Like other organizations, rural water systems have expenses that fall into two categories: fixed and variable. The largest component of fixed expenses is typically debt service. Operations expenses generally make up variable expenses. These include the cost of providing water, treatment chemicals and labor. For most systems, this is Financial Management 101.

Many systems therefore structure their rates to include two components—a minimum base and actual water usage. The minimum charge is determined by analyzing the system’s fixed costs, particularly long-term debt service. The usage charge, usually in dollars per thousand gallons, covers the variable expenses. This is a simple, direct approach to rates that is easy to administer and easily understood by customers.

Here’s an example of a rate structure with both fixed costs and variable costs. A system’s customer’s monthly bill includes a $15 minimum charge, plus a $22 usage charge based on the customer’s consumption. In this example, water is charged at $4 per thousand and the user has used 5,500 gallons of water during the month, resulting in the $22 usage charge. The $15 is used to pay off the system’s debt, while the $22 pays for the water, chemicals and labor. Many systems try to keep water rates steady for 3-5 years.

For some systems this one-size-fits-all approach is adequate. Others may need to take a more sophisticated look at their system’s needs and customers to optimize their rate structure.

Systems ask their engineers to perform rate studies to analyze usage patterns within the system, identify system needs, explore options and make recommendations as to how rates should be structured to best serve the system’s needs.

For example, a system might anticipate future capital expenses and choose to raise the monthly minimum charge to build a capital reserve for these future needs. A rate study might validate this decision.

Rate studies take a close look at customer usage patterns. Underlying their recommendations are fundamental questions regarding water usage. Does the system want to encourage or discourage water consumption? If the goal is to encourage consumption, a declining rate might be adopted. In this case, customers who use more water get charged a lower per-1000-gallon rate than those who use less. On the other hand, if the system wishes to encourage conservation, it makes sense to charge heavy users a higher per-1000-gallon rate.

Whether a system decides to promote conservation, or to encourage consumption, will often depend on the capability of their water supply and water delivery system, and of the cost of treatment and delivery of that water.

Each approach will have an impact on the financial position of the system, and the rate study should analyze and report what effect each will have. If neither conservation nor higher consumption is the goal, a steady rate which is the same for all users might be adopted.

Some customers may merit a lower rate based not on how much they use, but how they use it. A customer may need a large quantity of water for a livestock operation, but can fill the tank slowly and avoid peak hours. This allows the system to lower the level of service and may reduce system costs. Again, a rate study will examine opportunities like this.

Other types of customers may require special consideration. The needs of a community or small town that is buying water from the system will likely be treated differently than a household customer. Enticements might be built into the rate structure to maintain these larger customers and provide them with the benefits that come from economies of scale.

Underlying this kind of careful analysis of rate structures is the desire of the system to equalize costs in a fair manner.

Before beginning the process of analyzing changes to a system’s water rates, decision makers should first ask themselves what they want to achieve with the rates.  Do they want to promote water conservation, encourage water sales, build a fund for future improvements, or discourage consumption during some times of the year?  Once your goals are defined, an equitable rate can be structured to meet the individual needs of the system.