at or below 150% of Federal Poverty Guidelines; or the customer must be actively enrolled in another federal assistance program such as the means-tested veterans’ program, Supplemental Security Income (SSI), Supplemental Nutrition Assistance Program (SNAP), Food and Nutrition Services Benefits (FNS), or Temporary Assistance to Needy Families (TANF). Even if a customer is eligible, there is no guarantee they will receive assistance because LIHWAP is limited. Although North Carolina was awarded about $38 million to be distributed to eligible customers across the state, these funds may eventually run out given the substantial need. To prioritize funding allocation, the state divides eligible customers into
Priority Group 1,
Priority Group 2,
and Priority Group 3.
Group 1 includes any customers who are currently disconnected from water service due to non-payment, and these customers are first in line for assistance. Priority Group 2 customers are in danger of shut-off due to non-payment
but are not currently shut off. Once these two groups have received assistance, Group 3 customers (all other eligible customers) will receive LIHWAP assistance.1
Utilities can take several steps to ensure they are prepared to benefit from LIHWAP and ARPA funding. First, utilities can reach out to their LIHWAP administrator, who may also be the Low-Income Household Energy Assistance Program (LIHEAP) administrator. It will be important for utilities to have people on staff to engage in the stakeholder process. Next, customer data must be organized and easy to access. Vendors are partly responsible for verifying LIHWAP eligibility and confirming arrearages needing reimbursement, so a well-organized and informational billing database is essential. Part of the LIHWAP process relies on well-coordinated logistics between the utility’s finance department and billing department, which must work together to ensure that customer data is made available to the County, and that LIHWAP funds are reflected in customer account balances. Finally, utilities should make a list of capital improvement projects eligible for ARPA funding to streamline the ARPA application process, which is likely to be competitive.
Utilities may wish to review their shut-off policies to encourage customers to apply for LIHWAP assistance, since customers may not be aware of LIHWAP. Creating a strategic communications and outreach plan for customers is recommended. This plan should be designed to reach target audiences within the service area. It should also consider potential barriers to applicants such as language barriers, immigration status concerns, lack of transportation to County Department offices, or limited access to internet. The plan should also consider existing partnerships with community organizations that have historically assisted low-income households. These plans may take time to develop, but they are likely to provide ongoing benefits even as the pandemic recedes. As affordability continues to loom large in the utility space, strategic planning can set utilities up for successfully serving their customers well into the future.