Policy Report City Services Bill - Monthly Billing Background: Public Utilities and Public Works provide water supply, wastewater collection, solid waste collection, and stormwater management services to the residents of Virginia Beach. Service charges for all four are combined in a single City Services Bill. Annual billings are $185 million which represents about 22% of the City’s annual revenue excluding state and federal funding and the school budget. Collection efficiency is 99.6% of billed revenue 1. Public Utilities reads water meters and bills for service bi-monthly (61-day billing cycle +/-). The City is considering monthly billing because the typical two-month residential bill for all four services is high – about $200. Research conducted by the American Water Works Association and the US Environmental Protection Agency indicate that financially challenged customers benefit from monthly billing even if the total annual charges remain the same 2. Benefits include cash flow and budgeting – and lower accrued delinquent balances if the billing process results in shorter billing and enforcement periods. If combined with monthly meter reading, leaks are detected sooner. Monthly billing allows customers to better understand the cost of each service in-and-of-itself, and relative to private utilities which bill monthly (electricity, gas, phone, cable, etc). Monthly billing processes that result in longer billing cycles and enforcement periods will result in larger accrued delinquent balances and will hurt – not help – financially challenged customers. The Billing Process: Meter reading, billing, and revenue collection involve millions of actions each year that are coordinated and mass-produced for efficiency and low unit cost. Each work day, 3,000 to 4,000 meters are read manually (805,000 per year). Readings are entered into handheld devices then uploaded to the billing system. The readings are processed by the billing system at night and bills are sent out the next business morning. This process is ongoing, five days per week, 52 weeks per year. Including re-billing and late notices, more than one million bills are produced annually. Customers are allowed 30-days from the bill date to make payment. About 750 to 1000 customers per day (225,000 per year) will not meet this date. If payment has not been received by day 33, the billing system will send a delinquency notice indicating that service may be terminated if payment is not made within 12 days (day 45 from the bill date). However, to allow a grace period and for other business reasons, service is typically not discontinued until 5 to 10 days after that (day 50-55) 3. In a parallel process – also controlled by the billing system – customers in good standing who request an 1

Put another way, bad-debt write-off is 0.4%. The Public Utilities Business Division and the Office of the City Treasurer share the credit for this outstanding metric which ranges from 3.0% to 0.3% across the industry. 2 Best Practices in Customer Payment Assistance Programs, Chapter 8 – Shrink the Bills: Billing Practices, AWWA Water Research Foundation and US Environmental Protection Agency, 2010. 3 Two days prior to service termination, delinquent customers are sent another reminder via an automated phone call.

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extension before day 33 are granted an extension until day 55 4. About 200 to 250 customers per day will have service terminated for either non-payment or defaulting on a payment arrangement (31,000 and 11,000 per year, respectively). Another 80 to 100 per week (4,000 per year) will require that a special lock be installed on the meter due to tampering. Including service restoration, delinquency enforcement accounts for 79,000 service orders per year. Considerations: Stormwater and solid waste must be billed at the same time and together with water supply if termination of water supply is to be the delinquency enforcement mechanism for all four services. There is no realistic method to terminate service for stormwater or solid waste. Payments and partial payments are applied to these two services first, then to wastewater, and finally to the water supply charges. When Public Utilities terminates water service, it is for the non-payment of water supply, but the other three services receive their revenues with the same collection efficiency. The billing system is a commercial-off-the-shelf (COTS) system designed around meter readings which is the dominant industry standard and best practice. As Figure 1 demonstrates, the billing system has major software interfaces to InSite, the Treasurer’s Office, HRSD, and third-party vendors (e-billing, e-payment, IVR and outbound dialing). Significant customizations limit the functionality of the billing system and may impact the software interfaces. They will impede or prevent the migration to a newer version – which is long overdue – and interfere with technology advancements such as automated metering and mobile service order dispatching that could reduce costs. The City’s experience with the Payroll System is an example of how major customizations reduce functionality and efficiency. The billing system is ten years old, two-generations behind the present-day release, not current with the City’s version of Oracle, and lacks web-based technology. The call center, service order function, and leak adjustments are time-consuming, employee-intensive operations. They are inherently costly and play a role in revenue collection efficiency. The call center answers 134,000 calls per year. The Business Division executes 119,000 field service orders per year – 79,000 related to delinquency enforcement 5. Customers request 3,045 leak adjustments per year (92% residential) which require two FTE’s to process. Customer delinquent balances are important for bad-debt write-off. Lower delinquent balances contribute to lower write-offs – higher balances the reverse 6. Each one-tenth of one percent (0.1%) of bad-debt write-off is an annual revenue loss of $130,000. The costs of major billing system functions for FY2014 are listed below: Billing System and IT Support Customer Billing and Collection Meter Reading Call Center Field Service Orders Leak Adjustments Bad-debt Write-off

