Customer Engagement, Proactive Plans for Financial Resilience Hold the Key

Even before the U.S. Environmental Protection Agency unveiled in March its long-expected proposed rule to regulate a new category of toxins in drinking water, putting the likely cost on ratepayers and the utilities, the U.S. water sector was navigating a tightwire over rates, services and competing demands for investment.

True to their calling, water utilities almost universally have provided clean, affordable drinking water, never mind the chronic and costly need to upgrade aging infrastructure well past its prime. On the other end of the tap, consumers often oblivious to decaying assets they can’t see — out of sight, out of mind — bristle at prospects of paying more for something they seemingly take for granted or expect to be subsidized as a necessity for health and safety.

Such is the nagging disconnect over the true cost of water, pitting utilities working within the confines of their rate structures against cost-conscious consumers footing the tab with little appetite for higher monthly bills in a high inflation economy.

Black & Veatch’s 2023 Water Report illustrates that divide, with a survey of some 450 U.S. water sector stakeholders painting a picture of an industry that, among other things, can and should do a better job of public messaging about the benefits of water as a precious resource – and where ratepayer money goes.

Call it a narrative disconnect or dissonance in the perceived or real value of water relative to the charges customers pay, begging the question: what is the logical outcome of that pervasive lack of understanding?

In the water sector, charges often may not align with the true cost of service; given political pressures and funding inadequacies, rates and charges may not sufficiently recover the revenue, effectively underpricing water. Shortcomings in consumer knowledge about what they pay may undermine their water utilities’ efforts to win their support for rate increases for long-overdue infrastructure upgrades.

Nevertheless, survey responses show that utilities are taking a laudable, diverse and balanced approach to push out information meant to bridge the education gap, ranging from leveraging social media updates (21 percent) to website FAQs (19 percent), consumer outreach (17 percent), newsletters (15 percent) and public workshops or open houses (14 percent). Just 8 percent said they’re doing nothing.

Other uses for the existing rate structure were tightly bunched, with respondents also citing service level differences (47 percent), equity among customer classes (46 percent), and low income affordability (44 percent). Put another way, not enough utilities are doing a cost-of-service analysis — a technical next step — accounting for the fact that not all customer classes, from residential to industrial, commercial and agricultural, put the same burden on the system and should be charged accordingly.

Fifty-six percent also have no proactive affordability reflected in their rate structure at a time when affordability is increasingly important in the industry, and inflationary pressures continue to squeeze customers. And more than half of respondents don’t address environmental justice in their rates, with just 18 percent saying they do.

Of respondents who said they have an affordability program for customers in need, nearly two-thirds said they include low-income discounts, while 44 percent said they offer markdowns for senior citizens. Such discounts for those two demographics reflect very traditional thinking by utilities. In the absence of general fund contributions, rate revenues (68 percent) are the favored source of the affordability programs, followed by customer donations (28 percent) and grants (24 percent).

As promising as these results sound, the question remains about whether these programs reach enough customers in need. Black & Veatch’s “50 Largest Cities Water and Wastewater Rate Survey” provides a comparison of affordability measures for some of the nation’s largest utilities. However, when examining poverty levels in many of these cities, addressing the needs of economically disadvantaged customers is a challenge. For example, the city of New Orleans has one of the nation’s highest poverty rates but has a very limited customer assistance program, and efforts to move towards a more substantive program are meeting resistance.

The importance of financial resilience — and the roadmap to get there — cannot be understated. Without a proactive strategy for addressing customer affordability, especially in an inflationary environment, it will limit your ability to build financial resilience. Moreover, not looking out for the low-income ratepayers could give those deciding your next rate increase request the grist to deny it.

With all that said, the water report survey offers a big-picture assessment, starting with the rising need for a holistic approach to building rate resilience and an amplified engagement and education of ratepayers that propagate their knowledge about the true value of their water. In short, it’s about having a better, more sophisticated alignment between the cost of water and rate structures.