Using Better Ratepayer Affordability Metrics to Support Proposed Modification of a CD Schedule

Authors:

  • Alan Karnovitz - Hazen and Sawyer

Ratepayer affordability is of continuing concern in many jurisdictions. Rising water and sewer rates concurrent with prolonged stagnant household income has substantially increased the financial burden on low income households. As utilities address their backlog of capital needs, rates will continue to rise while the outlook for an acceleration of household incomes is poor.

Historically, affordability issues have not influenced CWA regulatory compliance schedules. A key reason is that the standard metric for assessing ratepayer affordability often poorly characterizes income distribution, especially in large cities. EPA’s 1997 Guidance for Financial Capability Assessment and Schedule Development states that financial impacts to household are “high” when sewer bills exceed 2 percent of Medium Household Income (MHI). However, numerous studies show that MHI is poorly correlated with poverty rates and hence, ratepayer affordability. MHI typically overstates affordability where income distributions are highly skewed.

EPA has recognized the limitations of the 2 percent metric and through its Integrated Planning Framework (IPF) and Financial Capability Assessment guidance, the Agency encourages permittees to use supplemental information that better reflect the financial and economic health of the utility and its ratepayer base. Household income distribution in Washington DC (DC) is typical for a large urban area. Very low income and very high income households are disproportional to middle income households. Recent data show that the mean income of the upper 5 percent of DC households is greater than $520,000 while the mean of the bottom 20 percent is less than $9,500. Poverty rates are 20 percent above the national average. DC’s high cost of living further exacerbates the burden.

Recognizing that meeting the cost of the 2002 CSO Consent Decree (CD) and other CWA mandates would be difficult to sustain and that alternative technologies and practices have emerged in the past decade, DC Water proposed to EPA a modified CD based on IPF, including a revised affordability analysis. Using EPA’s 1997 Guidance, it appeared that the status quo CIP expenditures, would have modest financial impact on residential ratepayers. However, when the current average monthly bill and projected rates increases were measured against current and projected future household incomes disaggregated by quintiles, the picture looked very different. If cost of living adjustment is taken into account, the financial impacts to 40 percent of City’s households would be “high” for most the 20-year CIP planning horizon. The revised affordability analysis became a component of DC Water’s proposed consent decree modification and further supported the prioritization of its CIP to address the most pressing needs first and deferring lower priority investments to the extent feasible. In sequencing its investments, DC Water, attempted to constrain annual outlays to maximize affordability to its ratepayer base. This paper details how the affordability analysis was prepared, how using the different metrics affected the accuracy in characterizing the economic status of a population, and how affordability analysis was used to support DCs Water’s proposed and ultimately successful consent decree modification.

For more information, please contact the author at akarnovitz@hazenandsawyer.com.

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Horizons Fall 2017 (pdf)

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