A thought experiment and back-of-envelope illustration

Water/sewer utility customer assistance programs (CAPs) don’t run themselves. When utilities use rate revenue to pay for CAPs, administrative costs can quickly eat into benefits that such programs can deliver What’s more, CAPs seldom reach a majority of eligible customers, which means that rate-funded CAPs can end up hurting more low-income customers than they help. This simple hypothetical example shows how.

The scenario

Here’s a broadly realistic scenario based on communities I’ve advised. Let’s imagine a utility with 50,000 single-family residential customers, 10% of whom qualify for assistance. Suppose our utility also serves 2,000 multi-family residential connections that house an average of 5 households each, for another 10,000 households. Let’s say that 20% of those multifamily households have low incomes, but don’t qualify for CAP because they don’t get a bill. That means our utility serves a total of 60,000 households, 7,000 of whom are low-income, but only 5,000 of whom could potentially qualify for the CAP.

Getting customers to enroll in a CAP is very difficult, but let’s imagine that our utility is unusually successful and gets 40% participation. That means our program gets 2,000 participants.

Let’s further assume that our CAP provides an average of $50/month (or $600 annually) to each participant. So the CAP provides a total of $1.2 million in annual benefits to participants. The utility will raise residential service rates across-the-board to pay for the entire program.

Three administrative setups

Let’s imagine three different ways that a utility might set up and administer its CAP. We’ll start with my super-simplified Walden Pond Program, then look at two utility-specific tailored CAPs that are fairly representative of typical approaches. We’ll assume that benefit amounts and  participation rates are the same under each program.

#1 | The Walden Pond Program. This CAP design emphasizes administrative simplicity. Any customer who qualifies for another income-qualified assistance program automatically qualifies for the water/sewer CAP. All participants will get a simple fixed dollar discount or price cap on their monthly bills. The utility will need to add one full-time equivalent employee (FTE) to manage outreach, enrollment, and other aspects of the program. The utility’s finance director can calculate the program’s costs with a couple hours and one spreadsheet, so there’s no need to hire a specialist to design it. Audit and appeals processes can be handled in-house. These features minimize customer service and data management costs for the utility.

#2 | Tailored CAP, utility administration. This CAP is tailored to meet the community’s specific needs and priorities. It sets specific income thresholds and other rules (e.g., age, disability status) for eligibility. Participants receive benefits on a sliding scale, depending on their household needs. To administer the program the utility will need to add two full-time equivalent employees to manage outreach, intake, benefits administration, and so on. This program is complicated, so the utility also will need to pay for an expert to help design and/or evaluate it. Audit and appeals processes can be handled in-house, but will be more complicated because the utility needs to manage sensitive, confidential data.

#3 | Tailored CAP, third party administration. This CAP is the same as #2, except that the utility contracts with a nonprofit community action agency to manage primary outreach, intake, and enrollment processes. The utility will still need to add a half FTE to manage contracting and to coordinate between the third-party agency and utility customer service staff. Overall administrative costs will be somewhat lower, as the community agency operates assistance programs with greater efficiency. However, audit costs will be higher because the utility has to monitor the third party agent’s work.

Important caveat: I made up these numbers! Don’t take the actual figures here too seriously. The administrative cost estimates here are probably on the low side, but they’re at least in the ballpark of what I’ve seen from utilities across the United States. Real figures might be much different from place to place. Anyone contemplating a CAP ought to do a similar analysis.

Takeaways

A few important things emerge from this exercise. First, the Walden Pond alternative has by far the lowest administrative costs because it is so analytically simple and it effectively outsources eligibility determination. Second, the costs of administering a tailored, utility-specific program are roughly similar for direct utility administration and third-party administration.

Lastly and most importantly, under each of these plans, the CAP provides generous benefits to the 2,000 low-income customers who participate, but also results in higher overall bills for the 6,000 low-income customers who don’t participate. That is, all three of these programs hurt more customers than they help. Maybe worst of all, they hurt 2,000 low-income multifamily residents who were never eligible for CAP in the first place because they pay for water/sewer services through their leases or association fees. Before you dismiss the $20-25 a year that each low-income non-participant pays as insignificant, take a look at the USDA’s estimates of food costs. Any rate-funded CAP risks forcing the poor to subsidize the poor in this way.