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. This article further explores the ways municipalities have traditionally determined affordability and introduces alternative methodologies to assessing affordability.
Cross-Utility Rate Comparisons
To explain or justify their rates, municipalities often compare them with the rates of neighboring communities. Although this information can be useful in analyzing general trends, it does not definitively answer the core question of affordability at the local level. Every community has its unique characteristics, and that can make comparing two neighboring communities like comparing apples and oranges. The bottom line is that cross-utility comparisons can be useful, but only if each community’s distinguishing characteristics are factored in.
% of MHI Method
Another method municipalities commonly rely on is the EPA’s combined average water and sewer bill as a percentage of Median Household Income (MHI). The problem with this method is that the EPA’s threshold of 4.5% (2.5% for water and 2% for wastewater), which is often misinterpreted as an affordability metric was developed for determining capital replacements from a regulatory enforcement standpoint. It was never intended to be the standard for assessing affordability at the local level.
At the local level, an assessment of affordability must include both (1) any factors specific to your local community and (2) the subset of customers who are impacted the most by affordability concerns (i.e. fixed-income and low-income households).
In the next article, we will consider how affordability should be determined.
If you have any questions or comments regarding rate affordability or would like a copy of the 2018 Indiana Statewide Rate Comparison Study, please contact us.