How much assistance should each customer get?
Customer assistance programs (CAPs) form the fourth pillar of affordability strategy. Previous posts described the first three pillars of affordability—quality, efficiency, and rate design. Water and sewer affordability is a complicated challenge that demands a multifaceted solution; these pillars offer a practical way for utility leaders to think about affordability strategically.
This is the second of four posts with thoughts on how to design an effective CAP. My last post discussed CAP eligibility, or who these programs are supposed to assist. Today’s post takes up the next thorny issue: how much assistance should a CAP provide?
In theory, once you’ve decided what’s affordable, designing a CAP is just a matter of figuring out how to close the gap between each customer’s monthly bill and the resources (s)he has available to pay it. In reality, that’s very, very hard to do. An effective CAP must balance the subtleties of individual needs with the practical realities of delivering assistance. Crafting a CAP that delivers the right amount of assistance requires a blend of normative complexity and programmatic simplicity.
First, kill the zombie
Affordability is a matter of community values. When contemplating how much water/sewer assistance to offer, policymakers are really asking: What is a reasonable monthly water and sewer bill for people of limited means? What sacrifices should low-income families have to make in exchange for these essential services?Once again, there is no scientific answer to these fundamental ethical questions. And once again, there’s a tendency for people to appeal to authority rather than grappling with ethics. For decades, people have declared that bills less than 2% of household income for water or 4.5% for water and sewer combined are affordable according to the “EPA standards.”
Relying on those “EPA standards” is a mistake. For starters, 2%/4.5% of income are completely arbitrary thresholds that mindlessly appeal to authority. But even more maddeningly, it’s not even a real authority, because there is no EPA standard for household water/sewer affordability. Five years ago I called the 2% or 4.5% of income affordability standard a zombie metric: a lousy measure and meaningless threshold for household affordability that won’t die, no matter how bad it is. Despite my efforts to kill it off, researchers, lobbyists, analysts, and activists who ought to know better keep calling it the “EPA affordability threshold.”*
So once again, for the record, for the greater good, and for the love of Abel Wolman: THERE IS NO EPA STANDARD FOR HOUSEHOLD WATER OR SEWER AFFORDABILITY!!
Then set a target
Ultimately, a utility CAP requires its leaders to define what is affordable water and sewer service in its community. If leaders want to make it 2% of household income, that’s fine! But that is a policy choice—it’s not a federal rule or guideline.
Some percentage of gross income, discretionary income, or other measure of resources for low-income households can work to define needs. I’ve suggested a couple potential thresholds in the past. Affordability definitions might account for things like number of people in the household, age, medical needs, and so on. Some reasonable volume of water might be part of the definition of affordability, too. The main thing is that affordability targets and thresholds ought to emerge from careful deliberation and reflect their community values and priorities. Whatever standard a utility sets, economic conditions and community values change over time, so periodic review of affordability levels is a good idea.
One size fits most
In the stylized world of welfare economics where all information is complete and all transactions are costless, a CAP would provide each low-income participant with a subsidy equal to the difference between her bill and the amount that policymakers define as affordable. Utilities could give qualifying customers customized discounts, or place participants into tiers and categories that account for varying income, household composition, and any other factors that might affect affordability. Such a setup would maximize social welfare.Thing is, that utilities in the United States rarely (never?) have ready access to the information required to tailor assistance for individual customer needs.** Utility managers don’t know how many people live in each household, how much money each person earns, or what other financial resources each has available, or the constraints each one faces. Aside from the privacy concerns, gathering and maintaining the necessary data for such a program involves enormous costs for the utility and creates enormous barriers for customers—topics I’ll take up in future posts.
So rather than the economist’s perfect world, consider designing a CAP for the messy, imperfect real world. Set a benefit level that would help most eligible customers reach the community’s affordability threshold with minimal required documentation and record-keeping, then give the same benefit to every participant.
If a flat 40% discount would get a large majority of customers under the affordability threshold, then use a 40% discount. If a $25 monthly discount would do it, go with the $25 monthly discount. It is not clear that the benefits of more granular assistance levels justify the added costs and burdens that come with them—especially for utilities who don’t have thousands of employees, ample customer service staffs, or big budgets to pay consulting firms. Indeed, there are good reasons to think that all that tailoring is a net negative for a CAP.
A fine tailored suit is a thing of beauty. But if you’ve got limited fabric and you need to cover a lot of people’s privates, you’re better off with towels than tuxedos.
A basic CAP design
With simplicity and practicality as guiding principles, here’s a basic design for a water utility CAP using easily accessible, publicly available data. For illustrative purposes, let’s design a program for the place where I live: Middleton, Wisconsin (population 22,636). Madison Metropolitan Sewerage District provides sewer service in Middleton, so our CAP will be for water only. Middleton is a moderately affluent community, with a $74,000 median income and low poverty rate of 8.1% (compared with $60,000 and 12.6% nationwide, respectively). At the same time, Middleton has just eight full-time employees in its water department and six in finance, which means it’s got pretty limited organizational capacity. Our community might be relatively well off on average, but there are still people who need help here.
Eligibility. Rather than creating new eligibility rules, we’ll say that anyone who is currently receiving public assistance automatically qualifies for our program. American Community Survey data indicate that 619 Middleton households participated in SNAP, SSI, TANF, or another such program in the past year—that’s about 14% of all Middleton households. Probably not all of those folks pay a water bill, but in theory around 600-700 people could potentially participate in Middleton’s CAP.
Benefit. Let’s say that Middleton defines water affordability in terms of working class labor, and declares that a month of water service should cost no more than the equivalent of three hours of labor at minimum wage. Wisconsin’s minimum wage is $7.25/hour, which equates to a maximum monthly water bill of $21.75. Participants in our low-income assistance program would have their water bill capped at $21.75 monthly—regardless of household size or volume of water used. Setting up a blanket maximum helps protect large families and/or folks with older, inefficient fixtures and appliances. If their regular bill is less than $21.75, then participants would simply pay the lower regular bill.
If we’re concerned that the legal minimum wage is too far removed from actual labor market wages, we can choose a popular local fast food chain (e.g., Culvers) and calculate the bill as a function of its starting wage ($19/hour at present).
Obviously, there are important limitations to this design. Relying on other government programs to establish eligibility might inadvertently disqualify some people who we want to help. $21.75 for a month of water service is pretty cheap, but there still could be some folks who struggle at that price. At the same time, a simple price cap might end up giving “too much” help to some households that could pay more if push came to shove.† We’ve got plenty of water in Wisconsin, but in water-scarce regions a maximum price scheme might lead to water waste (though we could set a maximum volume or just deal with extreme profligacy on a case-by-case basis). And of course, this setup offers no assistance for “hard-to-reach” customers who pay for their water through rent or multifamily meters.
But for all those flaws, this CAP has one great merit: simplicity. There’s no need to add lots of staff, work with a third-party administrator, or contract with an expensive consulting firm to design or run this program. It’s easy to estimate this CAP’s scope and costs, and easy to evaluate its impact. For places like Middleton with limited organizational capacity, simple-but-effective is often the best option.
A simple CAP is like a towel in the sauna: it isn’t spectacular, but for most people it covers what’s essential.
The next couple posts look at administrative costs and burdens that come with CAPs.
**Countries with nationalized utilities and/or authoritarian governments don’t face this obstacle. Lots of problems are easier to solve for governments that don’t care about privacy or civil liberties.
†This always strikes me as a weird objection. Are we really worried about accidentally being too generous? Is our goal really to wring every available dollar out of utility customers?