If you are running a small water or wastewater system, evaluating your rate structure on an annual basis is a best practice. By reviewing its financial goals, rate structure, and budget each year, a system’s leadership can better assess if a utility’s needs are being met or if changes must be made.
Understanding Your Water System’s Goals and Priorities
Every public water and wastewater system has competing obligations it must prioritize in order to effectively run itself as a business while simultaneously striving to maintain affordability for customers. With a requirement to protect public health, systems must charge a rate that pays for appropriate treatment, operations, and maintenance of the utility’s assets. It also has to determine how other values, such as water conservation, economic development, and affordability for various classes of customers should be considered. And finally, a water or wastewater system must plan for tomorrow, putting away savings that can help with both planned and emergency expenses necessary to maintain or improve service. Without savvy financial planning, broken equipment can cause a public health crisis.
Understanding Your Rate Structure: Water Systems
Unless your system is brand new, it is already charging customers for water or wastewater services, using a variety of factors to determine rates. Your rate structure–the implementation of how those charges are determined–should be publicly available and reviewed at least annually.
Historically, many small water systems used a rate structure that charged just a fixed or flat rate for water, which does not account for a customer’s usage. While convenient for accounting, this rate structure does not help with affordability or conservation measures a system might wish to prioritize. With meters highly encouraged, charging based on volumetric rates is preferred. If your water system has individual meters that measure the amount of water each customer is served, you can use volumetric pricing, in which charges are allocated based on consumption. Using volumetric charges means that both the utility and the customer are informed on how much water is needed for a service connection, which can influence customer behavior and encourage conservation.
For households who struggle with paying utility bills, volumetric pricing also allows costs to be distributed based on consumption, allowing those connections to save money through conservation. Many utilities who use volumetric charges still have a base charge, the minimum amount paid by a customer regardless of their usage. They may also have a consumption allowance, in which customers only pay the base charge if they use less than a certain threshold of water or wastewater services.
For systems incorporating volumetric charges into their rate structure, there are three additional ways to charge based on volume: a uniform rate, a decreasing block charge, or an increasing block charge. In a uniform rate, the amount charged for each unit of water (often in thousand gallon increments) stays the same, regardless of the total water used. In contrast, both increasing and decreasing block charges change the price of water based on how much is used. In an increasing block rate structure, the unit price of water increases the more water a customer uses. In a decreasing block rate structure, the opposite occurs. For systems attempting to encourage conservation, an increasing block rate incentivizes low water usage, as high usage customers are penalized the more they consume. This is common in water-scarce communities who have concerns about long-term supply. In contrast, if a community is attempting to encourage growth of water-dependent businesses, a decreasing block structure would make water cheaper per unit the more a customer uses.
Beyond the rate structure for base and volumetric charges, water systems must also consider if other costs should be accounted for elsewhere. Taxes, conservation fees, and other ancillary charges should also be acknowledged in a system’s rate structure. If a community provides water or wastewater to different types of customers, having different rates for each class of customers is also appropriate, particularly if some of those customers require larger capacity of distribution lines. Evaluating how a system charges customers if they are single-family households, apartment complexes, or commercial enterprises is an additional factor water and wastewater systems should consider when reviewing their rate structures.
Understanding Your Rate Structure: Wastewater Systems
If your water system also has a wastewater component, a review of its rate structure is also necessary. However, while many systems meter water consumption going into their community’s homes and businesses, almost no wastewater systems meter the flow of the waste effluent. Deciding how to charge customers, then, can vary according to each utility.
For many systems, a flat charge for wastewater based on the type of drinking water connection (residential, commercial, etc.) is utilized. While simple to determine revenue, this structure again fails to account for customers creating more wastewater. Other options include charging customers based on their drinking water consumption levels, with the idea that the more water being used in a household or business, the more wastewater will likewise be generated. However, some water delivered to a household does not return to the system as effluent, but instead is used for purposes like gardening and watering lawns; these households use more water in the summer months, but do not require additional wastewater services than when they are not using water outside. If a system would like to incorporate this additional scenario, determining an annual wastewater rate based on winter monthly consumption of drinking water (when outdoor usage is at its lowest level) might be an appropriate approach.
As with water rates, wastewater rates ultimately are the primary means by which a utility generates the funds needed to operate and maintain itself. One additional recommendation for utilities is to maintain separate accounts for water, wastewater, and other utility services such as trash collection or parks. Doing this will allow the system to better determine if the rates being charged–and revenue generated–indeed match the expenses for each component of the utility, or if some parts of the utility are being subsidized by others.
Understanding How Much Revenue Your Rates Generate
Once a system has reviewed how its rates are structured, evaluating how much revenue is being generated from them is the next step. Reviewing historical records of water consumption, along with a system’s expenses and revenue, can help illustrate how the amount of water used by customers has impacted the amount of revenue generated over time. When compared to a system’s historical record of expenses, water and wastewater utilities can begin to project how prior usage trends might look in the future, which allows a utility to set its rates at appropriate levels to ensure full-cost recovery going forward.
For systems who may have records but are unsure how to best evaluate their budgetary needs, finding free support through technical assistance providers like the Environmental Finance Center Network (EFCN) is recommended. Resources like the EFCN’s Water and Wastewater Rates Analysis Tool allow public utilities to incorporate water consumption and rate structures, along with additional variables such as growth rate, uncollected bills, loans, and multiple rate classes and block rates, into their internal evaluation. If a system is unsure how best to evaluate its historic data to project future revenue, getting help from the EFCN is a great next step to take.
Conclusion
A water system’s rate structure is the means by which it generates the money needed to pay for its current expenses and save for future ones. If your water or wastewater utility has not reviewed its rate structure, financial goals, and budget in the past year, it is time to do so! Working with a technical assistance provider can help utilities get the additional expertise needed to make better long-term decisions for their community.
Stay tuned for a future blog, How to Adjust Your Utility’s Water and Wastewater Rates, to learn more about how to adjust your rate structure to meet revenue needs.