AWWA Manual M1 2000
$101.29
AWWA Manual M1: Principles Of Water Rates, Fees And Charges, 5th Edition
| Published By | Publication Date | Number of Pages |
| AWWA | 2000 | 362 |
2012-06-30
PDF Catalog
| PDF Pages | PDF Title |
|---|---|
| 2 | Principles of Water Rates, Fees, and Charges |
| 9 | Figures |
| 11 | Tables |
| 15 | Foreword |
| 21 | Section I Revenue Requirements |
| 23 | Chapter 1 General Concepts In providing adequate water service to its customers, every water utility must receive sufficient… Adequacy of Revenues Adequacy of water revenues can be measured by comparing revenue requirements to be met from rates… Length of Projections Revenue projections can be made for any length of time depending on the purpose of the projection… Regardless of the projection period used, the utility should review its projections at least annu… |
| 24 | Other Adequacy Studies The adequacy of water revenues is measured and studied to aid the process of rate making for futu… • input for overall financial planning and budgeting • support for (often part of) documentation for issuance of debt securities to be financed from u… • measurement or evaluation of the adequacy of revenues in the past or future as a part of contra… Rate making and planning require projections of future revenue needs. The issuance of debt securi… Approaches to Projecting Revenue Requirements The two generally accepted and practiced approaches to projecting total revenue requirements of a… General Techniques Utilities should realize that it is acceptable to measure total revenue requirements using one ap… Table 1-1 Normalization factors |
| 25 | Actual performance generally will vary from projected performance. The projections are intended t… Cash-Needs Approach The objective of the cash-needs approach for projecting revenue requirements is to ensure that ut… As used in this manual, the term cash needs, as it applies to measuring revenue requirements of a… Generally, revenue-requirement studies using the cash-needs approach are simpler than studies usi… Revenue-requirement components Basic revenue-requirement components of the cash-needs approach include O&M expenses, debt-servic… Operation and maintenance expenses The O&M expense component is usually projected based on actual expenditures and adjusted to refle… Generally O&M expenses include salaries and wages, fringe benefits, purchased power, purchased wa… Debt-service payments and specified reserves The debt-service component of the cash-needs approach usually consists of principal and interest … |
| 26 | Capital expenditures Generally, capital expenditures are classified into three broad categories: (1) normal annual (ro… Government-owned utilities commonly use current revenues to finance: • normal annual replacements, • extensions, and • improvements (such as meters, services, vehicles, smaller mains, and similar items that occur r… Major capital projects are typically financed with a combination of long-term debt and equity. Ca… Other components Other cash revenue requirements of a government- owned utility that may be financed from water sy… Utility Approach The utility approach to measuring revenue requirements is mandated for all investor-owned water u… The term utility approach or utility basis tends to have two meanings in water utility rate makin… The utility basis of cost allocation is an appropriate method for calculating the costs of servic… |
| 27 | Projections for Government-Owned Utilities For a government-owned utility, the total level of annual revenue required may be similar under e… Depreciation Depreciation is a real part of the cost of operating a utility, whether government owned or inves… Depreciation expense should be based on the depreciable plant investment that is in service durin… Return on rate base The return component is intended to pay the annual interest cost of debt capital and provide a fa… The utility basis of determining revenue requirements usually necessitates establishing a rate ba… As previously mentioned, another element of utility basis revenue requirements for a government-o… |
| 28 | Projections for Investor-Owned Utilities The total annual revenue requirements of an investor-owned utility include O&M expenses, deprecia… Federal, state, provincial, or local income taxes must be paid by an investor- owned utility and,… Each utility commission and regulatory body has its own rules, regulations, and policies for dete… Test Year Revenue requirements are frequently expressed in terms of a test year for purposes of allocating … Test-year periods are usually of three general types—historical, current, and future. An historic… Generally, government-owned utilities are free to set their own policies regarding test-year peri… Government-Owned Utilities Government-owned utilities typically select a future test year in recognition of budgetary requir… When selecting a test year for a government-owned utility, legislative or debt- indenture require… |
| 29 | Table 1-2 Summary of test-year revenue requirements (¥ $1,000) Debt-related agreements may include provisions that could influence the selection of the test yea… Investor-Owned Utilities An investor-owned utility must follow the established practices and policies of the applicable ut… A comparison of example test year revenue requirements for a government- owned utility on both th… As shown in Table 1 2, the O&M expense component of the total test-year revenue requirement is th… For a government-owned utility to meet the total cash-revenue requirements under the utility appr… |
| 30 | For the same example utility on an investor-owned basis, income taxes and other taxes must be con… The income-tax element of the investor-owned utility’s cost of service is based on the applicatio… The rate base for the investor-owned utility is less than that for the government-owned utility b… An overall rate of return of 10.5 percent on the rate base of $13,820,000 was assumed, resulting … Where a government-owned utility is serving customers outside its jurisdiction who are considered… From the example shown in Table 1-2, it is apparent that the overall revenue requirement to be ob… |
| 31 | 2 Chapter 2 Revenues Revenues are the lifeblood of a water utility. Without adequate revenues, the quality of service … Sources of Revenue There are two basic sources of revenues available to a water utility: operating revenues and non-… Additionally, in some government-owned utilities, transfers from the government- entity general f… Revenue Classifications Table 2-1 shows a list of typical revenue classifications. As noted in the table, sales to genera… Where applicable to government-owned utilities, each of these general water- service classes is c… Sales for resale generally consist of deliveries to customer groups, such as suburban cities or w… |
| 32 | Table 2-1 Typical revenue classifications Private fire protection service revenues include charges for sprinkler-service connections, stand… Miscellaneous service revenues include any revenues resulting from other services regularly provi… Forfeited discounts include revenues from discounts foregone as a result of untimely payment of w… Rents from water property include rental income from the lease or rental of operating property an… Merchandising and contract services (jobbing) revenues are net revenues from sales of equipment a… |
| 33 | Rents from non-operating property include rental income from utility property not used for operat… If a utility sells or otherwise disposes of an item of utility property, the net proceeds are rep… Tax revenues usually consist of ad valorem or other taxes assessed for the benefit of the water u… Allowance for funds used during construction (AFUDC) is an accounting entry designed to permit th… Other non-operating revenues is an all-encompassing term for items of non- operating revenues tha… Historically, for investor-owned utilities, these revenues were not considered to be part of the … Developer and customer contributions consist of cash or property donated for plant construction, … Grants usually are considered to be contributions made by the granting agency, such as the federa… |
| 34 | Unbilled Revenues All water meters are not read and billed at the same time, since most water utilities cycle their… If there is no growth in the number of customers, no rate change during the accounting period, an… Some utilities bill service charges or minimum charges in advance. In such cases, some billed but… For ratemaking purposes, the accrued amount must be excluded from base revenues because rate chan… Cash Versus Accrual Revenues Cash receipts sometimes are used as a basis for setting and adjusting water rates. However, most … Many government-owned water utilities operate on a cash basis of accounting because of bond inden… Projecting Revenue In projecting revenue that may be available to the utility from the sources listed in Table 2-1, … Historical Data The amount of revenue that may be derived from water rates under any particular rate schedule can… |
| 35 | The amount and detail of needed data vary, depending on the local situation. The most accurate pr… Flat-rate revenues and fire-service revenues can be annualized by establishing the average number… In many situations, particularly for smaller utilities, detailed billing data are not available. … Projection Considerations Reasonable projections of each revenue category listed in Table 2-1 must be considered and made a… Growth in number of customers Growth in the number of customers served can be projected by recognizing historical growth patter… The number of customers served at any particular point in time, such as historical year end, need… Non-recurring sales Sales not expected to continue in the future should be eliminated from projections. This would in… |
| 36 | Weather normalization In many areas, weather conditions can greatly affect water sales. Thus, the utility should consid… Care should be exercised when attempting to normalize water sales for weather. Other variables th… Conservation Revenue projections may need to be adjusted to reflect conservation measures installed in the pas… Price elasticity Most water use is considered to be relatively insensitive to the price of water (price inelastic)… Many water utilities are investigating and implementing pricing techniques to modify water demand… Example Tables 2-2 and 2-3 illustrate how to project revenues. These tables are intended to assist the re… Revenue sources typically available to utilities have been discussed in this chapter. Included in… The number of customers and water use by customer class for the most recent historical year are s… |
