Bad Debt Impacts Utilities’ Plans for Capital Projects

by | Apr 8, 2022 | Education, Financial Shock, Large Cities, Public-Private Partnerships, Service Line Responsibilities, Water Solutions

Bad debt and mounting maintenance costs: Just call them the Scylla and Charybdis of public water utilities.

Much of the investment into the water systems across the nation are nearly half a century in the past and the maintenance bill has come due. The American Society of Civil Engineers (ASCE) noted that there is a water main break every two minutes, resulting in 6 billion gallons of treated water being lost every single day. In 2020, only 21 percent of U.S. utilities reported being able to cover the cost of providing services, with 20 percent of large utilities and only 10 percent of small ones confident they will be able to provide full cost service in the next five years.

Prior to the passage of the Infrastructure Investment and Jobs Act, federal funding had fallen from more than 60 percent in the Environmental Protection Agency’s early years during the mid-70s to less than 10 percent. The bipartisan bill has earmarked $55 billion in water and wastewater spending, but it remains to be seen whether this is the beginning of renewed investment in water infrastructure by the federal government.

In the wake of the pandemic, many municipalities and utilities have had to divert funding from planned water capital improvement projects and routine maintenance to operating funds. Many systems experienced budget shortfalls caused by sick and overtime pay and the need to purchase Personal Protective Equipment, along with decreased industrial and commercial usage and delinquent residential accounts.

The Pacific Institute found that between one-quarter and one-half of systems lost up to 30 percent of their revenue during the pandemic, which will impact future maintenance and improvements. The aggregate impact to water utilities is estimated at nearly $14 billion, according to a study commissioned by the American Water Works Association and the Association of Metropolitan Water Agencies. Those participating in the study indicated they expected to reduce capital spending by up to $5 billion and many plan to defer planned rate increases at an estimated impact of an additional $1.6 billion.

Even as financial stresses have impacted municipalities, they also have affected residents, and those residents may still be struggling with lingering debts incurred during a period of unemployment.

In June 2021, the temporary Low Income Household Water Assistance Program (LIHWAP) was launched, distributing $1.14 billion to address delinquent accounts and avoid shutoffs. However, even before the COVID-19 pandemic, more than 1.5 million households in 12 cities owed $1.1 billion in delinquent payments. In California alone, bad debt ballooned to $1 billion during a pandemic-related moratorium.

Historically, bad debt has ranged between half a percent and two percent, but the pandemic has pushed it up to an estimated 6 percent. And the longer a bill is unpaid, the more likely it won’t be paid. In Atlanta, the collection rate for bills 90 days past due is 80 percent and only 20 percent for those bills past 120 days.

Prior to LIHWAP, water utilities had to depend on local charitable organizations or their own customer assistance programs to help customers with delinquent bills. Other federal programs offer some utility assistance, such as the Treasury Department’s Emergency Rental Assistance Program and Homeowner Assistance Fund. However, assistance available to customers with delinquent water bills and the criteria for that assistance can vary from state to state and even city to city, and some customers aren’t aware of the options or know how to navigate the applications.

Once again, addressing these serious issues and providing solutions falls on the shoulders of individual water systems, and, unsurprisingly, water companies have demonstrated innovated, outside-the-box thinking in addressing the problem. Some utilities offer discounted rates to older adults and low-income residents, while others alert customers when there is an unusual spike in usage, indicating a leak.

Others offer debt forgiveness for those who enter a debt payment program and stay current on their bill for a specified time, while others waived late fees and penalties for those who enrolled in a payment program. Some programs, like Atlanta’s Care and Conserve program offers both financial assistance and plumbing repairs for low-income households to help them address the root cause of leaks and high water bills. The Baltimore Department of Public Works allows bill adjustments for those who provide documentation that they repaired a leak that caused a high water bill.

However, in a time where many utilities are facing financial hardships, building out such program takes time, funding and resources that some utilities simply don’t have. This is where a partnership with the ServLine Leak Protection Program by HomeServe can save a utility time and money while shielding them from bad debt.

The Program insures utilities against financial loss resulting from customer water leaks and provides a turnkey administration of leak adjustments, allowing utilities to devote limited resources elsewhere. Since 2014, ServLine has shielded utilities from $20 million in leak adjustments. The Program works with 175 participating water utilities and has been vetted by the National Rural Water Association and 30 State Rural Water Associations.

For more information on how we can help your utility avoid bad debt caused by residential water leaks, contact us.

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