What role should affordability play when utilities set their rates?
July 17, 2018
July 17, 2018
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.
Our team has developed successful approaches to evaluate and integrate affordability into the financial planning, cost allocation, and rate-setting process:
If we focus on how to better understand and define affordability, we can arrive at fair rates that enhance affordability and fund critical infrastructure.
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.
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).
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.