| 37 | Table 2-2 Number of customers and water use Table 2-3 shows projected revenues under existing rates for both government- owned and investor-o… Table 2-3 Water sales and miscellaneous revenues |
| 38 | Projected revenues from miscellaneous operating and non-operating sources are based on historical… |
| 39 | 3 Chapter 3 Operation and Maintenance Expenses For any utility to be self-sufficient, the utility must recover its full revenue requirements on … • classifying O&M expenses • identifying non-recurring O&M expenses • identifying capitalized O&M expenses • identifying special considerations for government-owned utilities, including interdepartmental … • estimating O&M expenses O&M expenses are the prudent and necessary costs to operate and maintain treatment plants, wells,… As used in this chapter, O&M expenses exclude depreciation expense and expenditures that would si… |
| 40 | Classifying O&M Expenses To properly account for O&M expenses, it is necessary to develop a common accounting method for c… • Permit proper monitoring and reporting of each O&M expense item. • Separate capital expenditures from O&M expenses. • Provide appropriate information to utility managers for operating the utility in a cost-effecti… • Provide historical data in a format that facilitates projections. • Support cost-of-service and rate-making calculations. • Enhance comparability of expenses among water utilities. Chart of Accounts The most effective way to classify and track O&M expenses on a consistent basis is through a deta… The National Association of Regulatory Utility Commissioners (NARUC) has recommended a “Uniform S… The NARUC coding (numbering) scheme consists of a three-digit number for O&M expenses (600–699 fo… For example, salaries and wages for employees is account 601. If those salaries are performed in … Identifying Nonrecurring O&M Expenses Some O&M expenses do not have the characteristics of ongoing annual expenses. These expenses are … Amortization Many utilities amortize infrequently occurring O&M expense over the expected period between expen… |
| 41 | Scheduling If possible, groups of non-recurring O&M expenses should be scheduled in such a way that approxim… Identifying Capitalized O&M Expenses From the revenue-requirement standpoint, it is important to recognize that some expenditures that… Identifying Special Considerations for Government-Owned Utilities The accounting system and related chart of accounts should be structured to provide each utility … • personal services • contractual services • commodities • administration • interdepartmental expenses Each category could contain numerous expenses to provide further detail. Many utilities adopt more than one chart of accounts for O&M expenses. One chart might provide fo… |
| 42 | Interdepartmental O&M Expenses As discussed above, many government-owned water utilities are a part of city or county government… To recognize all O&M expenses, it is important to identify interdepartmental O&M expenses incurre… To address this issue, many local governments have developed systems that allocate interdepartmen… Payments to General Fund Other cash revenue requirements that may require financing from water system revenues might inclu… Estimating O&M Expenses In projecting future O&M expenses, factors that will affect future expenses must be adequately an… Expense projections should recognize such factors as changes in the number of customers served, c… Example Table 3-1 shows projected O&M expenses for an example utility. The projections are assumed to app… The functional categories of O&M expenses, as shown in Table 3-1, reflect a typical chart of acco… It should be noted that, on line 4, water treatment chemicals, the expenditure for chemicals in p… |
| 43 | Table 3-1 O&M expenses* |
| 45 | 4 Chapter 4 Taxes Investor-owned water utilities are responsible for paying taxes to local, state, and federal auth… This manual makes no attempt to fully cover the subject of taxation for utilities. This chapter i… Local Taxes The most common form of local tax is the property tax, but franchise taxes also may be levied. A … Municipally owned utilities are not normally subject to taxation by local, state, or federal auth… |
| 46 | State Taxes Various states use different methods of assessing taxes, such as gross receipts taxes, franchise … Generally, state income taxes are levied on revenues net of expenses and are usually a fixed perc… Federal Taxes Investor-owned utilities are responsible for paying income taxes to the federal government. Feder… It should be noted that tax laws and regulations are subject to change. This manual does not atte… • The utility must add the estimated unbilled revenues due at the end of the tax year and subtrac… • Uniform capitalization rules require capitalization of construction-period interest, sales and … • Bad-debt expense must reflect actual uncollectibles for the tax year rather than reflecting the… Tax Depreciation Depreciation is permitted as a deduction from revenues for federal income tax purposes. There are… Asset depreciation range system The class life asset depreciation range (CLADR or ADR) system is an elective system of depreciati… |
| 47 | Table 4-1 Federal tax rate schedule Accelerated cost recovery system The accelerated cost recovery system (ACRS) is a mandatory system, with few exceptions, of tax de… Modified accelerated cost recovery system Effective Jan. 1, 1987, the Tax Reform Act of 1986 (TRA-86) modified the former ACRS (modified AC… Tax Calculations When revenues have been determined and allowable deductions have been taken, the federal tax rate… Investment Tax Credit The TRA-86 repealed the investment tax credit (ITC) for all property placed in service after Dec…. |
| 48 | Tax Issues in Rate Cases Federal income taxes embedded in customer rates can be broken down into two separate parts: curre… The total provision adjusts current tax for any tax deferrals reflected in the cost of service. D… Deferred Taxes As the name implies, deferred taxes are tax liabilities from a current tax period that are deferr… For ratemaking purposes, most utility commissions now recognize a level of taxes in the revenue r… While such timing differences can result from many differences between tax and book expenses, it … Normalization Process For ratemaking purposes, deferred taxes are accounted for by a process called “normalization.” No… |
| 49 | Table 4-2 Tax versus book depreciation Using normalization stabilizes revenue requirements to reflect the spreading of any tax benefits … |
| 50 | Flow Through Until ACRS rates for tax depreciation became effective for property installed after 1980, state c… One of the arguments raised to support flow-through treatment is that as time goes on there will … Current law mandates that normalization be authorized for ratemaking purposes for plants installe… Interest Synchronization Most state commissions calculate the level of interest to be used in determining taxable net inco… Synchronized interest expense will differ from interest expense reflected in the records when (1)… Consolidated Tax Returns Current tax law permits a taxpaying corporation with a number of different affiliated corporate i… Consolidated tax returns raise several issues, including how to allocate consolidated income tax … The water utility has several options for handling the tax benefit. The first option is to reimbu… |
| 51 | This brings up the second issue, which is the regulatory treatment of a regulated operating compa… |
| 53 | 5 Chapter 5 Capital-Related Costs Under both the cash-needs approach and the utility approach to measuring revenue requirements, th… For utilities using the cash-needs approach, capital-related costs include debt principal and int… For utilities using the utility approach, the capital-related costs include depreciation expense … Cash-Needs Approach Utilities that determine revenue requirements using the cash-needs approach do so in conjunction … It is common practice for utilities to finance a portion of the capital improvement program from … |
| 54 | Debt-Service Component The debt-service component of revenue requirements using the cash-needs approach includes princip… In the example for the government-owned utility presented in this manual (see chapter 6, Table 6-… The annual debt service on existing revenue bonds for the government-owned utility example amount… In addition to debt service and payments to reserve fund accounts, many utilities are required by… Financing Constraints Financing constraints may be set forth in a city ordinance or charter. These limits affect the al… The budget process would be affected by the financial constraints if the financial model, which i… |
| 55 | The debt-service coverage would be measured as net revenue divided by the greatest future annual … If the bond covenant required a 1.35 debt-service coverage, gross revenue would need to be adjust… In summary, the net revenues available to meet capital-related costs of a cash- needs-oriented, g… Utility Approach In the utility approach to measuring capital costs, depreciation expense and return on rate base … Depreciation Expense Depreciation is the loss-in-service value not restored by current maintenance. Depreciation is in… Depreciation expense is the recovery of the original cost of the asset less the estimated net-sal… |
| 56 | Although the concept of depreciation is simple, considerable statistical work may be required to … Using the average service life procedure, the depreciation rate is determined as follows: (5-1) The summary of such calculations for each depreciable plant account, when applied to the original… Computer programs have made it easier to calculate depreciation expense on an individual account … Rate Base Determining the base to which the rate of return should be applied (that is, the rate base) invol… Including construction work in progress in rate base is subject to considerations such as the all… Rate-base components and issues have been addressed in numerous commission and court cases. Thus,… The following section discusses several rate-base components. It does not attempt to enumerate th… Plant in service In accordance with most, if not all, accounting systems, the original cost of plant in service is… The primary issue related to including plant in the rate base is whether the plant is used and us… |
