In Featured, Research Article, Utility Rate Studies

Accuracy and Public Accountability Should Be Priorities

The accuracy of customer bills sent out by municipal water and sewer agencies is reviewed far less than it probably should be. Particularly during implementation of a new rate structure, it is often unclear how the billing software will handle the changes and whether there will be any errors. Utilities should ensure that every customer bill is accurate, and as recent class-action lawsuits against local water and sewer agencies have shown, there may be more at stake than simply rectifying a few discrepancies in customer bills. For utility managers, this is your fiduciary responsibility.

Many utilities have older billing systems that are updated infrequently, if at all, and audits that check the accuracy of customer bills may be infrequent even for systems that aren’t all that old. Adding to the problem, system inaccuracies may be introduced over time as residential accounts change ownership, rental property accounts are opened and closed, and commercial account ownerships change. Inaccuracies are easy to accumulate, so a sound approach should include a periodic spot-check of both customer account records and bill calculations.

This article summarizes a few billing system malfunctions that municipal water and sewer utilities should be aware of. Besides risking the loss of customer confidence, agencies may also be under-collecting revenue. Some common billing system problems are discussed, along with suggestions for fixing them.

Examples of Billing System Malfunctions

Implementing new water rates may introduce errors into a utility’s billing system, errors which may be related to either the rate increases and/or the new rate design. For example, the amount of revenue collected from fixed vs. volumetric charges may change, or the utility may be adopting a more complicated rate design such as budget-based rates. New sewer rates might include adding volumetric rates based on average winter water use. Other ways of introducing errors into billing systems include:

  • Inaccurately inputting new rate structures into the billing system.
  • Misapplying metered consumption to tiered water rates.
  • Miscalculating average winter-water use by the new volumetric sewer rates.
  • Assigning incorrect customer class codes (e.g., if multi-family accounts are now counted in the commercial rather than residential class).
  • Not fully understanding the intricacies of how the new rate design should be incorporated into the billing software.

A few examples of billing system debacles are presented in the following sections, and although the system specifics are omitted, each represents actual situations as encountered by the author:

New Water Rate Design – Years ago, a large water utility adopted water-budget based tiered rates, which required re-calculating residential bills to reflect individual parcel data. During the first summer, one upset customer walked into the mayor’s office with an $800+ water bill demanding to know, “What is going on?” Many other customers were also over-charged. A quick audit showed that at least 30% of bills were not accurately calculated and that the problem was rooted in how parcel-based water consumption records were used in calculating bills under the new budget-based tiered rate structure. Unfortunately, the decision-makers who adopted this complex new rate structure assumed it could be easily incorporated into the existing billing system. Meanwhile, the billing system administrator resigned unexpectedly, just as the full impact of this catastrophe was coming to light.

New Sewer Rate Design – A sewer utility adopted a new rate structure that was designed to charge a volumetric rate based on each customer’s average winter water use. This approach was used to charge less to those generating less sewer effluent, more to those generating more based on winter water use. In a Mediterranean climate, this is the best proxy for levels of household effluent generation because it largely removes irrigation-related water use. However, in this case, billing staff were unaware that there was a mechanism in the billing software to switch volumetric calculations between monthly and winter average water use, and therefore monthly water use was misapplied in many accounts. A quick audit of about half of customer bills indicated that 20% of customers were under-billed while 10% were over-billed. The bottom line was that the utility lost roughly eight percent of the expected sewer rate revenue.

In another case, a sewer utility was billing volumetric sewer rates based on monthly water use for several years, even though sewer rates should have been applied only to winter average water use. Although customers had regularly raised questions about why their summertime sewer bills were so high, the city was collecting additional revenue and was slow to make this correction.

Lack of Field Verification of Customer Accounts – It is easy to overlook changes in commercial businesses that occur over time, particularly with sewer accounts. Businesses frequently change or close, and when a different type of customer reopens as a new business, the billing system does not automatically catch this change. One sewer district had a customer show up at the board meeting on the night that higher rates were to be adopted and said she knew of several cases where the business was closed, the building demolished, or the business was just not being billed. After postponing the adoption of the new rates, a subsequent field verification concluded that 15-20% of the accounts were either misclassified, not being billed, or, in one case, the structure had been torn down.

