Low-Income Affordability
Programs/Rate Design

More Than 30 Years of Experience | Serving clients in US & Canada

Low-Income Affordability
Programs and Rate Designs

In the US, the real situation we are up against is that the US economy produces “living wage” jobs for under one-half of our population. Though it has social programs that cover parts of the population who are elderly or younger but unable to work, and these programs have goals of inclusion, they are far short of providing universal income sufficiency.

Living wage jobs cover immediate needs for a moderate level of living, but often do not include meaningful provisions for personal sick leave, taking care of other family members when they are sick or injured, vacation pay, a defined benefit pension, saving for older age, or ability to cover educational expenses for children.

Below "living wage", jobs have the following issues:

  • Do not pay enough to meet essential current expenses for a moderate level of living.
  • Typically make households continually or repeatedly income insecure over the lifespan.
  • Do not provide real pensions, paid vacations, sick or family days, or essential medical coverage.

Solutions to Income Insufficiency

The proportion of structurally income-insufficient and economically insecure households is substantial. In fact, it is built in to the way the American economy works and is administered – the high proportion of the job structure that underpays and under-provides is a systemic feature of the economy. With political will, the most effective way to fix the problem of income insufficiency is a fairer distribution of income. An example of what works simplest and best is the child allowance during the first period of COVID-19. Government should make this kind of income supplement permanent.

Until we get a fair incomes policy at the federal level, a less optimal but workable approach covering only the the areas of energy and water is currently addressed by utilities, states (and provinces), and local governments by working out structures for income transfers (subsidies) directly. We can’t solve poverty and wider income insufficiency without a fair incomes policy. But we can achieve and maintain household energy and water sufficiency. We cannot solve the continual creation and reproduction of poverty without federal incomes support. But solving household energy and water affordability is quite possible.

Affordability solutions take the form of payment assistance and low-income rates. These are currently the main approaches to meet the utility needs of households with insufficient incomes. There are many program and rate designs within these two approaches. The programs work best for households in the upper poverty ranges. Programs that work well “on average” usually do not work well or do not work at all for households in the lower poverty income ranges (below 25% of poverty; below 50% of poverty; below 75% of poverty). They may appear to work if all analysis is based on averages, but many have hidden problems that simply do not make sense from the perspective of a low-income household that is trying to cover the “please pay” amount on the monthly utility bills (gas, water, electric). If you hear people saying how well these programs work, look more closely. They do often work wonderfully well if the household income is, for example 150% or 200% or 250% of poverty. Look at the low end (below 25% of poverty; below 50% of poverty) and you will see that they do not work well at all in these ranges. In the range of 0-75%, the programs start to work to some degree. In designing and evaluating these programs, analysis and reporting in the form of program averages leads to missing real problems. Instead, we use a Reichmuth Sector Map (see the Sector Map Methodolgy link on the “Verification” tab) that lets you see the whole distribution including behavior of bills and payments within each poverty range. In planning a new program or rate design, be sure not to start analysis with a range from 0-100% of poverty at the bottom – that wide a span, and working using averages will create more subsidy than needed at the top of the range and fail household in bottom of the range. And, to find the social reality of the problems, talk with the clients in the lower poverty ranges, or you will miss many of the real problems. The goal is that each “please pay” bill is comfortably affordable. If you cannot do that, then affordability has not been fully addressed, even though a design may work well for some households in the upper ranges of low-income or “on average”.

Budget Counseling Is Not Enough

The primary utility and regulatory approach is specially designed low-income rates. Such rates are in place at most electric, natural gas, and water utilities. In the 1980s and 1990s, such rates were often accompanied by a theory and rhetoric that suggested most payment problems were due to some kind of failure on the part of some low-income customers, for example, lack of education, lack of ability to do household budgeting, and the need for budget counseling to better handle household expenses.

While there are some households do need budget counseling, no matter how well a household knows how to budget, if income is structurally insufficient over the lifespan, necessary costs cannot be paid. It is not a small problem. It is a fundamental structural feature of our economy that continues and is enforced over time. There are different types of poverty and some individuals and families can move out of poverty, but degrees of poverty and income insufficiency are a built-in feature of the economy. If one household moves out of poverty, the structure of available job slots means than another household moves in. Then, there is life arc – over a lifetime, many households able to build a workable income lose it when one earner loses a job, and again when parents enter older age and cannot work anymore. And, the official poverty levels and poverty statistics underestimate this income insufficiency. Beyond poverty, a very substantial proportion of households have serious income problems. Now, with rapidly advancing climate change, these problems are intensified, and will continue to intensify and the proportion of households unable to pay utility bills will continue to enlarge. Climate change will likely be associated with inflation, government engineered recessions to control inflation, and very substantial rate rise due to costs of electrification, decarbonation, and hardening for resilence. These costs will to substantially expand the number of households requiring income support.

