Utility Payment Economics Are Fun?

As the Real Median Household graph shows (Fig. 1), there has been a huge drop in real median household income in the past decade, which started even before the onset of the Great Recession in 2008. However, Figure 2 shows lower unemployment rates in recent years. Yet, when you consider both graphs together, they seem to contradict each other. Because if unemployment goes down, household income must go up, right? Not necessarily. In the real economy, the story is much more complex. Incomes can continue to drop despite the availability of more jobs for a number of reasons. For instance, more people might be leaving the workforce voluntarily due to discouragement or disillusionment with the economy, or because of retirement. Also, those who have found new jobs might now be in lower paying positions than they previously held, while those people lucky enough to hold onto their old jobs have flat wages that can’t adequately cover the ever-increasing costs of living.

Fig. 1

Fig. 1

Fig 2

Fig 2

Since the business models of utilities are volume based–meaning the more power and/or water sold, the more revenue made–they can have difficulty collecting from consumers who have been hit hard by job loss or stagnating or declining wages. This problem is compounded by issues on the supply side as well, such as drought, conservation initiatives and infrastructure investments. Drought and conservation plans in particular can take a bite out of revenues since there is less water or energy to sell. Infrastructure investments require a lot of money, which utilities must raise through bond markets and then pay interest on. In order to raise this money, utilities often need to raise consumer rates.

Now, when customers are initially hit with larger rates, they try to pay them. Eventually, though, they hit a point where they use less water or energy to save money. The tricky part for utilities is to predict how much they can raise their prices without triggering decreased demand for their services. But making such a prediction is a shot in the dark. Meanwhile, if most customers are struggling with income losses due to having no job or lower wages, then they will hit the point where they begin to scale back on their consumption very quickly. This spells bad news for utilities, which then have less money as a result, forcing them to raise their rates even higher to recoup their financial losses. Since consumers likely have even a harder time paying than they did before, they cut back even further on use, creating a vicious cycle.

Since utilities provide the lifeblood of the modern economy and the basic necessities of human dignity, we need to acknowledge this problems exists and do something about it. Rather than look at this as a negative, it should be viewed as challenge to change the world for the better in a way that benefits both the utility companies and the people they serve.