| 57 | Accumulated depreciation The deduction of accumulated depreciation from the original cost of plant results in the net book… The accumulated provision for depreciation (also called the book depreciation reserve) is availab… Past depreciation practices, especially the methods used to calculate annual depreciation, should… Construction work in progress Where it is permitted, including construction work in progress (CWIP) in the rate base recognizes… The inclusion of CWIP in rate base raises equity questions. Should current ratepayers provide a r… An alternative to including CWIP in rate base is capitalization of financing costs related to the… Working capital The primary elements of working capital include materials and supplies and cash working capital. … The allowance for materials and supplies in rate base permits the utility to earn a return on the… The allowance for working capital in rate base permits the utility to earn a return on the invest… |
| 58 | Contributions and advances Contributions in aid of construction (CIAC), that is, capital or plant supplied by customers, dev… Other non-investor capital The deductions from rate base for accumulated investment tax credits, where applicable, and defer… The amount of unamortized investment tax credits is developed in a similar fashion. In this case,… Other rate-base adjustments The above discussion of the components of rate base is not all inclusive. Items such as unamortiz… In today’s regulatory environment, the guiding principle in determining the appropriateness of a … Table 5-1 shows the total gross plant in service at of the end of the most recent historical year… Table 5-2 uses the total plant in service from Table 5-1 to determine annual rate base for both a… |
| 59 | Table 5-1 Total (gross) plant in service—Year end Table 5-2 Test-year rate base (in thousands of dollars) |
| 60 | It should be noted that including CWIP in rate base, as shown in this example, is not accepted by… Rate of Return The need to earn income as a source of and a return on capital provides business with the incenti… In a competitive economy, risks and income vary over time as some industries or companies become … General Principles of Rate of Return Whether the utility is government-owned or investor-owned, the return component is intended to pa… The dollar return is the product of the rate base and the specified rate of return. Changing eith… There is no single method for determining a fair or reasonable rate of return. The Bluefield Wate… The return should be reasonable, sufficient to assure confidence in the financial soundness of th… |
| 61 | In 1944, the US Supreme Court elaborated on the reasonableness issue in the Hope Natural Gas case… It is important that there be enough revenue not only for operating expenses but also for the cap… Most of the arguments currently used in rate of return regulation are based on one or more of the… One approach to determining a fair rate of return on equity for a water utility is to examine the… The comparison to unregulated firms or industries is based on the argument that regulation is sup… Capital Structure Courts and commissions have determined that, for a utility to compete successfully in the capital… The concept is quite simple, but numerous issues can affect the total cost of capital. The actual capital structure of the utility is most often used to determine the weight of each co… |
| 62 | Based on the previous example, if the amount of common equity in the capital structure is reduced… Cost Rates for Capital Components It is relatively simple to determine the cost of long-term debt; it is usually based on the actua… Determining the cost of preferred stock is similar to determining the cost of debt. The cost is g… The most difficult issue in determining the cost of capital relates to the cost of common equity…. Many factors motivate potential investors to purchase a given stock. These factors include divide… |
| 63 | 6 Chapter 6 Examples of Revenue Requirements The previous chapters have described the various elements that comprise the revenues and revenue … Government-Owned Utilities For government-owned utilities, the initial measure of whether revenues under existing rates are … Line 13 of Table 6-1 shows that the revenues under existing rates for the government-owned utilit… |
| 64 | Table 6-1 Flow of funds—Existing rates (in thousands of dollars) Table 6-2 shows a flow of funds under increased rates for the government-owned utility. Many rate … In addition to meeting annual cash revenue requirements, the net operating revenue shown on line … Investor-Owned Utilities For the investor-owned utility, Table 6-3 shows projected revenues under existing rates and their… |
| 65 | Table 6-2 Flow of funds—Increased rates (in thousands of dollars) The resulting operating income (line 9) divided by rate base (line 10), which was developed in Ta… Table 6-4 shows a projected operating income statement under increased rates for the example inve… |
| 66 | Table 6-3 Operating income statement—Existing rates (in thousands of dollars) Table 6-4 Operating income statement—Increased rates (in thousands of dollars) |
| 67 | Section II Cost Allocation |
| 69 | Chapter 7 Allocating Costs of Service to Cost Components The total annual cost of providing water service is the annual revenue requirements that apply to… The basic premise in establishing adequate rate schedules that are equitable to different custome… The total annual revenue requirements discussed in chapters 1 through 6 are the total costs of se… |
| 70 | Operation-and-maintenance expenses include both the costs of operating the system and the costs o… Capital costs may be expressed as annual costs associated with plant investment. Under the cash-n… In allocating costs of service to customer classes, whether for a government- owned or investor-o… Costs are allocated to express the total utility cost of service, including O&M expense, deprecia… The allocation of water utility costs have, over the years, evolved into a variety of bases or me… Another method of allocating costs, the functional-cost method, has been used in the past but is … Cost allocation under the base-extra capacity and commodity-demand methods includes: 1. Allocation of costs that apply to the functional cost components of base, extra capacity, and … 2. Distribution of costs by the various cost components to respective classes of customers accord… |
| 71 | The allocations of costs to cost components by the base-extra capacity method and the commodity-d… It is useful to consider the distinctions between variable and ï¬xed cost categories in performing… Categorizing expenses as either variable or ï¬xed is useful to understanding how the utility incur… Base-Extra Capacity Method Using the base-extra capacity method, costs of service are usually separated into four primary co… Base costs are costs that tend to vary with the total quantity of water used plus those O&M expen… Extra capacity costs are costs associated with meeting rate of use requirements in excess of aver… Customer costs comprise those costs associated with serving customers, irrespective of the amount… Direct ï¬re-protection costs are those costs that apply solely to the ï¬re-protection function. Usu… |
| 72 | In the base-extra capacity method, cost must be carefully separated between base costs and extra … As previously discussed, total costs of service are represented by three principal elements: (1) … Table 7-1 presents an example of the allocation of rate base to cost components under the base-ex… Raw- and treated-water pumping and treatment facilities are allocated 65 percent to base and 35 p… |
| 73 | Table 7-1 Allocation of rate base—Base-extra capacity method (test year) |
| 74 | The value of ofï¬ce buildings, furniture and equipment, vehicles, and other general plant is alloc… The allocation to base and extra capacity components depends on conditions controlling the design… Construction work in progress is allocated to cost components on the same basis as similar elemen… In many water utility systems, the accounting records will show contributions in aid of construct… The results of the allocation of rate base to the various cost components, as illustrated in Tabl… Table 7-2 illustrates the allocation of annual depreciation expense to cost components. The categ… Table 7-3 presents an example of the allocation of O&M expense to cost components under the base-… Expenses that tend to vary directly with water usage are assigned directly to the base cost compo… |
| 75 | Table 7-2 Allocation of depreciation expense—Base-extra capacity method (test year) |
| 76 | Table 7-3 Allocation of O&M expense—Base-extra capacity method (test year) |
| 77 | Expenses other than power, chemical, and customer-related costs can be allocated to cost componen… Expenses for meters and services and for customer billing and collecting are allocated directly t… Commodity-Demand Method In the commodity-demand method, costs of service are separated into four primary cost components:… Commodity costs are costs that tend to vary with the quantity of water produced. They usually inc… Demand costs are associated with providing facilities to meet the peak rates of use, or demands, … The deï¬nition of customer costs for this method is the same as for the base- extra capacity metho… Table 7-4 presents an example of how rate base is allocated under the commodity-demand method. In… |
| 78 | Table 7-4 Allocation of rate base—Commodity-demand method (test year) |
| 79 | Table 7-4 illustrates how the results of the allocation of rate base to the various cost componen… Table 7-5 presents an example of how depreciation expense is allocated to cost components under t… Table 7-6 presents an example of how O&M expense is allocated under the commodity-demand method. … In the example, administration and general expense is allocated to cost components in a manner si… In comparing allocations under the base-extra capacity and commodity-demand methods, base costs i… It should be noted that, if all elements of cost are properly allocated, use of either the base-e… Special Considerations Some water utility systems have customers with water-use characteristics that require special con… Customers provided with ï¬rm water service, that is, unlimited service in the amounts and at such … In establishing charges for non-ï¬rm service, such as off-peak or interruptible service, utilities… |
| 80 | Table 7-5 Allocation of depreciation expense—Commodity-demand method (test year) |
| 81 | Table 7-6 Allocation of O&M expense—Commodity-demand method (test year) |
