The Gray Area in Funding Affordability Programs

Why Water or Wastewater Utilities in Many States May Be Apprehensive to Fund Affordability Programs with Rate Revenue

Written by: Erin Riggs
Erin Riggs is a Legal Advisor for the Environmental Finance Center at the University of North Carolina at Chapel Hill

One of the reports recently completed at the Environmental Finance Center at the University of North Carolina at Chapel provides an analysis of the legal and policy environment surrounding rate-setting for water and wastewater utilities in all fifty states, as well as Puerto Rico and the District of Columbia. The report, Navigating Legal Pathways to Rate-Funded Customer Assistance Programs, attempts to answer the question of whether, state by state, water and wastewater utilities can implement assistance programs for low-income customers, where these programs are funded with rate revenue. However, after researching and drafting the summaries for each state, the black and white answers we were looking for, have turned out to be in fact, mostly gray. That is, in most states, there is not a clearly defined path that water and wastewater utilities can follow to legally fund affordability programs with rate revenue. Thus, despite the importance of ensuring affordable water for all, there are many utilities which don’t have these types of cross-subsidized affordability programs, perhaps, in part, due to this legal uncertainty. So why are some states black and white, while others remain gray?

The Black and White States

In an earlier blog post, we discussed three different states (California, West Virginia, and Washington) which have provided the legal certainty needed for water and wastewater utilities to be able to implement reduced rates to assist low-income customers, by allowing for classifications based on income. Specifically, all three states have elected to create express statutory language that either allows or requires certain utilities to provide reduced rates for low-income customers. In contrast, there are a few states where there are express statutory prohibitions on using rate revenue to fund certain types of programs or to subsidize other customer rates. Additionally, in some states there have been judicial holdings that find basing rates on anything other than cost of service is unreasonable, discriminatory, or unjust. All such states, whether they expressly allow or disallow certain affordability programs, are essentially black and white states, because the barriers or possibilities to affordability programs are written in statute or case law, and there is, thus, a higher level of legal certainty for utilities to follow.

The Gray States

For the rest of the states, the legal question of whether customer assistance programs may be funded using rate revenue is more cautiously answered with a “maybe.” In such states, there is mostly ambiguous statutory terminology, and a lack of judicial interpretation of such terminology. As the summaries reveal, the most common limitation on water or wastewater utility rates found in state statutes is that they must be “reasonable.” Many states use additional terms, such as requiring that they be “uniform,” “nondiscriminatory,” or “just.” Because such terms are subject to wide variation in their meanings, it is hard to predict whether a court or other reviewing body, such as a regulatory commission[1], would interpret using rate revenue to subsidize a certain customer class based on income as fitting within the definition of such terms. Further, the case law that does exist relies heavily on the justifications arising out of differences in rates, such as the type of user or the territorial boundaries of a service area, which create logical bases for differentiation in rates. What the case law does not address is whether it is appropriate for utilities to use general rate revenue—or even charge differing rates based on income—in an effort to subsidize customers who simply cannot afford their water bills.

In addition, the legal and policy environment in many states is further complicated by the inclusion of home rule charters for different municipalities in the state. For such territories, the question of how a utility could fund an affordability program relies not only on general state law and case law, but also on any applicable provisions found in the municipal charter. Therefore, what may be legally appropriate for one city in a state, may not be appropriate for another.

How Can Utilities Move Forward with Funding Affordability Programs?

First and foremost, utilities should figure out where they stand legally in their state; more specifically, utilities should evaluate whether there are clear black and white judicial holdings or statutes that address using rate revenue to fund affordability programs. Utilities in states that do not authorize rate revenue funded affordability programs in clear plain language, may decide that these programs are too important to avoid and move forward in the gray space. Programs that are not challenged may thrive in the gray space, while others that are challenged in the courts may have to await the outcome to ultimately know how their state’s legal system views these programs. Alternatively, a utility may use outside funding, or rely on voluntary customer contributions to fund affordability programs. Such an approach has been taken by many utilities in the country, as evidenced by the Environmental Protection Agency’s recent compendium.

As an example of forward moving utilities, both Detroit and Atlanta have created low-income assistance programs which are funded using rate revenue. The policy arguments in favor of the funding of such programs with general rate revenue include the argument that such assistance reduces the costs incurred from the shut offs to service, bad debt, fruitless collection expenses, or other such costs associated with a large customer base of low-income customers who can’t afford their utility bills. Subsidization of low-income customer bills, thus, is part of the cost of service, and should be permissibly included in a rate structure.

Finally, what is abundantly clear from the survey of all 52 states and territories is that, in the energy sector, utilities typically do not have the same gray areas when it comes to funding affordability programs. Many states have clear laws that allow or require bill discounts for low-income energy or gas customers. Additionally, there are clearly designated federal funds available to assist the same customers. As states recognize that the policy arguments in favor of subsidizing low-income water customers are the same arguments that have been made to subsidize low-income energy customers, it is the hope that statutory and regulatory changes will be made to assist water and wastewater utilities in funding more comprehensive affordability programs.

How is your local water or wastewater utility handling affordability concerns for its low-income customers?