This is the first in a series of Valor Water Analytics blog posts exploring water affordability, customer nonpayment, and technology that can enable utilities to deliver water more equitably and sustainably to all customers.
Where We Are: Assessment of Water Affordability Today
By Stacey Isaac Berahzer, Christine Boyle, PhD, editing by Maryana Pinchuk
In the next 5 years, water may no longer be affordable to as many as 35.6% of American households. Given the looming affordability crisis, new interventions are needed to help communities pay their water bills, while also helping utilities collect the water and wastewater fees needed to fund much-needed infrastructure upgrades. To date, a large volume of work on how to measure affordability has been undertaken, but what is sorely needed are programmatic strategies to help both households and utilities cope with the mounting costs of clean water provision.
This post (the first in a series on affordability) explores three foundational topics: defining affordability, measuring affordability, and funding customer assistance programs (CAPs). These are important topics for beginning to understand the current state of the conversation on water affordability, and they are relatively well-covered in scholarly and industry publications. In future posts, we will explore topics that have received less coverage but are also critical to tackling the growing affordability crisis: customer data, utility-customer communications, and novel interventions that may help utilities recover more revenue while assisting their most economically vulnerable customers.
Defining Affordability: What is “Affordable” Water?
The United Nations (UN) recognizes the basic human right to water and sanitation. In its Comment No. 15, the UN defines this right to water as the right “of everyone to sufficient, safe, acceptable and physically accessible and affordable water for personal and domestic uses.”
But what does it mean to say that water must be “affordable?” How to define affordability in the context of water service delivery is an ongoing discussion. There is some consensus emerging that affordability is not a universal term and should be defined at the local rather than the national level. In the latest version of its “Principles of Water Rates, Fees and Charges” (or M1) publication, the American Water Works Association (AWWA) includes a few updated chapters, including the “Low-Income Affordability Programs” chapter. The authors state: “Given variations in local economic conditions, compositions of the customer base, and community values, defining affordability must be done at the local level.” In another article, “Is Our Water Affordable?,” authors Jon Davis and Joe Crea corroborate this idea: “Any one-size-fits-all guidance on what constitutes affordable water service is going to be inappropriate when applied to most local considerations.”
In this view, affordability is not a top-down mandate with clear, universal success metrics to be achieved, but rather an ongoing conversation that takes into account the specifics of each water utility service area and its customers.
Measuring affordability: Which Metrics Work Best?
Inherent in any definition of water affordability – at the local or national levels – are metrics for benchmarking it. The UN offers some guidance on how water affordability should be measured. In 2002, the UN stated that to be affordable, water costs should not exceed 3% of household income, with the combined cost of water and sanitation not exceeding 5%. But, there are many older guidelines for measuring and benchmarking water affordability within the United States. The most common way of measuring water affordability, and indeed the most maligned method, involves Median Household Income (MHI). In what may have been a series of unfortunate events, “4.5% of MHI” evolved into an infamous benchmark for affordability, where 2% is used on the wastewater side and the other 2.5% is attributed to water. This guidance is derived, in part, from the 1997 EPA report “Combined Sewer Overflows—Guidance for Financial Capability Assessment and Schedule Development.” The metric, known as the Residential Indicator, was developed only for wastewater systems’ ability to comply with federal regulation, but it somehow mistakenly became a poor proxy for an affordability benchmark. The 2.5% MHI benchmark on the water side is similarly arbitrary and its origins shrouded in mystery.
Critics of using MHI to measure affordability point to the fact that even people below the “middle” income point in any community also need water. Therefore, measuring affordability at the median level hides the problems that customers in the lower income brackets, such as the lowest 20% income-earners in a community, face. Since these lower-income earners have less disposable income, it is more relevant to benchmark water affordability against their incomes. Alternatives to MHI that reflect this belief include the Affordability Ratio (AR) and Hours’ Labor at Minimum Wage (HM). The AR considers the cost of water and wastewater compared to essential household expenses such as taxes, housing, food, medicine, health care, and home energy. Jason Mumm and Julius Ciaccia offer another alternative to the Residential Indicator (RI) called the Weighted Average Residential Index, or WARi.™” It is a calculation of the weighted average financial burdens across all income levels, in all census tracts in a given utility’s service area. Less crude examples than the “4.5% of MHI” metric look at a spectrum of incomes in a community and the relative percentage of those incomes that customers are spending on water. The UNC Environmental Finance Center’s free Affordability Assessment Tool is a good example of putting this metric into practice.
Acting on Affordability: How to Transform Definitions and Measurement into Action?
Communities that have crossed the initial hurdles of locally defining and setting a threshold for affordability may be displeased with the (growing) number of their customers who cross this threshold. A natural response is to develop a customer assistance program (CAP) to help customers that fall below the accepted affordability threshold. But, funding a CAP may be challenging. A 2017 report, “Navigating Legal Pathways to Rate-Funded Customer Assistance Programs,” found that deciding if a utility’s primary revenue source – rates – can be used to fund a CAP is not a simple exercise. Most states have fuzzy language when it comes to whether a utility’s rate revenues can be used for a program like a CAP. Money from volunteer bill round up programs, lease money from cell companies, and royalties from insurance on service lines all have a bright green light for CAP funding. Unfortunately, these methods tend to generate relatively small amounts of money. To develop a robust and effective CAP, a utility needs to access its rates revenues. There is mounting evidence, and publications, that paying for a CAP through rates revenue ultimately helps a utility’s bottom line. States like Indiana have recently revised their statutory language to make it clear that utilities can include CAP development in the rate setting process.
These three affordability topics – defining affordability, measuring affordability, and funding CAPs – have been the focus of much research and publication up to this point. While there is still room for more work in all of these areas, there are additional areas ripe for exploration, especially when it comes to how a utility can take advantage of new technologies around communicating with customers. Stay tuned – we will explore this in subsequent installments of this blog series.