| 82 | In areas where irrigation or other seasonal uses impose signiï¬cant demands on the system, utiliti… When allocating the costs of service between inside-city and outside-city customers, government-o… In certain utility systems, the service area may be subdivided into pressure zones or districts b… In some instances the utility should consider the responsibility for reserve capacity in the syst… |
| 83 | 8 Chapter 8 Distributing Costs to Customer Classes The preceding chapters of this manual have dealt with how utilities determine revenue requirement… The ideal solution to developing rates for water utility customers is to assign cost responsibili… Customer Classes In establishing customer classes, water utilities consider service characteristics, demand patter… Demand patterns of various customers differ, depending on their peak-day and peak-hour rates of d… |
| 84 | The classiï¬cation of water customers as either inside or outside the city limits is related to ea… Utilities may need to recognize certain customer classiï¬cations from an accounting standpoint bec… General Classes Most water utilities typically have three principal customer classes: (1) residential, (2) commer… Residential: One- and two-family dwellings, usually physically separate. Commercial: Multifamily apartment buildings and nonresidential, nonindustrial business enterprises. Industrial: Manufacturing and processing establishments. Some utilities may break down these general classes into more speciï¬c groups. For example, the co… Many systems, particularly larger ones, have customers with individual water- use characteristics… Special Classes In addition to the general classes of service previously described, water utilities often provide… Wholesale service Wholesale service is usually deï¬ned as a situation in which water is sold to a customer through a… Fire-protection service Fire-protection service has characteristics that are markedly different from other types of water… |
| 85 | There are two principal approaches to determining ï¬re-protection service costs that differ widely… Costs allocated to ï¬re-protection service as a class can be subdivided to those related to public… Lawn irrigation Residential lawn irrigation is characterized by the relatively high demands it places on the wate… In most instances, lawn irrigation service is not separate from other service; therefore, the hig… Service Outside City Limits Many government-owned utilities recognize in their rate structures the differences in costs of se… The costs to be borne by outside-city (non-owner) customers are similar to those attributed to th… Sometimes, those who design or review water rates do not fully understand how the cash-needs appr… A government-owned utility, in most cases where not regulated by a state public utility commissio… |
| 86 | In some instances, as a matter of policy, a government-owned utility might choose to waive the di… Units of Service As a step toward rate design, component costs may be distributed among customer classes in the pr… The total cost of each component, such as base cost, may be divided by appropriate total customer… Maximum rates of use may be expressed in terms of capacity factor—that is, a percentage relations… To estimate customer-class capacity factors, utilities need to investigate and study all pertinen… |
| 87 | The total annual quantity of water attributable to ï¬re service is usually negligible, at least in… Customer-related costs for meters and services may be properly distributed among customer classes… Appendix B of this manual further discusses how to develop the meter and service cost ratios show… Costs related to billing and collecting may be distributed among customer classes based on the to… Table 8-1 illustrates the development of the test-year units of service for the hypothetical util… For the example, it is assumed that retail service and ï¬re-protection service are provided inside… |
| 88 | Table 8-1 Units of service—Base-extra capacity method (test year) Table 8-2 Units of service—Commodity-demand method (test year) |
| 89 | Table 8-1 shows, under the heading “Base,” the total annual water use in thousand gallons for eac… Equivalent meters and services are derived by applying equivalent meter and service cost ratios t… Table 8-2 shows the development of the units of service that apply to the commodity-demand method… The maximum total capacity on both a maximum-day and maximum-hour basis for the total system (sho… A test of the reasonableness of the estimated maximum day and maximum hour capacity factors assig… (8-1) Unit Costs Component costs can be directly distributed to respective customer classes in proportion to the r… Unit costs are determined simply by dividing the test-year functionally allocated O&M and capital… Unit return on rate base is determined by ï¬rst calculating unit rate base. The functionally alloc… As discussed in chapters 1 through 6 of this manual, for the government-owned utility to meet tot… |
| 90 | Table 8-3 Unit costs of service—Base-extra capacity method (test year) |
| 91 | Although it is not presented in Table 8-3, total outside-city return may be calculated by determi… The inside-city rate of return is determined by dividing the balance of total return of $703,200 … Returning to the unit-cost approach presented in Table 8-3, inside-city unit return on rate base … Total unit costs of service are comprised of the O&M, depreciation, and return on rate-base unit … Unit costs of service for the commodity-demand method are developed using an approach similar to … Distributing Costs to Customer Classes: Base-Extra Capacity Method The costs of service are distributed to the utility’s customer classes by applying unit costs of … As discussed previously, base costs are costs that would be incurred in supplying water at perfec… As shown in Table 8-5, residential customers are projected to use 968,000 thous gal of water in t… |
| 92 | Table 8-4 Unit costs of service—Commodity-demand method (test year) |
| 93 | Table 8-5 Cost distribution to customer classes—Base-extra capacity method (test year) |
| 94 | Extra capacity costs for maximum-day and maximum-hour service are incurred in providing facilitie… Customer costs, which include the category of meters and services and the category of billing and… Billing and collecting costs may be related to the number of bills issued and, in turn, distribut… The base, extra capacity, and customer costs, summarized by customer classes, constitute the cost… Distributing Costs to Customer Classes: Commodity-Demand Method Costs are distributed to customer classes under the commodity-demand method with the same method … In the commodity-demand method, commodity costs are distributed to customer classes on the basis … Commodity costs, which tend to vary with the annual quantity of water produced, are distributed t… |
| 95 | Table 8-6 Cost distribution to customer classes—Commodity-demand method (test year) |
| 96 | Cost of service for outside-city wholesale service may also be derived by applying the outside-ci… A summation of the distributed costs for each cost component for inside- and outside-city custome… A word of caution should be added that may prevent misinterpretation of the commodity cost of $0…. |
| 97 | Section III Rate Design |
| 99 | Chapter 9 Selecting Rate Structures A utility is presented with a major challenge when it sets out to select a rate structure that is… A water rate structure is a fee or schedule of fees designed, among other things, to recover the … It is this ï¬nal element of a rate structure, the schedule of charges, on which utilities and cust… When diverse and competing objectives are well understood and evaluated, a utility has the opport… Planning the Rate Structure Study The process of selecting the most appropriate rate structure for a particular utility is not simp… Because selecting the most appropriate rate structure is an important undertaking, it is advisabl… |
| 100 | • deï¬ning the goals and objectives of the rate structure • evaluating the available alternatives in meeting these goals and objectives • understanding and communicating the potential effects on customers Based on these three components, a rate selection process might include the following steps: Step 1 Deï¬ning Goals and Objectives This critical starting point is often difï¬cult. Questions such as “Why is the study being conduct… • the utility’s history • how customers responded to existing and previous rate structures and rate increases • who are the major classes and major customers • the availability of water resources • the level of current or future costs • customer and utility concerns • socioeconomic status and concerns of customers • legal constraints on the utility These factors play an important part in determining which rate structure best meets the utility’s… Next, the utility must determine its rate structure objectives. Rate structures can perform sever… • yielding necessary revenue in a stable and predictable manner • minimizing unexpected changes to customer bills • discouraging wasteful use and promoting justiï¬ed uses • promoting fairness and equity • avoiding discrimination |
| 101 | • maintaining simplicity, certainty, convenience, feasibility, and freedom from controversy • compliance with all applicable laws Evaluating and weighing alternative rate structures and effects against these objectives is, perh… Step 2 Evaluating Available Alternatives The ï¬rst item to assess when evaluating alternative rate structures is the level of effort allott… Public involvement (discussed in detail in chapter 33) can take many forms, but often it includes… Next, a list of alternative rate structures needs to be identiï¬ed. Although rate structures are g… Finally, evaluation criteria are developed to determine how well each alternative rate structure … Step 3 Understanding and Communicating Outcomes Most evaluations of rate structures have a technical format. The tendency when presenting the tec… |
| 102 | Rate Structure Variables and Considerations Availability and Quality of Data The importance of the availability and quality of data cannot be overemphasized. In order to perf… Customer Diversity The water utility’s total system demands, seasonal demands, facility needs, and the resulting cos… Seasonality of Revenues and Costs The seasonal variability of operating expenses and revenues should be reviewed when selecting a r… It is also important to draw the distinction between operating expenses as they relate to cash flo… |
