Designing a Financial Bridge for Funding Water Infrastructure: The Affordability Section
Everybody knows that water is essential to life. However, there is a funding gap for the infrastructure needed to deliver clean drinking water to small, medium, and rural communities in America. There is enough money available for every water infrastructure project, but we have a system of barriers that prevent these crucial projects from getting the funding they need. We’ve already talked about how to design the financial bridge, where the money is going to come from, and the legislative barriers that need to be overcome, and now we are going to explore the affordability section of that Financial Bridge.
Social (in)Justice of Water
The social justice of water refers to the fairness of access to water resources the burden of poor water quality and water hazards. Unintended outcomes of our current approach means that race and class can determine if your community has access to clean water. In an article in the September 2017 issue of the AWWA Journal, researchers Switzer and Teodoro looked at the number of communities with persistent and frequent violations of the Safe Drinking Water Act. Their research showed that there is strong evidence of a systemic issue in utilities serving low-income communities of color across the United States. Their research included the recent water contamination crises in Flint and Corpus Christi, which represent a broader pattern of environmental injustice for water.
Paying for Infrastructure
Operating a drinking water or wastewater utility is a complex business, with a variety of fixed costs associated with providing public services. Regardless of size and location, these utilities must cover the cost of daily operation and maintenance expenses (including energy, labor, chemicals, and other supplies) to ensure continuous service that meets applicable federal and state public health and environmental standards. Utilities have limited revenue sources to cover these costs. These revenue sources are usually some mix of usage charges, connection fees, and in some cases, property tax revenue. Setting rates is usually performed at the discretion of the utility and the local unit of government.
Affordability Standards & the Budgetary Paradox
There is no national affordability standard for water. Yet the EPA recommends that budget models assume 2.5% of Median Household Income each for water and wastewater service, for a total of 5%. Using this criteria, census data indicates that more than 20 million households’ water and sewer services are currently “unaffordable”.
"...under current rate structures, utilities often find nearly 1% of their customers are unable to pay at any particular time (WRF 2010)."
Today’s system creates a Budgetary Paradox for community leaders. They face a challenge of setting rates that are affordable for their communities and that also cover the cost of operations. If they meet the first challenge, many find that their utilities are underfunded. If they meet the second challenge, then they are likely to have a water system that their community cannot afford. This leads to system shutoffs and ever more costly fees for maintenance and repair.
We are in the middle of a trend of rising rates as utilities seek to realign their rates with the true costs of operations.”...from 2000 to 2017, water and wastewater prices increased by 136 percent, with average annual increases of over 5 percent.” This rate of increase is 35% higher than the rate of increase in median household incomes. The impact of these actions has created high water poverty clusters mostly located in Alabama, Louisiana, Arkansas, and Kentucky. These clusters are also prevalent in urban communities near Detroit, Phoenix, and Philadelphia.
Solutions on the Horizon
Customer Assistance Programs
Customer Assistance Programs or CAPs allow utilities to meet the needs of their most vulnerable customers. There are several different types of programs in use. [see callout below] Participation is based on eligibility criteria such as age, low income, and disability or veteran status. In their 2016 profile of Customer Assistance Programs, the EPA’s review of 795 utilities across the nation showed that almost 30 percent of utilities offer one or more CAPs, for a total of 365 active programs. Some CAPs provide assistance to more than one group of customers. Overall, the customers most frequently targeted by CAPs were those in low-income households”
Types of CAP Programs:
● Bill Discount
● Flexible Terms
● Lifeline Rate
● Temporary Assistance
● Water Efficiency
These programs are not a blanket solution and face their own collection of legal challenges. Some states prohibit CAPs where one group of customers bears costs on behalf of another. This impedes the ability to structure rates and CAPs to make water services more affordable.
In 2017, The Bipartisan Policy Center published a manifesto called Safeguarding Water Affordability. This report outlined several policy recommendations beyond CAP to move us toward a sustainable and affordable access to water. These recommendations include:
● Prioritize Asset Management
● Expand Funding and Financing
● Pursue Regional Options
● Partner with the Private Sector
● Strengthen Customer Assistance Programs
● Encourage Conservation
● Promote Innovation
● Educate the Public
It will be good to see how different communities embrace some of these recommendations. WaterFunder is helping small and medium sized systems explore financing options with private partners.
In the next article, we will take a closer look at the perceptions of using private financing for building water and wastewater infrastructure and the power of those perceptions to influence decision making.
Designing the Financial Bridge for Water Infrastructure: Perception Section
Designing the Financial Bridge for Water Infrastructure: Knowledge Section
Designing the Financial Bridge for Water Infrastructure: Communication Section