Low-Income Affordability Programs/Rate Design
Low-Income Affordability Programs and Rate Designs
- 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
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
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 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: Provide cost-of-service bills, but apply payment assistance (for example, federal Low Income Home Energy 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
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)
- Severe Injury
- Life-Threatening Illness
- Approach of Death
- Family Emergencies
- Loss of Income Due to Divorce
- Death or Incapacitation of a Wage Earner
- Medical Emergencies
The ALICE Problem
Provision for Middle and Upper Income
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.