| 103 | Ability to Send Price Signals Many of the desired outcomes of a rate structure depend on customers receiving a price signal, or… The element of time is critical to sending a price signal. As long as utilities maintain monthly … Price Elasticity of Demand Price elasticity of demand is a measurement of how buyers respond to changes in price. Under norm… All products have a different price elasticity of demand. Products that are non- price responsive… Weather Risks For many communities, weather is a major concern when estimating annual water sales and revenues…. Implementing an Alternative Before selecting an alternative structure, it is important to evaluate the time and cost of imple… Summary In general, a utility should determine how its rate structure can support its goals and objective… • yielding total revenue in a stable and predictable manner • minimizing unexpected changes to customers • discouraging wasteful use, and promoting justiï¬ed uses • promoting fairness and equity • avoiding discrimination |
| 104 | • maintaining simplicity, certainty, convenience, feasibility, and freedom from controversy • complying with all applicable laws The level of effort allotted should be determined when a comprehensive study of alternative rate … The remaining chapters of this section are designed to evaluate the beneï¬ts and detriments of var… |
| 105 | 10 Chapter 10 Uniform Rates A uniform, uniform-volume, or uniform-commodity rate is a constant unit price for all metered vol… The term uniform rates sometimes refers to applying a common rate structure to noninterconnected … General Considerations A uniform water rate is expressed as constant cost per thousand gallons or cost per hundred cubic… Uniform rates are relatively simple for water utilities to implement and for customers to underst… |
| 106 | Utilities might consider uniform rates when • Customer groups or service classes exhibit similarities in usage (demand) characteristics. • Varying rates by customer or service classiï¬cation is undesirable from an equity or other persp… • Simplicity and customer understanding of the rate structure are valued highly. • Rate uniformity adequately addresses efï¬ciency and conservation concerns. • Rate structures that vary charges by usage block or other means are not justiï¬able. • Cost and usage data by customer or service classiï¬cations are not available or too costly to de… The feasibility and ease of implementing a uniform rate structure depends on a variety of factors… Historical Perspectives Historically, many water utilities began charging for service without the beneï¬t of metering. Pro… With metering came the potential to charge for water on a per-unit basis, but many smaller water … By the late 1970s, concerns about conservation in the energy and water sectors led many legislato… At the same time, efï¬ciency emerged as an important consideration in the water sector as well. Me… |
| 107 | Advantages and Disadvantages The following section provides a discussion of the beneï¬ts and detriments of uniform rates, inclu… Simplicity Simplicity is one of the chief advantages of uniform rates. Uniform rates are easily understood a… Equity Uniform rates usually are considered equitable because all customers pay the same unit price for … Uniform rates might not be perceived as equitable when variations in the cost of serving differen… Revenue Stability Uniform rates provide utilities with a degree of revenue stability in comparison to increasing bl… Conservation A uniform rate facilitates conservation because customer bills vary with the level of water usage… Conservation advocates might believe that the conservation orientation of water prices could be e… Implementation With metered water service in place, uniform rates are easily implemented. Uniform rates across a… |
| 108 | Table 10-1 Uniform rates for all customers Example Developing a uniform rate is relatively straightforward. Some costs can be identiï¬ed with custome… Table 10-1 provides a sample calculation of a uniform rate. In this instance, the total cost of r… Table 10-2 provides a sample calculation of separate uniform rates by customer class. In this ins… To calculate the effect of the rate on total customer bills, the uniform rate is multiplied by th… Summary The uniform rate structure has gained relatively wide acceptance. Uniform rates also afford water… As with any rate structure, the effect of a change to uniform rates varies depending on the magni… Table 10-2 Uniform rates by customer class |
| 109 | A uniform rate might not be preferred by every water user. Large-volume customers might believe t… |
| 111 | 11 Chapter 11 Declining Block Rates A declining or decreasing block rate is a rate structure in which the unit price of each succeedi… General Considerations As with any rate structure, the declining block rate can be appropriate given certain situations … There has been movement away from the declining block rate structure in all sections of the count… Many customers unfamiliar with the rate design process consider the declining block rate structur… The size of the rate blocks and the variability of the declining unit rates should reflect the typ… |
| 112 | Utilities may consider using a declining block rate structure when • A single rate structure is used for all customer classes of service. • A class of service has an array of customers with varying usage and demand requirements (e.g., … • System costs decline with increasing water usage (i.e., economies of scale). • Economic circumstances dictate that price incentives be provided to encourage speciï¬c large-vol… A declining block rate structure is generally not difï¬cult to administer, depending on the number… Historical Perspectives A number of different justiï¬cations exist for declining block rate structures. The principal just… Generally, large users, as a class, have a lower peak to average demand factor with corresponding… Another way to view this approach is to consider the results of the cost-of- service study. Withi… Residential and small commercial customers usually have greater demand (peaking) factors than lar… Another justiï¬cation assumes that with increased consumption, certain economies of scale may be a… |
| 113 | One important attribute of the declining block rate structure often cited is revenue stability. I… Given the nature of this rate structure, there are mixed views regarding its appropriateness. Whi… Advantages and Disadvantages The following paragraphs discuss the pros and cons of declining block rates. Simplicity For the most part, the declining block rate structure is fairly easy for the customer to understa… Equity A declining block rate schedule is designed to recover, as a single rate schedule applicable to a… Utilities should carefully select the proper block sizes and associated rates, for each block can… A major assumption in regard to declining block rate structures is that larger customers have low… |
| 114 | The ï¬nal issue in regard to equity is customer perception. While a declining block rate may be pr… Revenue Stability A properly designed declining block rate should be able to adequately meet target revenue levels … Conservation A declining block rate structure appears to conflict with the goals of efï¬cient water use and reso… Implementation The declining block rate structure may be difï¬cult to implement if the utility does not already h… Implementing this particular rate structure also requires that the utility analyze its current me… Determining Declining Block Rates In developing declining block rate structures, the key issue is the number and size of rate block… Consumption patterns of each class must be reviewed and analyzed to determine the number of block… |
| 115 | Table 11-1 Derivation of typical inside-city cost per thousand gallons by water use blocks (test… Once the number of blocks and their sizes are determined, the level or amount of consumption that… Example Tables 11-1 and 11-2 illustrate an approach used to design a declining block rate structure. The … Table 11-1 shows the initial calculation of the average unit commodity charge applicable to each … As indicated in Table 11-2, because initial usage of larger customers must ï¬rst pass through the … |
| 116 | Table 11-2 Summary of customer water use by rate block and application of proposed rates (test y… |
| 117 | In practice, developing rates that result in revenue meeting costs within the limits indicated in… Summary The declining block rate structure remains in use in many areas, although utilities have begun to… |
| 119 | 12 Chapter 12 Increasing Block Rates Increasing block rates (also known as ascending, inclining, or inverted block rates) charge incre… General Considerations While increasing block rates can be more complicated to design than other types of rates, they al… Increasing block rates should be considered by a water utility when the utility • is able to distinguish separate customer classes for billing • has the analytical capability to design block rate structures, including defining the amount of… • is confronting system capacity constraints or potential system expansion (i.e., in cases where … • would like to send a stronger price signal • is willing to spend additional effort to communicate the nature and rationale of increasing blo… Increasing block rates are not a one-size-fits-all solution. Systemwide application of a single i… |
| 120 | Historical Perspectives Increasing block rate structures, when properly designed and differentiated by customer class, al… Advantages and Disadvantages The following paragraphs analyze the benefits and detriments of increasing block rate structures. Simplicity Increasing block rates are not as simple to design or explain as many other rate forms. They requ… Equity As with any rate design, overly simple or poorly designed increasing block rate structures run th… Revenue Stability Increasing block rate structures tend to result in more revenue volatility than other rate struct… A utility concerned about adverse revenue effects resulting from an increasing block rate design … |
| 121 | Conservation Increasing block rate structures are usually considered to be conservation-oriented. The most con… Implementation The flexibility advantage of increasing block rate structures is accompanied by some disadvantage… • These rates are more difficult to design for predictable revenue streams. • Definitions of rate blocks can be based on more than one rationale. • The rate structure can be more difficult to communicate to customers. Water systems requiring more flexibility from a rate structure may find the higher implementation… Examples The first example illustrates how an increasing two-block rate might be designed for residential … Based on a review of low consumption (typically winter) billing information and a bill tabulation… Block 1 Equation (12-1) |