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1,010,000 bills/year 805,000 reads/year 134,000 calls/year 119,000 orders/year 3,045 adjusts/year 0.4% per year

$1,549,000 $1,398,000 $ 980,000 $1,107,000 $ 929,000 $ 411,000 $ 520,000

Public Utilities attempts to conclude the delinquency process by day 55 because within the next 5-7 days, the customer will be billed for another two months of service and would then owe for four months (120 days +/-) of service, or approximately $400. For financially challenged customers, this is a formidable sum to deal with. 5 The 40,000 services orders not related to delinquency enforcement include move-in, move-outs, leak checks, and calls related to concerns about the accuracy of the meter reading or the amount of water consumption. 6 During the conversion to the current billing platform in 2005, delinquent accrued balances increased as Public Utilities worked through significant customization issues. Bad-debt write-off for those fiscal years increased from 0.3% to 0.5%.

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Figure 1 shows that the relationships between the billing system and nearly two dozen business practices and software applications are extensive and complex. These business practices have been designed around industry standard best practices to maximize efficiency while delivering quality customer service. Changes to the billing system and business practices must consider the potential for reduced efficiencies and increased workloads. A new billing process that sounds simple may have significant unintended costs in the call center, service order function, leak adjustment process, and/or bad-debt write-off. These four functions cost $3.0 million per year. Customers’ perception of water use is often different from their actual use because within a lengthy two-month billing cycle, periods of high and low water demand offset each other. A customer will recall a one-week vacation in which water use was zero, but not an offsetting period of high use during the other eight weeks of the billing cycle. Complaints about water usage are among the top three most frequent customer complaints and total about 12,000 calls per year. This includes complaints challenging the amount of water use, the meter readings, or the time it took to detect a leak. Monthly meter reading would decrease these complaints and improve leak detection. A Virtual Town Hall (VTH) with respect to monthly billing was conducted in February 2014. Threefourths of 361 respondents indicated that they were not in favor of monthly billing. In contrast, Norfolk and Suffolk utilities officials have indicated that customer reaction to monthly billing has been extremely positive. The VTH occurred following the increase in solid waste charges from $10.00/month to $21.36/month. Along with smaller increases for stormwater and sanitary sewer, the typical residential City Service Bill increased by 20% in July 2013. Many of the comments reflected concern with respect to adding solid waste to the bill, that the costs of all of the services were too high, or that the City should be able to bill monthly with no additional cost. Asking customers if they were willing to pay more for monthly billing – even a small amount – immediately after such a significant increase in the City Services Bill may have influenced the results. Participation in the VTH is self-selected. Therefore, the results may not reflect the views of the customer base as a whole. Converting to monthly billing would have costs associated with preparing and sending twice as many bills, regardless of whether monthly meter reading was implemented or not: Item Annual Cost Increase Paper, printing, postage for sending bills monthly $375,000 Support to the Treasurer to process additional volume $ 85,000 Three FTE’s in Business Division to handle additional $140,000 billing workload and support costs TOTAL $600,000 Alternatives for Monthly Billing: Estimated Meter Readings: This alternative would use estimated meter readings to send the customer an estimated, interim bill in the middle of the two-month billing cycle. Estimated meter readings create major customer confusion and complaints when the estimated consumption differs from the customer’s perception of his/her water usage. Enforcing delinquency based upon estimated readings is problematic, so the delinquency and enforcement periods would most likely default to the existing two-month cycle. Therefore, this alternative would not shorten the billing or delinquency periods, would not improve leak detection, and would not decrease delinquent balances. It would increase customer complaints and call center activity. This alternative would require a major customization to 3 of 7

