Read the previous blog, Rate Analysis for Your Water or Wastewater Utility, to learn more about what components of your rate structure should be reviewed annually by your system.
If you are running a small water or wastewater system, annually reviewing your rate structure and budget are integral components of administering an effective utility. Upon review, if your system needs to adjust rates to address rising costs due to new expenses, inflation, or long-term planning for infrastructure replacement, the steps to actually changing your rates can be complicated. Your water system should consider affordability factors, address fixed and variable costs, and ultimately review various scenarios to adjust rates equitably. It should also inform the public and pass the updated rate structure at an open board meeting that allows feedback and conversation from customers.
It is important to remember that ultimately there is no perfect single rate structure for all utilities, that every rate structure must weigh many factors, and that setting a new rate should be done collectively in order to build trust and understanding with those impacted by increased expenses. Deciding how to prioritize system needs is the focus of the prior blog and should be referenced when considering the information below.
Complete a Rate Analysis
If your system doesn’t know where to start but knows its rates are out of date, completing a rate analysis is the ideal first step, particularly if historic financial, water consumption and billing data are available. See the prior blog (LINK) post in this series to learn more about how to complete this analysis, which may require assistance from a technical assistance provider like those in the Environmental Finance Center Network (EFCN).
Consider Affordability
When determining how to update—and typically raise—water or wastewater rates, a utility has many priorities to consider. One is affordability, or the ability of customers to pay based on their entire set of expenses. Often, water systems are concerned that a rate increase will put an undue burden on their customers that rely on fixed incomes or qualify for assistance. And while the Environmental Protection Agency considers thresholds of either 3 or 4.5 percent of a community’s median household income appropriate for total water and wastewater utility charges, water systems may not be able to guarantee average charges to remain below those figures, particularly if facing additional challenges like increased regulatory requirements, a dwindling customer base, and increased costs due to inflation.
To combat affordability issues, a water system can attempt to include an increasing block rate structure in which water is increasingly more expensive the more a customer uses. This is perceived as a logical solution, since customers who face affordability concerns can use less water, while those less worried about utility charges can use more and pay their fair share. If a water system uses meters and can assess charges to customers based on consumption and has concerns about how a rate increase will impact its most at-risk customers, this approach is recommended.
Evaluate Fixed and Variable Costs
Another option for utilities to consider is to review expenses and determine which are fixed and which are variable. Fixed expenses like infrastructure, salaries, sampling, and loan repayments must be fully accounted for no matter how much water is used by customers. In contrast, variable expenses change based on the amount of water provided. These include expenses like chemicals for treatment and energy to run equipment.
A good rule of thumb for utilities is to use base charges to pay for fixed expenses, while volumetric charges are used to pay for variable expenses. However, this often means a high base charge, which can negatively impact customers who conserve water in order to save money. Finding a balance between full coverage of fixed expenses through base charges and still addressing affordability concerns is possible, but will likely require additional analysis.
Run Various Scenarios
If a water system knows it must find additional revenue but isn’t sure how to do so while still holding true to its stated financial goals, looking at a variety of options for rate increases is encouraged. The EFCN’s Water and Wastewater Rates Analysis Tool allows a water system to compare its current rates with proposed increases, and multiple comparisons can be incorporated in order to consider how best to ensure full cost recovery. Assistance from a technical assistance provider can also help a board determine what to focus on during a rate increase, as well as think about the full scope of alternatives, including a variety of block rates, rate classes, and different variable and fixed charges. Ultimately, the utility should ensure full cost recovery of anticipated expenses while also saving for the future.
For systems concerned about a dramatic increase’s shock value, incorporating incremental rate increases over time is another potential avenue of changing rates. By adjusting incrementally each year, customers may find rate increases more palatable than significant jumps sporadically. Some utilities also set multiple years of graduated rate increases all at once, rather than determining the amount each year. This still allows a system to plan for the future but allows that to proceed efficiently, without having to complete all steps over again.
Inform the Public
Once utility leadership has determined a potential solution for changing the water or wastewater’s rate structure, the proposed rate change should be publicly discussed. In some states, this is legally mandated for a public utility; it is a best practice regardless of statutory requirement.
The purpose of a public hearing of rate increases is simple. For customers who are concerned about how the increased bill will affect them, a chance to review the charges and their impact on customers is crucial. Having an open meeting allows citizen participation and ownership in the process, as well as allowing a chance for the system to defend its choices and frame the narrative around the change. While customers may not agree with the proposed structure, they may be more willing to accept the change knowing the rationale behind it, as well as that their voice has been heard.
Conclusion
Changing a water or wastewater utility’s rates—particularly increasing them—is a complex process that requires balancing competing priorities and public opinions. It also is necessary to raise rates over time, no matter how thrifty a community may be; inflation dictates that all other costs will likewise increase. By considering affordability, the breakdown of fixed and variable expenses, considered a variety of different scenarios, and incorporating public feedback, a utility can know that it has done due diligence in striving to find the most appropriate way to charge customers while still running a business.