| 122 | Table 12-1 Increasing block rate design—Residential class Block 2 Equation (12-2) Table 12-1 displays a method of verifying these calculations. The calculated rates would result i… Table 12-2 illustrates an alternative method of setting increasing block rates for the residentia… The revenue from block 2 water sales equals $425,920, leaving $508,080 ($934,000–$425,920) to be … Summary Increasing block rate structures have found greater use in areas experiencing strong growth in wa… Table 12-2 Increasing block rate design—Residential marginal cost-based rate |
| 123 | 13 Chapter 13 Seasonal Rates A seasonal rate is a form of time-differentiated rate, or a rate that varies by time period. It e… General Considerations All water utilities experience some degree of peak demands on a seasonal basis. Often peak demand… Seasonal rates can be implemented to reduce peak use, or at least to appropriately charge custome… The allocated cost of supplying water can vary substantially between time periods, depending on t… Given the premise that water rates should track costs as closely as possible, seasonal rates prov… |
| 124 | Designing a seasonal rate structure involves assigning the lower off-peak costs to the off-peak r… Two approaches are common when developing a seasonal rate structure. Under either approach, care … • On-peak/off-peak approach. This rate structure contains a speciï¬c rate for each season (i.e., a… • Excess-use approach. This rate structure may be similar to the approach above, but customer con… Several variations of seasonal rates are possible. For example, a seasonal rate structure may be … Seasonal pricing can be effective in several situations, including the following: • Substantial variation in demand exists between peak and off-peak periods. • A utility is capacity-constrained as a result of peak-period demands. • Systems experience seasonal fluctuations in the number or types of customers served. Both on-peak/off-peak and excess-use approaches are effective in meeting the goals and objectives… Under normal circumstances, when introducing a seasonal rate, the initial differential in the lev… Revenue generated from a seasonal rate can be weather and demand-response sensitive. Customer edu… In considering a seasonal rate, attention should be given to the degree of variability in usage b… |
| 125 | Seasonal rates can be an attractive alternative for utilities that have signiï¬cant fluctuations in… Given that the objective of seasonal rates is to communicate to the customer the cost of their co… Historical Perspectives Seasonal rates for electric and natural gas utilities have been common for many years. As reporte… Large-volume natural gas customers are frequently offered seasonal rates in the form of off-peak … For water utilities, seasonal pricing has been implemented on a limited basis, mostly within the … Water utilities are becoming more open to the advantages of seasonal rate designs in mitigating o… Advantages and Disadvantages The following section provides a discussion of the advantages and disadvantages of seasonal rate … |
| 126 | Simplicity There are two perspectives regarding the simplicity of implementing a seasonal rate. From the cus… One approach is to prorate the customer’s consumption during the transition period for the season… Equity A seasonal rate structure may be equitable from a cost-of-service perspective because the custome… Revenue Stability Implementing seasonal rates can place revenue stability at risk, depending on the differential in… A utility concerned about the adverse seasonal revenue effects resulting from a seasonal rate des… Effect on Customers Seasonal rates can have a negative effect on those customers that exhibit relatively high peak-to… In the long run, a seasonal rate may reduce the cost of water to all customers. If customers redu… Implementation The implementation of a seasonal rate structure requires identifying peak system consumption peri… |
| 127 | The utility should communicate with all customers before each peak season to increase customers’ … Determining Seasonal Rates A number of ways exist to quantify the seasonal rate component of the rate structure. One techniq… One might also use the base-extra capacity allocations to determine the cost of supplying water b… Once the structure and amount of a seasonal rate has been determined, estimates of and adjustment… Developing seasonal rates is not an overly complex exercise but does have a number of considerati… Rate Types As noted previously, there are two basic types of seasonal water rates. The simplest type has a h… A more sophisticated and complex method to develop seasonal rates is the excess-use approach. Exc… |
| 128 | Base use–excess use is typically determined by customer class. For example, a review of single-fa… A variation on the excess-use approach entails granting an additional allowance, above the comput… Deï¬ning Periods The ï¬nal key issue in developing a seasonal rate involves deï¬ning seasonal periods. To do this, a… Next, the number of seasonal time periods should be administratively feasible. A simple winter an… Determining Cost Basis Determining the cost basis for the cost differential is the last step of the process. Given that … • the base–extra-capacity cost of service method • directly allocating or assigning costs to seasonal periods • reviewing speciï¬c facilities and costs The ï¬rst approach uses the base–extra-capacity method of cost allocation. By deï¬nition, base cost… |
| 129 | Table 13-1 Seasonal residential class rates using the peak and off-peak approach The next method is to directly allocate or assign costs to seasonal periods. Under this approach,… A ï¬nal method to determine cost differences between seasonal periods is a use- of-facilities appr… Examples The numerical examples of developing seasonal rates that follow show that the analytical process … Table 13-1 develops seasonal rates using the peak/off-peak approach for the residential class. In… The base–extra-capacity allocations, as calculated in Table 8-5, indicate the consumption-related… In this example, it is the utility’s objective to have a higher rate in the summer than in the wi… |
| 130 | Table 13-2 Excess-use approach to seasonal residential class rates Table 13-2 provides a second example of seasonal rates using the excess-use approach. In this exa… Using the same information as for the ï¬rst example, the winter rate and block 1 of the summer rat… Both approaches presented reflect typical examples of seasonal rates. Each may be developed based … Summary Most utilities experience some differences in cost throughout the year, particularly in meeting p… |
| 133 | 14 Chapter 14 Fixed Versus Variable Charges Cost-of-service water rate designs often include a ï¬xed and a variable charge. The ï¬xed charge in… General Considerations A cost-of-service approach to setting water rates allocates costs to each customer or customer cl… Utilities also incur costs associated with meeting average and above average consumption. As desc… Fixed and variable charges for cost recovery in a cost-of-service water rate analysis is not the … |
| 134 | Table 14-1 Meter-size charges example Fixed Charges Water utilities use many different types of ï¬xed charges in their rate designs. Three commonly us… Service charges and customer charges. The terms service charge and customer charge are often used interchangeably. This type of ï¬xed ch… A service charge or customer charge is normally easy to calculate, implement, and understand. A s… Meter charge. A meter charge is a ï¬xed fee that increases with meter size. Often this fee is the same by meter … Table 14-1, based on inside-city unit costs of service, shows an example determination of meter c… |
| 135 | Table 14-2 Minimum charge example Minimum charges. A minimum charge is a ï¬xed fee that includes an allotment of water consumption. The allotment is … This fee typically recovers the same costs as a service or meter charge plus the allotted units o… Minimum charges generally result in the highest ï¬xed fees. Often they are criticized for being un… Variable Charges The rate design for metered water sales usually includes a charge per unit of water consumed. Thi… The charge can take many forms. The four basic types of consumption charges are discussed in chap… |
| 136 | Figure 14-1 Uniform consumption charge As displayed in Figure 14-1, a uniform rate (see chapter 10) is a single charge per unit of consu… Decreasing block rates (see chapter 11), displayed in Figure 14-2, divide a customer’s consumptio… As displayed in Figure 14-3, increasing block rates also divide a customer’s consumption into usa… Figure 14-2 Declining block consumption charge |
| 137 | Figure 14-3 Inclining block consumption charge Figure 14-4 displays a fourth type of charge called a seasonal rate (described in chapter 13). Th… Each consumption charge can be designed to recover the same amount of revenue. In selecting betwe… Historical Perspectives Historically, dual systems of charges (ï¬xed charges and variable charges) to recover water costs … Figure 14-4 Seasonal consumption charge |
| 138 | In designing rates, a utility has many objectives to balance. These objectives may have distinct … Example Trade-offs exist when a utility decides to recover more or less of its costs from a given charge…. If, on the other hand, a utility decided to recover more of its costs from its ï¬xed charge and le… Summary From a utility’s standpoint, both revenue stability and equity are generally enhanced as appropri… |
| 139 | 15 Chapter 15 Marginal Cost Pricing Marginal cost pricing has been the topic of extensive discussion in rate-setting theory over the … General Considerations The marginal cost of water service is the added cost of producing or acquiring incremental suppli… One component of marginal cost is the change in operating costs caused by a change in the rate of… |
| 140 | Another component of marginal cost is the cost associated with expanding system capacity. This el… Marginal cost pricing is a departure from the conventional average embedded cost approach to wate… Rates based on the marginal cost of water provide signals to consumers about the cost consequence… Most customers do not understand or appreciate the theoretical underpinnings of water service pri… Policy Issues In estimating the marginal cost of water service, an important issue is where the next increment … Marginal cost estimation is a forward-looking process, involving forecasts of future costs and fu… Differences between the average or embedded cost and marginal cost approaches can be overstated. … |
