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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. |