Using better data to update rate structures

Stormwater management costs are soaring to unprecedented levels. Whether you need to replace or repair stormwater infrastructure that is at the end of its service life, address increased flooding due to sea-level rise, or face new regulatory requirements or enforcement actions, you may be grappling with how to generate the revenue you need to cover these cost increases. In fact, the Water Environment Federation (WEF) Stormwater Institute’s (SWI) 2020 National Municipal Separate Storm Sewer System (MS4) Needs Assessment Survey Results, February 2021, list the top three stormwater program challenges from survey respondents as aging infrastructure (66%), funding or availability of capital (64%), and increasing or expanding regulations (56%).

Many well-established stormwater utilities have been evaluating and updating their rate structures in light of these challenges with a goal of more equitably allocating costs to different customer types. Equitable rate structures can be hard to achieve when also seeking rationality, defensibility, revenue sufficiency, and ease of administration. But when all of these objectives are met, utility directors can respond more quickly and easily to community and program needs with community support. The ability to meet these objectives lies in obtaining good data from a variety of sources.

Cost drivers – background

When determining how to set your rate objectives, it’s important to first examine the elements driving the costs. The earliest stormwater management programs were primarily focused on stormwater quantity control. With the onset of regulatory requirements, the focus of stormwater programs shifted to also include control of stormwater quality. Communities with municipal separate storm sewer systems (MS4s) were required to obtain National Pollutant Discharge Elimination (NPDES) permits for their stormwater discharges throughout the 1990s. Municipalities with combined sewer systems (CSSs) were also required to obtain NPDES permits but the primary focus of these permits was the control of combined sewer overflows (CSOs) that may be occurring more frequently due to climate change and growth.  Municipalities that cannot meet the requirements of their CSO Control Policy may be subject to the EPA enforcement action known as a Consent Decree. Efforts to bring the CSS into compliance with a Consent Decree can be quite costly. Amendments to the Clean Water Act require Total Maximum Daily Loads (TMDLs), or the maximum amount of a pollutant, be applied to impaired waterbodies and watersheds around the country. Municipalities must meet TMDLs if their stormwater discharges to a designated waterway, and this often requires additional funding for treatment.

Meanwhile, stormwater infrastructure across the country is reaching the end of its intended service life and needs to be replaced. Some communities, particularly in coastal and low-lying areas, are being impacted by sea-level rise and will need to upgrade their infrastructure to address increased flooding. Replacement and/or upgrade of the conveyance system is incredibly costly, and often cannot be funded with existing resources, be that stormwater utility funds, or other tax-based funding sources.

Determining the basis of the stormwater fee

Unlike other utility services such as water, wastewater and electric, there is no easy or cost-effective way to meter the amount of stormwater a property contributes to a system. There is an alternative approach to approximate a property’s runoff contribution. Impervious area on a property is strongly correlated with the property’s demand for stormwater service. Water from impervious surfaces (rooftops, driveways, parking lots, etc.) is unable to filter into the ground and thus may require collection and treatment. Over time, it has become an industry standard to measure impervious area (and the characteristics therein) and use that data to approximate the demand placed on stormwater services and systems. The increase in availability of accurate property data has played a large role in the implementation of an equitable rate structure.

Data availability and progression

In the early days of stormwater management, electronic property data and utility account records were not as prevalent or widely available as they are today. Therefore, it was challenging for stormwater programs to accurately measure property characteristics or to maintain data as property characteristics changed over time. Without ongoing data maintenance, impervious area on new buildings may not be captured and demolished structures may continue to be billed for surfaces that are no longer present. Stormwater rates and rate structures based upon inaccurate and out of date information may cause loss of credibility, revenue loss, charges of erroneous fees, and rates may become inequitable to certain types of customers.