| 141 | Another important difference between embedded and marginal cost approaches is procedural. With em… Historical Perspectives Attempts have been made to incorporate elements of both embedded and marginal cost in the rate-se… Advantages and Disadvantages Advantages of using marginal costs as a basis for water rates include • Rates are based on costs that are forward-looking. • If they are based on realistic costs, these rates can provide price signals that help encourage… • Rates are based on costs that are relevant for long-term capacity planning. These advantages must be assessed in the context of the following disadvantages of marginal cost … • Rates may not generate revenues that match utility revenue requirements. • Because long-run marginal costs typically exceed embedded costs, marginal cost rates may requir… These disadvantages must be addressed if there is to be widespread implementation of elements of … Examples Several techniques exist to estimate marginal operating costs. The techniques tend to produce mod… |
| 142 | Table 15-1 Calculating marginal operating cost Marginal operating costs can be expressed on either an annual or seasonal basis. For some systems… One marginal operating cost estimation technique is to forecast annual operating costs for the fi… Table 15-1 illustrates the two calculations of marginal operating costs. The example assumes that… Examples of Marginal Capacity Cost Most marginal capital cost techniques suitable for water service are variations of two basic appr… • demand projections to determine the output denominator and the timing for capacity increment • cost projections to determine the cost numerator • appropriate inflation and discount rates • service life of the new capacity Other information may be required, including cost and operating data on sources of supply, such a… Avoided cost approach. The basic avoided cost approach expresses marginal capital costs as cost savings from a slowdown … |
| 143 | In the avoided cost approach, the cost numerator is the capacity cost avoided by consumers practi… A simple example illustrates how marginal capital costs are calculated under the avoided cost app… The avoided cost method provides a wide range of marginal capital costs estimates under modestly … Average incremental cost approach. The average incremental cost approach to estimating marginal capital costs involves annualizing t… (15-1) Where: K = annualized incremental capacity costs C = total capital expenditure required n = the service life of the new capacity i = the appropriate interest rate |
| 144 | K can be segregated into peak and off-peak components. Similar to the avoided cost approach, an i… Continuing the example used to illustrate the avoided cost approach, it is assumed that the water… Under these assumptions, the average incremental cost approach produces marginal capital costs of… The average incremental cost method generates marginal capital costs estimates that are not very … Selecting an approach. Obviously, the choice between the avoided cost, average incremental cost, and other marginal capi… Several assumptions underlie the estimation of both marginal operating costs and marginal capital… • It is assumed that operating and cost data on new capacity (or other supply options) are either… • It is assumed that capacity service lives, appropriate financing rates, and the duration of cap… • It is assumed that reasonable estimates can be made regarding annual designed yield and revenue… Summary Rates based on marginal costs reflect future costs to be incurred or avoided in supplying water s… |
| 145 | Marginal cost estimations can be subjective. An embedded cost analysis can result in a close appr… |
| 147 | Section IV Customer- Specific Charges |
| 149 | Chapter 16 Low-Income Affordability Rates General Considerations If the cost of water or wastewater service grows to a signiï¬cant portion of a household’s disposa… Large and rapid increases in water and wastewater bills are perhaps the most difï¬cult expenses fo… Appropriately designed programs oriented toward affordability issues (lifeline and lower income) … Increased nonpayment and bad debt write-off is also a concern to potential purchasers of a utilit… Common Affordability Programs Affordability programs are intended to provide water to customers who are less able to pay for se… |
| 150 | A number of different programs implemented across the country provide rate assistance to customer… Affordable rate alternatives are typically developed as part of a larger program. These programs … Straight discount. A straight discount involves an across-the-board reduction or discount on the total water bill. T… Discount variable (usage) portion. Rather than discounting the entire bill, only the portion based on use is discounted. The ï¬xed po… Discount ï¬xed (minimum) portion. Another alternative is to discount only the ï¬xed portion of the bill, i.e., the meter charge, ser… Percentage of income. A percentage of income plan usually involves a system that charges customers for service based on… Fixed credits. In situations where assistance is provided to water consumers who may not be direct customers (e…. Historical Perspectives Costs for other utility services, such as gas, electricity, and telephone, have traditionally bee… Outside North America, low-income discounts, lifeline rates, and affordable water programs are co… |
| 151 | Policy Issues Low-income affordability alternatives are intended to address social issues, and utility involvem… These types of rate alternatives should be considered when a utility’s cost of water is high and … Low-income rates typically require some degree of subsidy. The question of which customer groups … The ï¬rst issue to consider is at what point a water bill becomes unaffordable. While there is no … • The Safe Drinking Water Act (S. 1547) established special assistance in communities where the a… • The US Department of Agriculture has a program to provide funds for water and wastewater system… • The AWWARF report, Water Affordability Programs, suggests that programs should not be based on … Different measures of poverty can be used to determine eligibility. These include Aid to Families… Based on the results of national water and wastewater rate surveys, bills have become unaffordabl… Perhaps the biggest issue involved with affordable rate programs is how to determine eligibility…. |
| 152 | Other utilities, including many electric, gas, telephone, or cable television companies, offer di… A number of income-based government assistance programs are already in place. Proof of eligibilit… • AFDC • SSI • LIHEAP (Low Income Home Energy Assistance Program) • Medicaid • Food stamps Utilities must also decide the quantity of water to discount. If only a portion is to be discount… Advantages and Disadvantages Advantages of adopting affordable rate programs include • providing a necessity of life (water) to all customers at an affordable price • helping to reduce utility collection costs, reduce arrearages, disconnects, and reconnects • increasing levels of ï¬nancial sufï¬ciency for the customer and utility • helping enhance public acceptance of water rates by making them affordable Disadvantages of affordable water rate programs include • being inconsistent with water conservation goals if a discount encourages wasteful use • requiring subsidy from other ratepayers, although this is typically minimal • creating controversy over water utility participation in social programs • implementing and administering affordable rate programs can be costly and difï¬cult Example Two lifeline rate examples are discussed in this section—reduction to the rate for a minimum volu… |
| 153 | Table 16-1 Requirements for affordable rates Table 16-2 shows the calculation for two options to make the water bill affordable to eligible cu… Because affordability options reduce revenues, rates charged to other customers will have to be a… Table 16-2 Calculation of lifeline rate options |
| 154 | Table 16-3 Effect on other charges Summary Various affordability programs may be more widely used as the cost of water service grows relativ… |
| 155 | 17 Chapter 17 Negotiated Contract Rates As discussed in previous chapters of this manual, it is standard rate-making practice to design a… General Considerations Entering into a customer-speciï¬c negotiated rate contract represents a deviation from the traditi… Applicability Criteria such as size and pattern of usage, the availability of an alternative supply, or other u… Components of Negotiated Contract Rates Negotiated contract rates can include a variety of different types of charges depending on the ci… |
| 156 | Customer charge. The customer charge is typically a ï¬xed amount to recover metering, billing, collection, contract… Demand charge. A demand charge can recover capacity costs associated with providing maximum-day and maximum-hour… Volume or commodity charge. These charges could be used to recover expenses that vary directly with water use, including such… Historical Perspectives Contracts have been negotiated between utilities for wholesale service for many years. The practi… Advantages and Disadvantages The following section examines some advantages and disadvantages of negotiated contract rates. Financial Sufï¬ciency A negotiated contract rate can help maintain the ï¬nancial condition of a utility by retaining a r… Equity Negotiated contracts can promote equity so long as the negotiated rates are based on the cost of … |
| 157 | Effect on Customers The ï¬nancial effect on other customers depends on existing rates and their relation to cost. To t… Implementation The use of contracts between two entities to accomplish a speciï¬c project or provide a speciï¬c se… Conservation Water conservation is not normally a consideration in determining the appropriateness or level of… Example An industrial customer is seeking to negotiate a special contract rate with the local water utili… To develop a rate for the customer, the utility uses the unit base cost of water ($0.5742 per tho… |
| 158 | Table 17-1 Example of contract rate determination Summary A negotiated contract rate may be desirable for both the utility and its large-volume customers. … |
