What role should affordability play when utilities set their rates?

July 17, 2018 Andrew Burnham

As water and sewer rates outpace inflation, some utilities are facing an affordability crisis—here are 3 steps to resolve it

 

One of the biggest issues facing utilities today is the affordability of their services. Water and sewer bills have gone up at 3 times the rate of inflation since 2000, while at the same time the number of low-income households has continued to rise. For some utilities, it’s becoming an affordability crisis!

A common question I’m asked is, how do I better understand and integrate affordability into my financial planning and rate-setting process? As a team member of the Financial Services and Management Group at Stantec, we’re able to answer the question of how to evaluate affordability so we can help communities manage these issues. It’s important to focus on understanding the real extent of the issue, effective evaluation and prioritization of future capital spending options including the level of rate increases needed to cover alternative capital investment plans, and thoughtful allocation of the full range of revenue requirements.

Bottom line? We’re making affordability easier to understand than ever before.

 

The City of Ann Arbor, Michigan, is an early adopter of advanced metering infrastructure.

 

Our team has developed successful approaches to evaluate and integrate affordability into the financial planning, cost allocation, and rate-setting process:

  • First, evaluate affordability using more than just Median Household Income. Many in the water and sewer industry focus on utility bills as a percentage of median household income when evaluating affordability, but a true understanding of affordability requires a more detailed understanding of the community and consideration of alternative measures of affordability. Using available census tract and billing data allows you to target areas within a community that may have genuine affordability challenges. Using alternative ways to measure affordability, like the ratio of water and sewer costs to disposable household income for low-income households, or the number of hours for minimum wage workers, are additional methods to evaluate affordability that are also more effective and easier to communicate. For more great ideas on this point, see Manny Teodoro’s January 2018 AWWA Journal article Measuring Household Affordability for Water and Sewer Utilities.   
  • Attach future rate increases to actual usage and incomes. It’s important to understand how affordable your utility service is today and in the future. When projected over time, how does it change for alternative financial plans? Using GIS, census, and billing data as part of the current and future affordability analyses is a great way to visually show and communicate affordability challenges to stakeholders. Managers need to know if their affordability situation is stable, or if it is likely to get progressively worse, and if so, when.  
  • Understand how groups with affordability challenges use water. Integrating data from affordable housing, rental agencies, census, and other sources can allow for a more specific understanding of the water-usage patterns of those with affordability challenges. Are affordability problems occurring despite efficient use, or are they being exacerbated by water losses behind the meter or excessive consumption? This type of knowledge can help ensure the appropriate allocation of cost based upon system use—nothing else—so the costs are equitable.

A recent project I managed for the City of Ann Arbor, Michigan, is a great example of this approach. Of course, all communities are different.

_q_tweetable:If we focus on how to better understand and define affordability, we can arrive at fair rates that enhance affordability and fund critical infrastructure._q_An early adopter of advanced metering infrastructure (AMI), which provides real-time data on water use, the City of Ann Arbor has been gathering detailed customer usage data for over a decade. But because the data was extremely difficult to synthesize into a cohesive format, there was no way to use the data to design more equitable rate structures.

That’s where we came in. We analyzed the AMI data to tease out how customers were using the water system on a peak day and peak hour basis. We discovered that there were noticeably higher demands during the summer months, driven by seasonal irrigation. The cost of service associated with meeting these demands is very high due to the capacity requirements. With clear evidence of customer usage patterns, our team helped the City design rates that better reflect the true cost of service to meet those peak demands and charge high-use customers more, and lower-volume users less (seems equitable and affordable, right?)

It’s also important to note that we cross-referenced the AMI data and billing information with census data, land use, affordable housing, and rental databases so we could identify and evaluate the specific usage characteristics and peaking patterns of low income single-family residential customers and multifamily residential customers (household types identified with affordability challenges). This analysis was imperative to recognizing different water use behaviors that we therefore used in cost-of-service allocations and in alternative rate structures.

Utilities are wise to heed legal precedents to set utility rates that align with cost-of-service results and ensure the proportionality of a customer’s bill to their usage. And that’s what we did in Ann Arbor, because in creating a standalone rate class for multifamily customers reflecting their water use characteristics, the proposed multifamily water rates are significantly lower than those being paid today. This reduced cost directly impacts multifamily customers if they are individually metered, or the property (also helping stabilize rental prices in the community).

 

The utility affordability crisis some lower-income populations are experiencing may be partially remedied by proactive rate-setting practices. 

 

Residential customers with water use evenly distributed throughout the year would be subject only to the lowest tiers of the inclining block rate structure. These customers can be assured that they are paying rates that are for the “base” cost of the system and do not include costs driven by seasonal users.

The study also recommended additional steps to address affordability outside of the rate-setting process. This included additional data gathering to better identify attributes of customers with affordability challenges, continued partnerships with the community to maximize existing resources, providing resources to customers with affordability challenges, and utilizing non-utility funding sources to expand existing affordability programs.

Affordability doesn’t have to be complicated. If we focus on how to better understand and define it, and then integrate it into rate setting, we can climb out of the “median household income” cycle and arrive at fair rates that enhance affordability and fund critical infrastructure.  

About the Author

Andrew Burnham

Andy Burnham helps lead operations and business development activities for our Financial Services practice. Recognized as an industry leader, he has assisted with utility rate-related regulatory proceedings in multiple states and territories.

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