The Root(s) of the Problem

While new rate structures can often introduce billing inaccuracies during their implementation, there are other possible causes:

Employee Training and Skill Levels – Through no fault of their own, many employees in charge of preparing monthly bills have inadequate training and/or skill levels to handle increasingly complicated billing software. This becomes particularly evident when extracting monthly water use and water/sewer billing data needed for a rate study. Managers often assume that since monthly bills have apparently gone out without a hitch, accounting staff must be experts at managing the billing software. To compound the problem, governing bodies also often assume they can adopt a new rate structure and it can and will be implemented the very next month, with little time to train staff, conduct an audit, or verify that the new bills are accurate.

Lack of Detailed Implementation Plans – Implementation of a new rate structure is often an afterthought. Managers may not be aware of billing software intricacies, or customer billing staff don’t fully understand how the new rate design was intended to work. To further complicate the problem, software designers generally have a “coding-brain” that thinks in terms of software rather than how accounting staff will use the software, and accounting staff are not typically software application experts. When considering a new rate design, one of the first questions to ask should be, “Can our billing system accommodate this rate design?”

Outdated Customer Accounts – As mentioned previously, businesses change over time and unless there are procedures to ensure customer accounts are updated, inaccuracies will gradually creep into the customer database. On the residential side, some water agencies have reported that they are aware of dozens, if not hundreds, of single-family accounts that have added a granny flat or accessory dwelling unit that has not been added to the billing system. Field verification, which is a time-consuming task, is often not a high priority. Under a new rate structure, the errors buried in the accounts might suddenly have greater importance to billing accuracy.

Fixing and Preventing the Debacles

Effective solutions to billing system miscues are often relatively straightforward, including the following:

Additional Training for Billing Staff – It’s not uncommon for billing and customer service staff to have insufficient software training and to not be particularly well-suited to solving software issues. Many billing systems could be used more efficiently if existing staff were better trained in their specific software features. Also, billing software is infrequently replaced, and if the original training was provided years ago, it may have been long-forgotten and/or the staff originally trained have moved on without adequately training newer staff. In the end, billing system staff need focused training on the utility’s current billing software, and this team should conduct regular audits to verify monthly bills are accurate.

Conduct a Billing Audit and/or Field Verification of Accounts – Typical billing inaccuracies occur due to meter misreads or data entry errors, but these are usually obvious and easy to fix. Systematic problems, however, can be more insidious and impact the entire customer base. For example, calculating average winter water use for individual accounts can be complex, as can be adapting bill calculations for tiered or budget-based volumetric water rates.  Periodically spot-checking a sample of customer accounts is a good way to ensure the accuracy of bills. Another recommendation is to ensure there are procedures for capturing changes in businesses or residential customer accounts and scheduling field verification of accounts, particularly in areas with new construction or renovation of commercial businesses. This might include checking multi-metered (and/or sub-metered) accounts, which tend to change over time. Billing notices should clearly show the components of a customer’s bill, and remember, customers themselves shouldn’t be a last line of defense against billing errors.

Update or Replace Billing Software – Replacing an antiquated billing system eventually becomes a necessity, and this can be costly in terms of both time and money. In order to ensure the utility’s requirements are met, have a written guarantee that specific performance standards for the billing software will be met. Don’t allow salespeople to promise specific features that the future installer can’t deliver; instead, make sure all contracts have explicit assurances of what the new system will do and that all deliverables are clearly defined.

Create a Test Environment for New Rates – When implementing new rates, a test environment should be set up in the billing system so staff can run utility billing at the old rates and new rates for a month or two before they are effective. This will allow staff to test the new rates and “work out the kinks” to ensure bills are accurate before they are actually sent to customers. In any rate setting process, allow enough time to implement new rate structures and ensure that bills are calculated correctly.

Conclusions

Billing system debacles are more common than the water industry would like to admit. Many water and sewer utility customers assume their bills are accurately computed and rarely check them. Nevertheless, if utility managers place a high priority on accurately billing their customers, they should not only be aware of potential problems, but proactively address them. Key actions to consider include:

  • Evaluate current billing system capabilities before exploring new rate structure designs.
  • Assess the billing staff’s training levels – particularly whether they can conduct audits to check the accuracy of customer bills, and then have them do it!
  • If implementing rate increases and/or changes in rate design, make sure there is adequate time to implement and review these changes before sending out new bills.
  • Incorporate procedures for periodically field-checking customer accounts, particularly commercial accounts that tend to change business types over time.
  • Plan for regular billing staff training, including attendance at industry conferences, to communicate with colleagues and billing staffs at similar agencies to learn from their experiences.

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