states. New Jersey, Minnesota, New Hampshire, Mississippi, and Oklahoma all allow community-based organizations to leverage limited financial resources by allowing such agencies to provide guarantees rather than cash security deposits.
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CHAPTER 9
SHRINK THE BILLS: BILL DISCOUNTS
As described in Chapter 5, there is ample evidence that constrained budgets in low-income households force trade-offs between utility bills and other necessary expenditures that can affect the health and well-being of the family. This provides a basis for defining affordability. It is generally accepted that an unaffordable utility bill is one that produces these adverse trade- offs (Saunders et al. 1998, Hasson et al. 2007).
In the water and wastewater sector, there have been repeated attempts to further define this trade-off threshold in terms of a simple percentage of household income in order to provide a working rule of thumb to help focus efforts to address the issue (Saunders et al. 1998, Hasson et al. 2007). A rule of thumb has emerged which pegs the affordability threshold at 2% of median household income (MHI) for both water and wastewater service (4% combined). This has been widely used in national level analyses of the affordability of the US Environmental Protection Agency regulations. It has two serious flaws. First, it is just a guess as to where the trade-off threshold lies. Despite decades of debate, there has never been any social science research applied to validating 2% as an estimate of the trade-off threshold. Second, it is unlikely that 2% of MHI is the right rule of thumb to guide development of programs to address affordability concerns since MHI is roughly four times the income of families living on public assistance programs (Saunders et al. 1998).
The generally accepted measure of “being poor” in the US today indexes a household’s income to the “Federal Poverty Level” (FPL) published each year—generally in February by the HHS. The FPL looks at income in relation to household size. This measure recognizes that a three-person household with an annual income of $6,000 is, in fact, “poorer” than a two-person household with an annual income of $6,000. The Federal government establishes a uniform “Poverty Level” for the 48 contiguous states. Since 100% of the Poverty Level is generally considered to be too low to be a reasonable demarcation of “being poor,” other estimates range from 150 to 200% of the Poverty Level or more.
For example, a Colorado statute authorizes utilities to have assistance programs for customers with incomes up to 185% of the Poverty Level.
While the question of what income is “sufficiently high” to afford water service remains elusive, guidance is available from several sources for determination of what constitutes a “livable wage” or “self-sufficiency budget.”
• A calculation of self-sufficiency standards for about 20 states can be found at the World Wide Web site of Wider Opportunities for Women. http://www.sixstrategies.org/resources/resources.cfm.
• The Economic Policy Institute has an on-line calculator that allows the user to calculate a “basic family budget” by number of parents and children, State, and area within the State. http://www.epi.org/content.cfm/datazone_fambud_budget.
50 | Best Practices in Customer Payment Assistance Programs
• The Center for Children in Poverty at Columbia University’s School of Health has an on- line “family resource simulator” that allows the user to determine net available resources for many, but not all, states given different assumptions about the State, location within the State, family structure, and number and age of children. http://www.nccp.org/modeler/modeler.cgi.
The design of customer assistance programs must proceed with some sense that there is a threshold level⎯measured by the monthly utility bill as a percentage of monthly income⎯at which adverse trade-offs occur. In any given month, there will be many “marginal” households with a bill-to-income ratio that is close to this threshold who will nonetheless pay their bills. Those that cannot pay the water bill are the ones that have clearly been pushed across the threshold. But it is important to stress that the larger group of “marginal” households are just as vulnerable to nonpayment the next month, or the month after that.
The strategic intent of a low-income bill discount program is to reduce the number of “marginal” households that are vulnerable to nonpayment by reducing the bill-to-income ratio for low-income customers across the board, thereby allowing many families to back away from the trade-off threshold and the risk of nonpayment. The primary advantage of a bill discount approach targeted to low-income households is that it addresses affordability concerns in a single action. It helps not only nonpaying customers, but potential nonpaying customers as well. By targeting the “marginal” households that are always at risk of nonpayment and moving them out of the marginal zone, it can help to break the cycle of repeated episodes of nonpayment and repeated disconnections and reconnections. The lost revenue can be offset to some degree by avoiding the perpetual customer service costs associated with this cycle (Colton 1991).
A cross-referencing of customer account data with community data on Federal government low-income assistance programs or with community demographic data should provide an indication of the proportion of the customer base that is comprised of households that lie within the “marginal” zone. Armed with this type of segmentation analysis, it is possible to develop a local assessment of the degree of discount that might be sufficient to produce the desired benefits of drastically reducing the overall payment-troubled caseload for the utility with a single administrative decision and action. If the first guess at the right level of discount is inadequate to produce the desired drop in the delinquent caseload, it can be adjusted as a matter of continual improvement. Such a procedure could in fact provide an empirical means of defining where the affordability threshold actually lies within a community. Such efforts have been summarized in case studies of programs in Seattle, Los Angeles, and Portland, Ore. (Saunders et al. 1998, Hasson 2002).
The primary barrier to employing a low-income discount strategy arises from the fact that offering any discount to the actual cost of service is considered out of bounds to many utility managers and governing boards strictly as a matter of principle. In many jurisdictions, it is prohibited by local or State laws. While cost-of-service ratemaking, avoidance of cross-subsidies between ratepayers, and equivalent treatment of ratepayers are time-honored principles in public utility theory, they are theoretical constructs that are intentionally blind to practical considerations that lie outside of ratemaking theory such as the real-world business problems posed to a utility by poverty. If the repetitious cycle of nonpayment, disconnections, and reconnections within the same “marginal” segment of the customer base is evident in a utility’s customer account data, then the only way to truly cure this embedded problem is to move them back from the affordability threshold to reduce the number of households that are marginalized.