Design and Evaluation

In designing low-income rates, the first principle is that billed amounts should be low enough that each household is able to comfortably pay the “please pay” amount on each monthly bill. There are several forms for these rates and a number of factors to watch to ensure other parts of the rate design do not cancel out the central logic of the rate structure.

In evaluating an existing rate, it is necessary to examine if and to what extent these fairly frequent side effects are happening and to recommend design changes to fix these problems.

Two standard and complementary approaches to resolve
problems of inability to pay cost-of-service bills are:

Separate Payment Assistance

Program (LIHEAP) utilty payment assistance grants. LIHEAP and the diligent services of the community action agencies that deliver it and the state agencies that administer it can perform wonderfully well. LIHEAP works, but funding varies from year to year and the program is underfunded in relation to need.

Direct Rate Subsidy/Rate Design

Utilities reduce bills through direct rate subsidy so the “please pay” amounts are far less than cost-of-service, and are actually affordable. One good direct rate subsidy approach is the Percentage of Income Payment Plan (PIPP), in which each income-eligible household receives a monthly bill tailored to their household income. A variant that avoids the cost of improving the central billing system to provide PIPP billing tailored to each household is a tiered PIPP. A tiered PIPP is structured using rate tiers for groupings of households at different poverty levels (for example, 0-25%, 26-50-%, 51-75%, 75-100%, 100-150%,151-200%, and 200-250% of the federal poverty level). A tiered program is not tailored to the individual household, but to groups of households, so it is easier to adminster (because it works on the average for a group). Program approaches based on averaging inherently over-subsidize at the high end of each group range and under-support a the low end of each group range. This problem decreases as the number of tiers is increased; it can be severe if the range for each group is large (for example, 0-100% will hide serious problems). The reason programs are often designed with only a few income groups (rather than PIPPs, or with several income groups, each with a small range) is that current utility customer billing software is not designed for PIPPs. Going to a full PIPP (or a PIPP with many tiers) could require replacement of customer accounting system software which would be a major expense. At the same time, if billing software is going to be replaced for other reasons, this capability could be included when searching for new software.

Elements to Take into Account

In low-income rate design, the first principle is to design rates so the “please pay” amount on the monthly bill received by each customer is low enough that the customer can comfortably pay the amount.

Some of the other elements to take into account are:

  • Linking the Rate (and Bills) to an Arrearage Management Plan (AMP)
  • Linking to Provision for Payment Agreements
  • Linking to a CARES-Type Program
  • Termination of Service Policy with Provision for Waiver of Termination
  • Structure of Fees and Penalties with Provision for Waiver of Fees and Penalties
  • Program Control Tools and How Control Tools Impact the Ability to Pay
  • Performance Metrics
  • The ALICE Problem
  • Provision for Middle and Upper Income

Arrearage Management Plan (AMP)

One of the things to consider when designing rates is linking the rate (and bills) to an AMP with a provision for arrearage forgiveness when payment is not possible given a household’s economic situation.

CARES-Type Program

A CARES-type program can provide services to customers experiencing major events of the life arc, such as:

  • Severe Injury
  • Life-Threatening Illness
  • Dementia
  • Approach of Death

referral services

It also provides careful referral services, with follow-up, for

  • Family Emergencies
  • Loss of Income Due to Divorce
  • Unemployment
  • Death or Incapacitation of a Wage Earner
  • Medical Emergencies

Performance Metrics

People flow through rates from year to year, and low-income rates link to balancing accounts. Metrics are required as performance indicators.

The ALICE Problem

ALICE (Asset Limited, Income Constrained, Employed) customers include customers recognized within the federal poverty system plus customers above the poverty line who are also income insufficient. Assessing a subsidy charge to customers who do not qualify for a program but are also income-insufficient is counter-productive to the goal of maintaining overall continuity of service and affordable payment.

Provision for Middle and Upper Income

During the COVID-19 business shutdown, some state governments and utilities redefined eligibility to be based on either actual income in the current month or (the standard qualifier) income over the last year.

This permitted the inclusion of normally middle and upper-income households faced with major temporary loss of income (for example, accidents, death, unusual medical expense, inability to continue working, and widescale business shutdowns). This provision for the special case of temporary poverty makes programs more equitable, meaning that households that pay for the subsidies can also take advantage of the programs in emergency situations.

Other Considerations

There are other elements, and there is more to low-income rate design. It requires analysis of ideally five years of data in the customer billing and payment system to base the design on quantitative analysis. The design should involve discussions with managers and staff plus discussions with parties and with low-income customers, and stakeholders. Plus, for regulated utilities, the design must be in accordance with state code and regulatory requirements and guidance. These are some of the key policy consideration in the design and evaluation of affordability programs and rates.

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