Addressing Water Affordability in Local Government Utilities

By Dr. Ahmed Rachid El-Khattabi, Research Director, SOG Environmental Finance Center

Residential water and wastewater rates have steadily increased nationwide over the past decade. In North Carolina, the most recent North Carolina Water & Wastewater Rates Report published by the UNC School of Government’s Environmental Finance Center found that average rates rose by roughly 10% over the past three years. Local government utility officials are increasingly concerned about affordability as they work to fulfill their mission of providing safe and reliable drinking water at rates that customers can pay. This post breaks down some of the key concepts related to affordability and introduces a new EFC affordability-specific dashboard that can be used to assess rates in the context of affordability.

How is affordability defined and measured?

Most affordability metrics express the cost of water or wastewater service as a percentage of household income. Common measures include comparing bills to median household income (MHI) or to income levels at the 20th percentile. The latter is meant to better reflect the financial position of lower-income households. See this blog post for more information on affordability metrics.

Although there is general agreement that water affordability is the ability of all households to be able to pay for a “modest level of service” based on their resources (e.g., household income), there is substantial disagreement on how to measure this in practice. In practice, many practitioners cite the rule of thumb that households should not spend more than 2.5% of their income on water, more than 2% on wastewater, or more than 4.5% on combined water and wastewater service, but these thresholds are not formal guidelines.

What options exist to address water affordability challenges?

Rate design is a key tool for managing affordability. Many utilities use increasing block rates, treating the first block as a “lifeline rate.” Others include a fixed volume of water with the base charge (i.e., an allowance) to help ensure basic household needs remain affordable. Some utilities may keep the base charge low and incorporate more costs into the variable rate, benefitting lower-volume users. However, under North Carolina law, utilities must treat all customers within the same service class equally, limiting their ability to tailor rates to individual needs.

At the same time, setting rates high enough to recover the full cost of service is essential for long-term affordability. If a utility avoids necessary rate increases due to short-term affordability concerns, it may underinvest in infrastructure, leading to costlier repairs later and less reliable service for all customers.

Though rate design provides indirect support to households, recurring bill assistance and crisis relief offer more direct forms of aid. Utilities typically provide these as Customer Assistance Programs. In North Carolina, local governments can sponsor such programs, but they lack statutory authority to use ratepayer revenue for this purpose. Instead, several pathways exist:

1. Counties and municipalities can use authority under G.S. 160D-1311 to establish subsidy programs for low- and moderate-income residents, funded with general fund dollars. Payments can be made directly to citizens or to the utility enterprise to offset bills, with governing boards determining eligibility criteria and assistance levels.
2. Any utility may establish a voluntary donation or “bill round-up” program. The utility can administer funds, and the governing board may set criteria for how assistance is allocated. Counties or municipalities may also combine this with the 160D-1311 program.
3. Any utility may partner with a third-party organization. The third party raises funds, sets criteria, and assists customers directly, while the utility serves as the connector between customers and the program.
4. Any utility can refer struggling customers to county social services programs. While not a direct subsidy, such assistance can free up household income to help customers pay their utility bills.

For more information on regulations regarding the establishment of customer assistance programs for water, see Navigating Legal Pathways to Rate-Funded Customer Assistance Programs: A Guide for Water and Wastewater Utilities. Though there have been some significant changes in some states since the publication of the report in 2017, the description of the regulatory landscape for North Carolina is still current as of this post.

National Water Affordability Dashboard

Given the need to understand the broader landscape, the EFC launched the National Water Affordability Dashboard to complement the existing state dashboards. This new dashboard focusing on specifically on affordability and creates an ecosystem of resources that utilities can use for benchmarking and peer-to-peer learning. The dashboard represents the largest publicly available repository of cost of water rates of its kind, consisting of information for over 7,000 utilities across the country. The dashboard consists of the following pages:

• Cost of Services page allows users to explore the distribution of bills for a given consumption level (e.g., 4,000 gallons) across utilities of different sizes, either within a single state or in the national database. It also helps utilities see the bigger picture by showing how their water service costs compare to others in the state, including visualizing costs as a percentage of the federal poverty level.
• Affordability Simulator page can model the affordability impacts of a potential rate increase. The interactive graph displays the distribution of households by annual income, along with each group’s annual percentage of income spent on water services, for both a user-defined status quo and a proposed bill scenario. For a selected utility, it also maps the percentage of household income spent at the block group level, helping identify areas most affected by a rate change. For utilities considering customer assistance programs, the simulator provides a rough estimate of the cost to support households paying more than a user-specified share of income. Overall, it helps utilities assess the affordability implications of rate-setting decisions.
• Customer Assistance Programs allows utilities to look up existing programs that other utilities in their state may be operating. This page may assist utility decision-makers in assessing their options for establishing such a program.

Together, these different features of the dashboard give utilities and policymakers a well-rounded view of water affordability challenges, helping them compare rates, anticipate the impacts of changes, and explore strategies for supporting customers.