the billing system. The additional annual costs would be about $600,000 per year for the additional bills, plus increased costs for the call center which cannot be quantified, but would not be insignificant. This would not provide significant benefit for financially challenged customers. Split-Billing: This alternative would bill for half of the service when the meter is read, and the other half thirty days later. This alternative would increase customer confusion with respect to water consumption as much as – if not more than – estimated meter readings 7. Public Utilities identified one water and sewer utility that implemented this process. The business manager for that utility described the process as “a customer service nightmare” and indicated that it generates a significant and disproportionate number of customer complaints. The related customer service calls require long periods to resolve – many up to 20 minutes 8. The utility is in process of abandoning split-billing by converting to automated meter reading so that it may read meters monthly. Split-billing would extend the collection and enforcement period and would result in higher balances for delinquent customers and customers who are relocating. It would not improve leak detection – it would hamper it. Customizations to the billing system would be significant, and would require a billing system and business practices that would be unique and opposite from industry standards and best practices. The additional annual costs would be about $600,000 per year for the additional bills, plus increased costs for the cost of collections, call center activity, leak adjustments, and bad-debt write-off. These costs cannot be quantified but collectively, they could approach or eclipse the cost of monthly meter reading 9. Monthly Meter Reading - Manual Meter Reading: As indicated above, the billing system is designed around meter readings. If meter readings are provided more frequently, the billing system will generate bills more frequently. Public Utilities would need to adapt the delinquency process to the shorter billing schedule and coordinate with the Treasurer’s Office, HRSD, and third-party vendors to assess the impacts of increased payment activity. These would be relatively minor changes to a stable system and the interfaces to other major data systems would not change. Monthly meter reading would reduce misperceptions over water consumption and flag leaks sooner. The billing and enforcement cycle would be shorter and delinquent balances at service termination would be smaller. If implemented in the short-term, the increased meter reads would be accomplished by contracting with private sector firms, as is done now in Norfolk and Suffolk. The additional annual cost of monthly billing with monthly meter reading would be about $1.0 million per year, or about 0.54% of total billings. In terms of the residential bill, this would be about $0.63 per bill. Monthly Meter Reading – Automated Meter Reading: Automated meter reading (AMR) and Advanced Metering Infrastructure (AMI) use technology to read water meters wirelessly in lieu of employee-based manual readings. These advanced meters collect and store water usage data on a continuous basis. AMR meters upload the data to a fixed receiver or drive-by vehicle on a monthly basis, while AMI systems report data to a server on a nearly real-time basis. AMI technology in particular holds promise for significant productivity gains and customer benefits. If Public Utilities had not had an active aged meter replacement program for the last 30 years, AMR or AMI would 7

Consider a billing period of August 1 thru September 30 (a high water use period). A customer would receive a bill for 50% in early October and the other 50% in early November (a low water use period). Public Utilities would be billing in November and attempting to collect in December for services that were rendered (partly) in August. 8 The average call time in the Public Utilities Call Center is 5.4 minutes. 9 Bad-debt write-off alone could cost as much as monthly meter reading. The utility using split-billing reported bad-debt write-offs of 1.0% to 1.5% with an aggressive delinquency policy. The Public Utilities write-off is 0.4%. The splitbilling utility is hoping that with monthly meter reading, it will improve bad-debt write-off to 0.5% to 0.7%.

