Rate Studies

What are they and What is our Belief?

Every utilities needs to generate sufficient revenues to pay for the operation. However water and wastewater are normally undervalued when compared to other utilities (cable, phone, etc.). Those enterprises have spent years advertising their products, but often water and sewer utilities do not. Public relations is a part of the water and sewer funding cycle.

The utility must be self sufficient, but generating revenues is one of the more challenging issues utility managers face, often as a result of political pressure from politicians and ratepayers. Hence, good financial planning and projections of the future are important part of rates and charges. One of this issues that arises is budgeting to control budgets – but how often can you cut operations? You need a certain number of operators, you need to fix things, you need chemicals. So maintenance and capital get cut, but both increase risk of failure by the utility – failure being outages or large financial hits. Rate projections are designed to avoid this. That is one thing we do – we do not look short-term – but medium term.

How do you charge? Utility systems charge a variety of rates, fees and charges for service. These include monthly service charges, impact fees, assessments and miscellaneous fees such as meter re-reads, connection fees, late payments and backflow testing. Each of these fees should have a basis for the charge generally consistent with the financial policy of the system.

Different user classes may be charged different rates if the rates can be justified. For example, a distinction can be made in some instances between user classes, i.e., residential customers being charged differently than industrial or commercial customers. Bills can be split ino pieces as well – most utilities do.

Periodic changes for service are the costs collected on a regular basis from existing customers for the amount of service they receive. Billing for service can occur at any interval, but typically occurs monthly, bi-monthly or quarterly, on a schedule determined by the utility. Periodic service charges are usually broken down into two portions - availability charges and volumetric charges. Availability charges are the fixed portion of the bill which is generally based on equivalent residential (or dwelling) units (ERUs or EDUs), meter size or some mixture of the two. The volumetric charge is based on the amount of water consumed by the customer as determined from meter reading. Due care must be exercised to avoid under-collection of fees with the imposition of any rate collection method.

The fixed-fee portion of the service charge is collected from every customer regardless of whether or not there is any usage at the address. This practice is intended to allow the utility to bill customers where service is available, because there is a cost for having the service available to the customer’s property. One obvious and consistent charge encountered is that of meter reading and sending out the water bills. As a result, this cost should always be included in the fixed portion of the bill; likewise, debt service continues to occur whether or not the customer uses the system. Because the repayment of debt is important in order to protect the financial position of the utility, debt is often the highest priority in the budgeting process and as a result, revenues to cover debt are typically included in the availability charge.

Inclusion of debt in the availability charge is something the bond rating agencies look for, and can save the utility money on long term borrowing by providing assurance that the debt will be collected. The problem with this rationale is that in areas with large numbers of people on fixed incomes or limited economic ability.

So how are these issues all put together? Financial projections, good past records, and an understanding of the future help create a picture of where revenues needs are headed. Then project your way to it. We do this with online models.

Only two fees have major legal constraints – impact fees and assessments. The case law defining the employment of user fees varies from state to state, but is underlain by the basic concept of fairness. A utility’s rates not only must be reasonable, they must be non-discriminatory, although different user-classes can be charged differently provided a valid rationale exists for the difference. We have lots of experience helping you develop a means to define impact fees.

Our GOAL

Simple is good. Easy to explain is important. Clear, concise, reasonable – that is the goal. You will have goals, like water conservation, coverage, etc. Those will be incorporated into your rate analysis. Some example pages from larger system are attached below. Your rate study should be less complicated, but the idea is that we can provide the complexity you need for your utility.

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