United States Environmental Protection Agency Water Engineering Research Laboratory Cincinnati OH 45268 Research and Development EPA/600/S2-86/054 Aug 1986 Project Summary Effect of Fees on Water Service Cutoffs and Payment Delinquencies Frank A. Brimelow and Sneh B. Veena A study was conducted to determine whether increased water and sewer user fees have generated increases in payment delinquencies and service cut- off rates and whether they have created other problems such as increased health hazards. Another objective was to examine the varied user-charge structures, billing procedures, and methods of debt collection in small util- ities to identify procedures and policies that might minimize any negative im- pact of sudden fee increases on low- income customers. These data will be used to assess the impact of any rate increases that may occur as a result of small utilities raising rates to pay for new technology mandated under the Safe Drinking Water Act. Three separate studies were under- taken. The first was a survey of man- agement procedures and policies in 30 utilities. Ten of these utilities were rural, 10 had service area populations between 10,000 and 50,000, and 10 were large metropolitan utilities. The second study consisted of a survey of selected low-income customers in these utility service areas to evaluate customer awareness and attitudes to- ward billing and debt collection tech- niques, to assess any possible hearth hazards connected with service cutoffs, and to prepare a socioeconomic profile of families likely to be adversely af- fected by sudden fee increases. Finally, monthly aggregate data from three util- ities that had experienced fee increases were used to test the hypothesis that fee increases generate increased delin- quency and cutoff rates. A similar tech- nique was used on individual account data for a given metropolitan utility to estimate price elasticities for three groupings of census tracts within the service area. Water supply was con- cluded to be very price inelastic and no relationship was demonstrated be- tween rate increases and customer cut- offs. This Project Summary was devel- oped by EPA's Water Engineering Re- search Laboratory, Cincinnati, OH, to announce key findings of the research project that is fully documented in a separate report of the same title (see Project Report ordering information at back). Introduction During the last decade, many small water and wastewater utilities in the southeastern United States have imple- mented large increases in water and sewer user fees to raise revenues for the installation of adequate control technol- ogy. In some instances, the monthly, bi- monthly, or quarterly bills of the aver- age residential customer have doubled or even tripled in a relatively short pe- riod of 2 or 3 years. Concern has been expressed that the Safe Drinking Water Act will require small communities in particular to install relatively expensive technology to meet more stringent drinking water standards. To pay for this technology, many small utilities may have to raise rates substantially. The general concern is that sudden rate increases will make marginal customers unable to pay their bills and will subject them to cutoffs in service. The principle thrust of this study is therefore to determine whether these ------- historical increases have caused in- creased delinquency rates and cutoffs that may in turn have produced signifi- cant public health and other problems for communities so affected. The study also examines the degree of hardship placed on certain classes of users—for example on senior citizens and others on fixed incomes, and on low-income families in general. To operate effectively, every utility must, of course, recover adequate service-charge revenues. Yet wide vari- ations exist in user charge structures, billing procedures, and debt collection policies, etc.—even between utilities that have approximately the same num- ber of customers and similar service areas. The persons most directly con- cerned in practice with billing and col- lection have been public utility officials, whose orientation has naturally tended to be almost exclusively one of cost-ef- fectiveness. However, some procedures and techniques are more likely to be cost-effective, to ensure adequate rev- enues, to place the least burden on low- income families, and to be advanta- geous from a public health and community standpoint. An important object of this study is therefore to exam- ine the social and economic impacts of various types of user-charge structures, of billing and debt collection proce- dures, and of large increases in service charges. This object has been met through three studies: A survey of utility person- nel, a survey of utility customers, and a study of the impact of large user-charge increases on delinquency rates and water consumption in specific utilities. Each study is described in the following sections. Survey of Utility Officials After a preliminary survey of billing managers, utility engineering staff- members, and other utility personnel, a questionnaire was drawn up as a basis for interviewing utility officials. This in- strument was further modified and re- fined through extended interviews with officials from utilities of widely differing operational methods and services areas. Next, a package was mailed to the chief executive officer of each utility se- lected for study. This package con- tained: 1. A letter of transmittal, 2. A memorandum headed "Letter to the Director of Public