Abstract
Water affordability and utility financial sustainability are increasing concerns for water management in many industrialized parts of the world. (Aspen Institute Energy and Environment Program, 2022; AWWA, 2021). This is in part due to rising water and sewer rates; a study of the 50 largest metropolitan areas in the US showed that water and sewer rates increased on average 4.2% annually in the past nine years (Bluefield Research 2021). This trend is expected to continue considering 64% of surveyed water utilities planned to increase customer water rates in 2021 (AWWA, 2021). Water service providers rely on their customers to pay their bills in order to generate revenue, so the financial condition of the community/customer base heavily influences the financial condition of every utility. This analysis considers the financial health of a utility by focusing on cost recovery as measured by the Operating Ratio (OR), or the ratio of a utility's operating revenue to its operating expenses, across a range of utility characteristics. The financial capability of a utility was measured using the Affordability Burden (Raucher et al. 2019), which combines poverty prevalence and the financial burden of low-income, i.e., 20th percentile income household, to pay for water services. This presentation will detail research that was performed to empirically explore the link between a utility's financial health and the ability of its customers to afford their bills. This exploration includes additional factors that may affect a utility's ability to cover its costs including the number of customers, the percent of residential customers and water use, the particular demographics of the served population, and other factors that, as of yet, have received surprisingly limited attention. Indeed, results from this study show a measurable and meaningful relationship between household income distribution and utility cost recovery, Figure 1. The research analyzes financial capability and cost recovery among 301 North Carolina water service providers. North Carolina water utilities provide a diversity of size, income, and population conditions. NC water usage quantity and customer type was informed by the 2019 North Carolina Department of Water Resources Local Supply Plans (NC DEQ, 2020). This data was used to calculate average and cumulative residential water usage at the utility level. Additionally, the US Environmental Protection Agency (EPA) Safe Drinking Water Information System (SDWIS) database provided the total population served by each utility. Customer income, demographic, population, and water rate information was obtained from the Duke Water Affordability Data Repository (Patterson & Doyle, 2021), which compiles data from the 2019 Census Bureau ACS 5-year survey and utility websites to provide a range of population, affordability, and demographic information such as Median Household Income (MHI), Lowest Quintile Residential Indicator (LQRI), Poverty Prevalence (PP). This database also provided water rate information compiled from utility websites, which was used to determine the monthly residential combined water and sewer bill at 5,000 gallons per month. Poverty prevalence (PP) measures the portion of community households at or below 200% of the federal poverty level (FPL) (Raucher et al., 2019). Affordability Burden (AB) is determined from the combination of LQRI and PP to evaluate the financial burden for the community posed by water sector costs. The LQRI thresholds used to define the AB severity were determined from the percentage of a household's monthly income associated with one and two days of labor, 4.6% and 9.2% respectively (Patterson & Doyle, 2021). Utility operating expenditures and revenue data were obtained from the 2019 annual audit report data submitted to the NC Department of State Treasurer (NC Department of State Treasurer, 2019). These audit reports, submitted annually by NC utilities, municipalities, and counties, include financial information regarding government activities including water, sewer, and stormwater services. The OR for the 301 analyzed utilities was calculated based on one year of financial data. Annual utility financial data was available for 2019 through 2021. To avoid financial distress related to COVID-19, 2019 was selected as a representative year. Therefore, this cost recovery metric provides a snapshot of utility financial performance and would ideally be combined with cash flow analyses to understand a utility's longer term financial condition. The results identify a significant and growing group of communities facing a conflicting dilemma of water affordability and utility cost recovery. Many communities have rates that are already considered unaffordable for low-income households and are also not generating sufficient revenue to cover expenses, indicated by ORs <1, Figure 2. The study results also show that most current interventions are designed to address either household affordability or utility cost recovery, while exacerbating the other. For example, raising rates to improve cost recovery generates additional household and community affordability issues. Alternatively, implementing a customer assistance program (CAP) to help low-income households afford their bills often requires significant utility investment which can impede cost recovery. Population trends indicate that customer bases for many of the struggling utilities in North Carolina are poor, small, and shrinking, which in combination dramatically exacerbate affordability and financial issues, Figure 3. The temptation may be to balance utility budgets by seeking to reduce costs and defer maintenance or infrastructure investments. However, regulatory compliance must be ensured so that consumers trust their water services. The results of the study reveal that now is a critical time for government intervention and investment. Affordable, safe, and reliable water is possible, but will require swift and concerted action. The current disparate management of water services in the United States exacerbates inequalities in water affordability, service, and safety. The presentation will include some strategies for addressing the financial resilience of vulnerable communities and their effectiveness in previous implementations.
This paper was presented at the WEF/AWWA Utility Management Conference, February 13-16, 2024.
Author(s)O. August1, M. Doyle2, L. Patterson2
Author affiliation(s)Hazen and Sawyer 1; Duke University 2;
SourceProceedings of the Water Environment Federation
Document typeConference Paper
Print publication date Feb 2024
DOI10.2175/193864718825159261
Volume / Issue
Content sourceUtility Management Conference
Word count15