November 2010
The Source
 

separator

Other Articles in this Issue:

separator

Subscribe to
The Source

Email:  

separator

Links:

 

Assessing Affordability

Miranda Kleven By Miranda Kleven

Money in WaterWater is a basic human need. As a result, the cost of an average level of residential water service cannot be fairly compared to the cost of non-essential items such as cable TV, soda pop, and other discretionary items when determining whether the cost is “affordable”.  Affordability means different things to different communities and varies from one user class to the next within each community. It is entirely subjective and wholly difficult to define. However, affordability is important to utility managers and policy makers, and it is useful to have some index by which to measure and quantify “affordability” when making decisions such as ability to fund a project or as justification when applying for funding assistance. In this article, we will discuss the Environmental Protection Agency’s (EPA’s) use of affordability indices and other common industry rules of thumb that can be used to generally gauge affordability. 

EPA’s “Affordability” Criterion
When the 1996 Safe Drinking Water Act was developed, the EPA established affordability criteria for water and wastewater treatment systems.  These indices, although subjective, were developed as a means by which to determine whether treatment techniques to be installed to meet regulatory requirements would place an undue burden on users, therefore becoming “unaffordable” and justifying the implementation of point-of-use devices. For water and wastewater, EPA established a four (4.0) percent benchmark of affordability, measured as total annual water and sewer bill divided by median household income (MHI) for the service area.  The four percent benchmark translates to levels of two (2.0) percent each for the individual water bill and individual wastewater bill. In a sense, this is an indication of “worst case scenario”, under which a utility would be compelled to consider foregoing treatment plant improvements because they are cost prohibitive.

It is important to understand the proper application of the four percent benchmark. The measure is based on a comparison of water and wastewater system revenues to MHI in the utility’s services area, not on individual household income. EPA has noted that it is not accurate to interpret the affordability benchmark as a cap for each household.  It is not EPA’s intent to give the idea that any individual household should not pay more than four percent of its income for water and wastewater services, as all households will not use the same amount of water and will not have the same household income.

Given this guideline, we were interested in a general assessment of how annual water and wastewater bills in our region measured against the MHI.  Based on information obtained from the 2010 AE2S North Central Region Utility Rate Survey, the graphic below was developed to illustrate the spread of total water and wastewater bills as a percentage of MHI. Based on precedent set by the Census Bureau to estimate annual MHI, the 2000 MHI was adjusted to 2009 based on the Consumer Price Index – Research Series from December 1999 to December 2009.   

Residential Water & Sewer Bill as Percent of MHI

The graphic above indicates that for 211 communities from across Minnesota, Montana, North Dakota, South Dakota, and Wyoming the majority of average residential water and wastewater bills equate to less than 0.75 percent of the MHI for water and 0.5 percent of the MHI for wastewater. The highest values reported as a percent of MHI were 2.03 percent for a water bill and 2.09 percent for a wastewater bill. Again, it should be stressed that affordability is a subjective term. EPA’s four percent benchmark for affordability when considering treatment techniques to meet regulatory requirements may not be appropriate when reviewing water rates for general affordability.  As such, the graphic above does not necessarily indicate that the majority of water and wastewater rates in the north central region are “affordable”.  

Industry Rules of Thumb
In addition to EPA’s subjective guidelines, there are general rules of thumb found in the literature. Values in the literature tend to be more conservative, generally indicating that the average residential water or wastewater bill should ideally not exceed 0.75 percent of the MHI or 1.5 percent of the MHI for combined water and sewer bills. Using this index, we can surmise from the graphic above that there are likely many systems in our region facing the challenge of maintaining affordable water and wastewater rates.

Conclusion
In summary, affordable water and wastewater rates are extremely important to systems throughout our region. Unfortunately, affordability is not easily measured and varies from one community to the next.  While there are general indices by which affordability can be gauged, they should be used with care and with consideration of other factors such as general financial management indicators, system debt, and socioeconomic conditions. Some efforts that can be undertaken to mitigate affordability concerns include reviewing your rate structure for potential modifications, such as “lifeline” rates, offering payment flexibility, or implementing a customer assistance program. 

Sources: 

2006-2008 American Community Survey, 3-Year Estimates, US Census Bureau http://factfinder.census.gov/

“Future Investment in Drinking Water and Wastewater Infrastructure”, November 2002. Office of the United States Congress, Congressional Budget Office.

“Water Rates Affordability and Affordability Programs”, Environmental Finance Center, www.efc.unc.edu.

U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements.  http://www.census.gov/hhes/www/income/index.html.

 

 
If you have any questions concerning the content of this newsletter, please contact Heather Syverson at 701-364-9111 or Heather.Syverson@ae2s.com. 
Copyright © 2010