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
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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-
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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.
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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
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