Works" that explained the purpose of the inter- view and asked for cooperation, 3. A copy of the questionnaire, and 4. A three-page "Guidesheet to Key Questions," which defined some of the terms used in the question- naire. Later an interview was set up with ei- ther the chief executive officer or with a designated representative. Often it was advantageous to interview two persons for shorter periods rather than to have a single long interview with one official. This was particularly true of the larger utilities. Several weeks later there usu- ally followed a second, shorter inter- view to clear up obscure points or ambi- guities. This second interview was often done through a telephone call. The utilities were selected from a four-state area—South Carolina, North Carolina, Georgia, and Florida. In select- ing the 30, a balance was maintained between urban and rural utilities: 1. Ten were metropolitan utilities serving areas with an estimated population above 50,000. 2. Ten were nonmetropolitan utilities serving areas with an estimated population of 10,000 to 50,000. 3. Ten were essentially rural. Other criteria were also used in select- ing utilities. For example, some were chosen because they were considered to be typical. Others were chosen be- cause they were believed to possess special characteristics (e.g., they had developed innovations in billing or col- lection methods or their user charge structure was atypical). The sampling technique was, as indi- cated, purposive. The utilities chosen did not represent a statistical cross- section of utilities in the four-state re- gion, but they did exhibit an extensive range of institutional practices that made possible an in-depth, analytical study of utility operations and of how utility officials perceive the social im- pacts of their procedures. Much of this collected information was, of course, anecdotal. Survey of Low-Income Families Selected low-income families were studied in the service areas of the 30 utilities studied. The main object of the investigation was to consider the im- pact of utility charge structures, billing procedures, and debt collection tech- niques on low-income families and to prepare a socioeconomic profile of families likely to be adversely affected by fee increases. The interview method of data collec- tion was used. In an interview study, any of three interacting variables can af- , feet the outcome of the study: The re- spondent, the interviewer, or the inter- view schedule. Hence this study dealt with these variables carefully. During the first portions of the study, an interview schedule was developed. A literature search indicated that no suit- able instrument was available for this study. The initial schedule included questions pertaining to the demo- graphic characteristics of the family, their knowledge about various aspects of billing procedures, and their opinion on water quality and services provided by the utility company. After pilot interviews were conducted in the Denmark, Columbia, and Barn- well areas of South Carolina, the se- quence of the questions was revised. Demographic and personal questions were asked first, as they helped estab- lish rapport with the respondents. Questions pertaining to knowledge and opinion were asked later. Relationship Between User Charges And Cutoffs The object of the third phase of the study was to provide empirical evi- dence on the relationship between in- creases in user charges for water/sewer services, delinquency rates, and cutoffs. I Special emphasis was placed on low- income consumers. Correlations be- tween fee increases and delinquencies or cutoffs were studied for three sepa- rate utility areas. Next, monthly data on individual accounts in one utility area were studied to provide a more inten- sive investigation of the above relation- ships and some evidence on the differ- ential impacts of price changes on low-income consumers. The burden that rate increases placed on low- income consumers was also examined. A methodology for measuring this bur- den is outlined, and some empirical estimates are made by using the indi- vidual account data. Conclusions A few observations can be made based on the data presented. Non- metropolitan utilities with service popu- lations of 10,000 to 50,000 operate the strictest, most cost-conscious revenue collection systems. This description is supported by a comparison of delin- quency rates, disconnection rates, and initial deposit charges. A comparison of pricing data, on the other hand, indi- ------- cates that rural utilities have the highest minimum periodic charges and mini- mum to average cost (M/A) ratios. These values appear to be sufficiently high to affect both cutoff rates and de- linquency rates in rural utilities. In metropolitan utilities, there appears to be only a slight relationship between cutoff rates and M/A rates. Almost all utilities require some mini- mum periodic charge to meet their need for recovering the fixed costs. A fixed monthly base charge per account that recovers only a portion of fixed costs (such as administration costs) appears to be more equitable than a minimum periodic charge per gallon. The fixed monthly base charge also offers an in- centive to conserve water. Utilities using base charges per gallon may wish to review the advantages of fixed monthly administrative charges when opportunities arise to modify their user- charge structures. Variable tailored price structures (which are used in a few metropolitan utilities) may have wider applications, though they involve signif- icant transfers in the incidence of the burden or payment of utility costs. With regard to billing methods, the following observations and recommen- dations can be made: 1. Responses of low-income heads of households demonstrate that low- income customers have very little knowledge of discounts for prompt payment. Such billing techniques therefore have little im- pact on the payment behavior of low-income customers. 