Audit of Water Service Account Inventory and Revenue

The Office of Inspector General (OIG) conducted an audit of the City of Chicago’s water service focusing on account inventory, meter reading, and temporary water usage practices. The Department of Water Management (DWM) provides and manages water access while the Department of Finance (DOF) manages billing. The Municipal Code of Chicago (MCC) authorizes non-metered water service provision to single family homes and two-unit residences at a rate based on property characteristics rather than water usage. All other structures—old and new—are to receive metered water service. The City’s water system currently serves over 490,000 accounts in the city and suburbs.

The objectives of the audit were to determine whether the City,

  • recorded meter read data in its water billing system in a timely manner
  • maintained a complete and accurate inventory of all locations receiving water service
  • billed the legally required rate for temporary water usage from fire hydrants

We found that DWM uploaded 100% of meter read data to the City’s water billing system in a timely manner, which is a critical step in the billing process. However, we also found that DWM allowed an estimated $3.9 million in free water use at private construction sites from June 2008 through December 2014. The revenue loss occurred because a permit fee for water used during construction activities was eliminated and the Department did not require property owners to install meters immediately after receiving a DWM water service connection.

In addition, we found that DWM was providing non-metered service to non-residential buildings and residential buildings with more than two units in violation of the MCC. DWM informed OIG that it identified 2,513 noncompliant, non-metered accounts in April 2011 and had worked to reduce that number to 837 by May of 2014. However, OIG’s examination of active accounts found that DWM had not identified all noncompliant non-metered accounts. Moreover, we found that DWM lacked a formal strategy for bringing noncompliant accounts into compliance in a timely manner.

We also found that the City provided $330,981 of water service to properties without collecting payment from property owners. DOF assigned an “inactive” status to accounts for 38 properties that were, in fact, receiving water service or had all necessary structures in place to receive water service. As a result, DOF failed to collect revenue for water used at 26 of those properties. DOF also lacked sufficient safeguards to prevent inappropriate classification of accounts as “permanently removed,” a classification limited to accounts for demolished buildings.

We reviewed a sample of water accounts and concluded that DWM maintained a complete inventory of properties with water service installed. However, we found gaps in the account verification process for new installations that could allow customers to receive water without being billed, although OIG saw no evidence that such an error has occurred.

Finally, we determined that DWM’s billing practices for temporary water usage from hydrants did not comply with the MCC:

  • DWM charged only one-third the rate prescribed by the MCC
  • DWM granted fee waivers that are not authorized by the MCC

In addition, DWM did not reliably track revenue generated from hydrant permits. As a result, we were unable to calculate the revenue lost due to DWM’s practices of granting fee waivers and charging a lower rate than required by the MCC.

OIG concluded that DWM effectively executed two processes that are crucial to the billing process—account creation and timely meter reading. However, DWM did not adequately charge for water use on private construction sites and hydrants, and gaps in DOF’s account status controls allowed some users to receive free water. OIG recommends that DWM ensure that all non-exempt customers are billed for water, bring all noncompliant, non-metered accounts into compliance with the MCC, and correct its billing practices related to hydrant permits. We recommend that DOF consider additional safeguards to prevent or detect inappropriate account classifications that could result in a failure to bill all accounts for water service.

In response to our audit findings and recommendations, DWM committed to begin requiring meter installations at the time new water service is requested and to take appropriate enforcement actions against noncompliant, non-metered accounts. DWM also stated that it will work with City Council to simplify the temporary water usage fee structure in order to ensure that it collects the appropriate fees for hydrant permits. DOF stated that it has created a weekly report that identifies accounts that may have been inappropriately deactivated for further review. DOF also stated that it has already reduced the number of users who can mark an account as permanently removed and will evaluate the feasibility of validating that the properties associated with permanently removed accounts were actually demolished.