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already be in place. Aged meters under-report water usage and lose revenue. Many utilities that do not replace aged meters are able to convert to AMR or AMI because the new meters recover lost revenue which then pays for the system. That increased revenue would not materialize in Virginia Beach. AMR/AMI has to be justified in terms of the cost of manual meter reading, the aged meter replacement program, and potential reductions in the cost of executing service orders. However, the benefits, capabilities and performance of AMR/AMI systems continue to climb and the costs continue to drop. Conversion from manually read meters to AMR – or more likely – AMI is a fiveyear, $25 million CIP project. However, the cost of manual meter reading, aged meter replacement, and service order execution is $3.5-4.0 million per year, a considerable amount of which would be eliminated by AMI. Other Utilities: Through the HRPDC and the Association of Metropolitan Water Agencies, Public Utilities solicited input from other water utilities with respect to this issue. Thirty utilities responded. The recommendation against estimated or split billing was virtually unanimous, including the utility that was doing it. Problems citied included 1) significant customer dissatisfaction, 2) increased administrative costs, 3) problems associated with billing system customizations, 4) problems with leak detection and adjustments, and 5) issues with move-in and move-outs. As indicated above Columbus Water Works in Columbus, GA has implemented split-billing, but is in the process of converting to monthly meter reading using AMR technology. Public Utilities could not locate any utilities currently using estimated meter readings for billing. However, anecdotally it was reported that many years ago, the City of Nashville and Dominion Power had attempted and subsequently abandoned estimated meter readings for billing. In Hampton Roads, four Utilities bill monthly and all four read meters monthly (Norfolk and Suffolk read meters manually, while Franklin and Gloucester use AMR and AMI). Chesapeake and Newport News plan to install AMR and AMI systems and will pursue monthly meter reading and monthly billing as part of those implementations. Portsmouth and James City County are currently installing AMI and AMR systems and have positioned themselves to implement monthly billing at a time of their choosing. Not a single utility endorsed estimated meter readings or split billings as a viable alternative to monthly meter reading. Summary and Conclusions: Monthly billing would be a convenience to many customers because the more frequent and smaller payment obligations would align better with household cash flow and budgeting. However, it is financially challenged customers who need and benefit the most from monthly billing. In addition to cash flow and budgeting, these customers benefit from the external discipline of shorter billing and enforcement periods, lower delinquent balances if they do fall behind, and faster leak detection. Unfortunately, without monthly meter reading, the benefits that these customers need the most are not achieved. Monthly billing alternatives based upon estimated meter readings or split-billing will not incur the cost of obtaining twice as many meter reads. However, they will have increased costs in the call center, the service order function, leak adjustments, and bad-debt write-off. If estimated billing or split-billing made good business sense, water utilities and the private-sector gas and electric utilities would be doing it – but they aren’t. If these alternatives were viable, billing systems would have optional modules to implement them – but that is not the case either. In fact, the utilities industry is moving in the opposite direction. Water and sewer utilities are joining the ranks of private gas and electric utilities by migrating to monthly billing with monthly meter reading, often as they convert from manual meter reading to AMR or AMI. 5 of 7

Recommendations: Public Utilities recommends exploring the financial feasibility of converting to an AMI system and implementing monthly billing as part of that conversion. AMI has the potential to transform billing and meter reading in the same way that online transactions have transformed banking, bill paying, and shopping. As indicated above, this is a five-year effort. If the investigation does not indicate that AMI is financially feasible or if it is determined that monthly billing should proceed immediately, then Public Utilities recommends that contract meter readers be engaged to implement monthly meter reading. For reasons stated herein, Public Utilities does not recommend estimated or split-billing alternatives.

Prepared By: ______________________________ Director of Public Utilities

January 20, 2016 ___________________ Date

Reviewed By: ______________________________ City Attorney

___________________ Date

______________________________ Deputy City Manager

Approved By: ______________________________ City Manager

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___________________ Date

___________________ Date

Figure 1: Public Utilities Billing Practices and Workflow START Meter Readings

Public Works Waste Management

Banner CIS Billing System

Public Works Storm Water Experian Quality Assurance System

Customer’s Financial Institution (Electronic or Paper)

Treasurer’s Office NCR-Mail Walk-ins Electronic

Mail & Electronic

Customer

Walk-ins Late Service Inspectors

Outbound Dialing Services

Service Orders

Hansen – Work Orders

Memo Payments

DPU Line Fees Function Bills, Notices Tap Orders

Striata Electronic Billing

HRSD

Primary Internal/ External Users Interfaced Applications/Services

ComIT Operations Center (City Enterprise Printing)

iNovah Cashiering System

WaterAdmin

DPU Call Center & Billing Section

Banner Reports Rocket Direct Bulk Mailing Services

United States Postal Service

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Interactive Voice Response (IVR) System

INSITE Financial System (City Enterprise System)

Symposium Automatic Call Distribution System

Western Union Speedpay Electronic Payments

Business Call Recording System

Web Services

Online Services