Over the years, advances in geographic information systems (GIS) have allowed for the electronic storage of large quantities of tabular data, including property characteristics, along with their associated geographic location. Additionally, high quality aerial imagery can be combined with the GIS data to provide a more accurate measurement of property characteristics. Aerial imagery can be captured frequently, allowing for consistent updates to the data, which can help stormwater programs maintain accurate rates. This data can also help utilities create a rate structure that better aligns with the items driving their stormwater costs.

Due to this increased data availability, many cities and utilities are looking to modify their stormwater fees based on the new data and increase the frequency with which they examine their rate structures. Many stormwater utilities are working to gradually update their data to support their stormwater fees, which were first implemented in the early 1990s. This includes moving to digitized impervious area-based fees, re-examining their current billing units, and detailing the impacts of changing data on their revenue sufficiency. We recommend re-evaluating the billing unit, explained further below, based on a variety of factors, especially the growth rate or development trends of the community. These factors can be a catalyst for re-evaluating a rate structure and provides an opportunity for community characteristics to be reflected in the rate structure as well.

Rate structure components & modifications

A rate structure can contain several components to make up the final bill, depending on the needs and capabilities of the stormwater utility. Local or state laws may determine the way these needs can be addressed. An Equivalent Residential Unit (ERU) is often used as the billing unit for stormwater, and typically equals the median amount of impervious area on a single-family residential home specific to the service area. Most often, a stormwater rate structure will apply to two customer types: the single-family residential (SFR) and non-single family residential (NSFR) customer. Additional customer types can also be defined to address customer-specific goals, decrease data maintenance needs, and meet public expectations. These may include a multi-family residential type, single-family attached type (townhomes, duplexes, triplexes), etc.

SFR customer’s bills are based on a specific rate structure such as a flat, tiered, or tiered with a “cap” rate. A flat rate is the easiest to administer, while tiering introduces more equity by placing properties within a tier based on the impervious area on the property. A tiered with “cap” rate structure uses an upper limit on impervious area so that SFR properties above this threshold will be charged according to the total number of ERUs on their property, just as NSFR properties are, as discussed more below. Using this method keeps administration costs low due to tier-specific charges while adding further equity by more accurately charging the largest residential customers in accordance with their impact on the stormwater system. Because of the amount and variability from one property to the next, NSFR customers are most often billed based on the number of ERUs of impervious area on their property.

Other potential components of a rate structure include a gross area charge according to the total property size, a base charge calculated from shared costs, or a special district charge to address a specific need or series of projects. Many programs use multiple components within the overall rate structure to meet community and program goals.

Designing a rate structure

Rate structure design is a crucial part of the process of examining your stormwater utility. Working closely with our clients, our work focuses on identifying the needs of a community and how designing a rate structure can meet those needs. The needs may include the drivers for the stormwater utility, the community’s strategic goals, and public acceptance requirements, among others. As costs are rising, utilities are becoming increasingly aware of the need for equity and affordability within a rate structure and anticipated rate increases are bringing these issues to the forefront. Components of the rate structure, and a routine review and modification of such components, can help further these goals using a tailored, community-oriented approach.

For example, to address community concerns regarding impacts on low-income residents, our team worked to develop a multi-family residential rate structure alternative designed to blunt the impacts of rate increases on these residents. This alternative calculates a flat rate for each dwelling unit on multi-family properties using the total amount of impervious area divided among the number of multi-family dwelling units, distributing the impact across all multi-family customers while reducing the administrative burden on the program.

Rate structures into the future

Though increasing costs are putting additional pressure on stormwater utilities, the availability of more accurate property data provides utilities the flexibility to explore rate structure design in a new and easier way. It also allows utilities to keep their stormwater billing data up to date, making cost recovery more equitable. By periodically revisiting how customers are charged, utilities can maintain the program’s credibility, as well as keep up with changing development characteristics and the evolving financial landscape. In light of increasing stormwater costs, being proactive with equity and affordability in stormwater fees is an essential way to yield better outcomes and maintain community support.