Blog  /  May 2018  /  Designing the Financial Bridge for Funding Water Infrastructure: Affordability Section

Blog Post Teaser

Everybody knows that water is essential to life.  Not just “water” in and of itself, but affordable access to clean drinking water and safe wastewater systems is needed to keep the public healthy, the economy thriving, and our communities safe and whole.  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.  What we need is a “financial bridge” made up of the processes, frameworks, and mindsets needed to overcome these barriers and bring us over the funding gap.  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.

 

Water Infrastructure Affordability

 

Social (In)Justice of Water

The social justice of water refers to the fairness of access to water resources and equality of burden from poor water quality and water hazards.  Unintended outcomes of our current approach mean 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 and the Budgetary Paradox

There is no national affordability standard for water.  Yet the EPA recommends that budget models assume 2 percent to 2.5 percent of median household income for water and wastewater service combined.  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 percent 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 the 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.  According to the Bipartisan Policy Center, water and wastewater prices increased by 136 percent from 2000 to 2017, with average annual increases of over 5 percent.  This rate of increase is 35 percent 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, or CAPs, allow utilities to meet the needs of their most vulnerable customers.  There are several different types of programs in use.  Participation is based on eligibility criteria such as age, low income, and disability or veteran status.  In their 2016 profile of CAPs, 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 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.

 

Upcoming Articles

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

 

References

Water Rates:  Water Affordability

Drinking Water and Wastewater Utility Customer Assistance Programs  

California Hones Drinking Water Affordability Plan

Rate Setting, Making Water Affordable, and Customer Assistance

Affordability of Water Service

Social Justice and Water Rates

Water Could Soon be Unaffordable for Millions of Americans

Safeguarding Water Affordability

 

About WaterFunder LLC

WaterFunder (www.waterfunder.com) is an advisory and professional services consultancy that addresses the gap in water infrastructure funding by connecting private capital to broadly defined water projects though direct investment.  The organization builds alliances with investors and works with stakeholders to accelerate the development process and find the right balance of debt and equity financing, thereby allowing the project team to do what they do best -- design, build, and maintain the asset.