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Indiana: exploring utility rate affordability - part 3

In Part 1 of this series we introduced the topic of utility rate affordability and discussed the various factors causing concern about the pace of utility rate increases.  In Part 2 we further explored ways municipalities have traditionally determined affordability and introduced alternative methodologies to assessing affordability.

This article we will consider how affordability should be determined.

How Should Affordability Be Determined? 

How should one define affordability if standard formulaic answers can’t be applied across the board? Dr. Manuel Teodoro proposed a two-step process based on the answers to these two questions (Measuring Household Affordability for Water and Sewer Utilities (2018 © American Water Works Association):

  1. What amount is reasonable for households of limited means to pay for essential water and wastewater services?
  2. What economic sacrifices are reasonable to expect low-income households to make in order to pay for water and wastewater? 

These questions focus attention on the fixed-income and low-income households in our communities that are most impacted by affordability concerns. Carrying out these steps involves. 

Partner with local social service agencies

The simplest way of assessing affordability is reaching out to local social service agencies. These agencies may already have programs such as energy assistance programs in place, which means they already have information on households that qualify and participate in these programs. 

The information the agencies provide can help determine at a high level how many households are experiencing affordability issues. It can also help in developing customer assistance programs (CAPs) that partner with these agencies to providing household assistance.

Affordability Analysis

The most accurate way to determine affordability is to undergo an affordability analysis. An affordability analysis involves compiling the income statistics of the municipal service area by tract in order to estimate the number of households that fall within certain income percentiles of poverty (e.g., 50, 75 or 100 percent of poverty).  Annual income at the 20th percentile is one metric that has garnered attention as this represents a threshold where income is low enough that households may struggle to pay utility bills but too high to qualify for assistance.  Whichever threshold is used, the data from this analysis can be used to approximate the number of households potentially experiencing affordability issues.  From there, the municipality can assess the overall affordability concern and whether a CAP is needed.

In our next series, we will explore specific types of Customer Assistance Programs (CAPs) that are being utilized by municipalities

If you have any questions or would like to read our previous articles on rate affordability please contact our team.

Jeffrey P. Rowe
Partner, CPA
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