Detroit

If the numbers provided in recent articles (here & here) are to be believed, the Detroit Water & Sewerage Department (DWSD) is in dire financial straits. 

This is completely understandable as the population of the city has been dropping, leaving ever fewer people to pay the fixed depreciation and increasing maintenance costs of past capital investments. Over-sized infrastructure is a major drain on any utility, and it is one of the most legitimate reasons to aggressively price water services in order to encourage conservation.

Another major issue appears to be delinquent accounts (150,806 out of 323,900 - 48,4%), with an average debt of roughly US$780, for a total of US$118M. Shockingly, this represents only a fraction of the total US$5 billion in debt that the utility has accrued. 

The average monthly water bill is US$75, which means that the utility is grossing US$24.3M per month, US$11.3M of which is going straight into accounts receivables. With the US$13M left over, DWSD has to pay salaries, other operational costs, etc. not to mention the US$5 billion (!) in debt. Looked at it another way, the debt represents 32 years' worth of collected sales.

This calls into question activists' accusations that DWSD is undertaking this campaign to ready itself for privatization. It is hard to imagine a private utility that would take a second look at the DWSD without significant public assistance in cleaning up the debt situation - even with 100% collection rate. Given Detroit's otherwise disastrous debt situation, this is very unlikely.

Whether the disconnection strategy will yield results remains to be seen. While the utility is right to seek redress from bad payers, outright disconnection effectively reduces the customer base, without providing a solution to sponge up the accounts receivables mess. Disconnecting customers is also costly, to wit:

3000 disconnections per week are 600 disconnections per day, 5 days a week. Depending on the efficiency of technicians, the opposition of residents, the distance between disconnections, etc., we can conservatively assume that this will require 75 technicians (1 disconnection per hour per technician, 8 hr/d). Assuming that a technician's yearly salary is about US$35,000, the monthly cost of the disconnection program is at least US$218K, or about 2% of uncollected monthly sales, not including management costs, gas, depreciation of vehicles, etc...

In other words, this disconnection operations makes sense only if it results in at least a 2% monthly improvement in collected sales. If customers are not paying their bills for lack of money, this seems like an unattainably ambitious goal. If they are failing to pay for lack of discipline or any other non-financial reason, this program might just work.