2. Erratic enforcement of cutoffs, es- pecially when combined with long grace periods, probably dimin- ishes incentives to pay utility bills in a timely fashion. 3. Some evidence suggests that quarterly billing has many advan- tages. One is that it lowers admin- istrative costs, which ultimately makes possible the reduction of minimum charges (base charges). Yet it does not appear to increase delinquency rates, cutoff rates, and uncollectable debt. Quarterly billing may be the preferred method in service areas with a stable population, especially in metropolitan utilities with large meter-reading staffs. 4. The objection to quarterly billing is the magnitude of the bills. There is much less opposition to prorating bills than is often supposed. The system of prorating quarterly bills by thirds has much to recommend it. 5. Liens are ineffective as a means of recovering utility debts. Collection agencies, however, are increas- ingly used and tend to be ex- tremely effective. However, many important arguments have been made against their use by a quasi- public authority to collect small debts. Their use is not recom- mended. All the 30 utilities in this study en- forced payment of bills through discon- nection as a last resort. The negative public health consequences of cutoffs have been examined and are most ap- parent in rural and metropolitan service areas. Though some health hazards re- sult from cutoffs, no evidence points to grave or widespread public health dan- gers. Utility officials at all levels are in- sensitive to the public health aspects of disconnection. Utilities should increase the public health awareness of staff members through short workshops that use the expertise of local public health professionals. Notification of public health hazards should be placed on a more regular, formal basis in many util- ities. The policy of enforcement by cutoff needs to reconsided. Costs of discon- nection and reconnection (i.e., in labor and materials and in lost user-charge revenues) are almost always higher than the reconnection fee the utility re- ceives for re-establishing water service. So both the customer and the utility suf- fer an economic loss. Evidence indicates that delinquency rates, and in some cases cutoff rates, apparently increase following a sub- stantial increase in user charge. The evidence is clearest in the Sumter, Au- gusta, and Columbia data. The Colum- bia data also imply that fee increases result in more delinquencies among low-income customers. The burden of higher user charges is closely related to the capacity of cus- tomers to adjust their consumption to the higher charges. Accordingly, the price elasticities for consumers in three different groupings of census tracts have been calculated as follows: Tracts with 15% or more below the poverty line -0.232 Tracts with 5% to 15% below the poverty line — -0.103 Tracts with less than 5% below the poverty line — -0.277 For all census tracts -0.204 The differential price elasticities at dif- ferent average income levels have im- plications for policy-making, but they need further study. The methodology presented in the full report for examin- ing the burden of user-fee increases on low-income consumers can serve as a prototype for other utilities. The most serious drawbacks to large fee increases are deterioration of the en- vironment and the attendant public health risks. At least as serious, how- ever, is the effect the large increases have on potential customers who are discouraged from tapping into existing water and sewer systems. One of the most striking observations made in this study was the large number of families using well water and septic tanks in semiurbanized areas close to estab- lished water and sewer systems. In the last decade, large capital expenditures on new treatment facilities have forced many utilities to increase the cost of tap- ins and service charges so much that there is little motivation to hookup. Util- ities facing such problems may wish to consider the various tap-in fee payment options discussed in the full report. The full report was submitted in fulfill- ment of Contract No. CI-81-0221 by Voorhees College under the sponsor- ship of the U.S. Environmental Protec- tion Agency. ------- Frank A. BrimelowandSnehB. Veena are with Voorhees College, Denmark, SC 29042. Robert M. Clark is the EPA Project Officer (see below). The complete report, entitled "Effect of Fees on Water Service Cutoffs and Payment Delinquencies," (Order No. PB86-201357/'AS; Cost: $16.95, subject to change) will be available only from: National Technical Information Service 5285 Port Royal Road Springfield, VA 22161 Telephone: 703-487-4650 The EPA Project Officer can be contacted at: Water Engineering Research Laboratory U.S. Environmental Protect/on Agency Cincinnati, OH 45268 United States Environmental Protection Agency Center for Environmental Research Information Cincinnati OH 45268 PRIVATE I Me s.330 Official Business Penalty for Private Use $300 EPA/600/S2-86/054 n - U , rfi METER 62508'i! 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