| 159 | 18 Chapter 18 Economic Development Rates An economic development rate encourages community-related economic development by setting the rat… General Considerations To be effective, an economic development water rate should be part of a comprehensive community p… Economic development rates from a water utility imply the utility is willing to sell water to the… Conditions for Implementation At least three criteria should be met before a water utility considers an economic development rate. |
| 160 | • A comprehensive economic development plan. The plan should identify ï¬nancial and economic beneſt • A ï¬nancially sound utility. The comprehensive economic development plan should address any thre… • A long-term economic gain. The potential long-term economic gain to the community should be gre… Key Factors in Rate Development This section discusses a number of factors to consider when formulating an economic development r… Cost basis of existing water rates. The utility should consider how well its current rates recover costs from existing customers. To … Supply and capacity considerations. Excess source of supply and treatment capacity mean potential short-run economies of scale. The u… If the system requires additional capacity to serve targeted customers, additional ï¬xed investmen… Duration. The economic development rate should only be available for a speciï¬ed period of time. It should b… Short-term economies of scale. Short-term economies of scale may allow the utility to serve targeted customers with minimal cost… |
| 161 | Targeted customer. Usually economic development rates are thought of as applying to new customers. The idea is that … A community or a utility may not want to limit its targeted customers to only new customers. It m… Effects of the subsidy. The concept of average cost rate setting assumes that increases or decreases in the cost of provi… This is not the case for economic development water rates. In this case, targeted customers beneſt Similarly, if the economic development rate is set above the short-run marginal cost, then existi… Finally, if the economic development rate is set below the short-run marginal cost, the new custo… Burden of the subsidy. Any subsidy required could be met by allocating additional costs to existing water customers, uti… |
| 162 | Revenue stability. The utility should determine any potential effects on revenue stability to ensure a full recognit… Historical Perspectives Economic development rates are not common in the water industry. Electric utilities, however, hav… The method of subsidy allocation varies greatly among the various states. Because private compani… Advantages and Disadvantages The following paragraphs examine the beneï¬ts and detriments of economic development rates. Financial Sufï¬ciency A water utility can remain ï¬nancially sufï¬cient, and, in fact, may improve its ï¬nancial position … • increases in the rates to all nonsubsidized users • additional funding from utility stockholders (for private companies) • local tax revenue supplements • revenue from other sources Equity Since the economic development rate provides a subsidy to the targeted customers, based on the th… Effect on Customers An economic development rate obviously beneï¬ts the customer who receives the subsidy, but may inc… |
| 163 | Simplicity The simplicity of an economic development rate is a function of existing rates because the concep… Implementation Implementation of an economic development rate could create public acceptance problems. Some cust… Conservation Water conservation is not normally a consideration in determining the appropriateness or level of… Example In this example, an economically failing community has decided to try to attract a large manufact… The community is evaluating how much of a water rate discount it can provide to the manufacturer…. Table 18-1 Annual revenue requirements |
| 164 | Table 18-2 Short-term variable expenses The utility’s annual metered use without the new customer is 2,766,000 thous gal based on Table 8… The overall consumption-related cost of providing service to all the utility’s existing customers… If average pricing methods are used, existing customers would save $38,724 (2,766,000 thous gal ¥… After determining the relative boundaries between the short-run marginal cost ($0.1428) of extend… |
| 165 | 19 Chapter 19 Standby Rates Situations sometimes arise that prompt a water utility to develop rates for nonstandard services…. General Considerations Rates and Charges for Standby Service Standby, or backup, water service provides supplemental water during an emergency to protect agai… A water utility may wish to acquire ï¬nished water from an outside source in the event of an inter… Large industrial or institutional customers may also pursue arrangements for standby water servic… |
| 166 | The water utility providing standby service must have the necessary reserve capacity to supply th… The provider must be careful to specify where the standby customer falls in the hierarchy of thos… Historical Perspectives Standby rates have been offered in the electric utility industry for many years. At the present t… Standby service is not commonly offered in the water utility industry. This is because water util… Advantages and Disadvantages The following paragraphs describe advantages and disadvantages of standby rates. Financial Sufï¬ciency By deï¬nition, standby service is intended to be used on a random and infrequent basis. Therefore,… Equity To ensure rate equity, a standby customer should be required to bear any direct costs incurred to… Effect on Customers The availability of standby service should have little or no effect on other customers, provided … |
| 167 | Simplicity Because standby service normally will be offered to either another water utility or to a large, n… Conservation By its nature, standby service is used randomly and at infrequent intervals. The standby customer… If, however, the customer exceeds the capacity demand speciï¬ed in the rate, or if the customer us… Conservation should be a part of any standby agreement. Any emergency services provided to anothe… Example A water utility agrees to provide backup service to a neighboring utility that desires to provide… Table 19-1 Example of standby charges |
| 168 | Because the standby service will be metered, an appropriate meter charge for this service is also… Summary Standby water arrangements offer advantages to both the water supplier and the customer. For a wa… |
| 169 | Section V Alternative Rates |
| 171 | Chapter 20 Demand-Side Management While chapter 21, Price Elasticity, discusses study results about the measurable response of wate… Demand-side management is usually considered any effort to manage or control system demand charac… • physical modiï¬cations made to the targeted end use (e.g., indoor water use) • public–customer education • pricing or rates Rates can play both a passive and active role in a DSM program. Over time, the higher costs of pr… General Considerations Before implementing a DSM program, a utility should establish clear program goals to integrate in… |
| 172 | Integrated resources planning (IRP) is becoming a more commonly used planning framework in the wa… A rigorous demand forecasting procedure should be one of the ï¬rst evaluations made by a utility c… Demand forecasting techniques range from the relatively simple (linear regression trend analysis … • differing growth rates and use per customer among different classes of service • the effect of price on water demands • the effects of active and passive conservation measures A utility should not initiate a DSM program until adequate demand forecasting tools are in place. Historical Perspectives Before the mid-1980s, a water utility’s long-run marginal cost was primarily deï¬ned by the invest… Advantages and Disadvantages Following are some beneï¬ts or detriments of demand-side management. Delaying System Expansions The advantages of a DSM program are best realized when working with customers to affect their dem… |
| 173 | Indirect Costs Signiï¬cant indirect costs can result from a failure to properly integrate into a utility’s operat… To avoid introducing revenue instability, the relationship between demand and price must be caref… Equity Equity between customer classes with regard to their respective costs of service should be anothe… Example The following example illustrates the importance of incorporating DSM, particularly the effect of… On the other hand, if the utility reflects an educated allowance for the effect of price on demand… |
| 174 | Table 20-1 Rate impact of including price effects in demand-side management planning |
| 175 | Summary Demand-side management is often included as a part of the evaluation of the necessity for increas… |
| 177 | 21 Chapter 21 Price Elasticity Price elasticity of water demand measures the sensitivity of water use relative to changes in the… Mathematically, price elasticity is the ratio of the percentage change in use to the percentage c… (21-1) Because there is an inverse relationship between price and use, price elasticity coefï¬cients have… General Considerations and Policy Issues Price elasticity is not always used in determining the overall adjustment in rate levels needed t… |
| 178 | Price elasticity is an important tool for estimating the effect of a rate change on water use and… In some cases, rates may not be a major influence on water use, for a variety of reasons. The pric… Measuring the responsiveness of use to rate changes is further complicated by the timing or lags … Historical Perspectives More than 100 studies of the effects of price on water demand have been completed during the past… • Governmental customer demand is relatively price-inelastic. • Price elasticity of residential demand is similar to that of municipal demand except when divid… • Price elasticity appears to vary positively with rate levels, i.e., there is more use responsiv… Each user class responds differently to rate increases. A review of elasticity studies indicates … Although relying on a literature review to estimate the price elasticity of water service for a s… |
| 179 | Additional study results contributing to the use of price elasticity in the rate determination pr… • Wastewater charges affect the price-elasticity results (excluding usage- dependent sewer rates … • Fixed charges affect water use (incorporating ï¬xed charges in analyses produces higher short-te… (These two conclusions indicate that consumers may react to average rates, which are a blending o… • Rate design affects water use but not necessarily price elasticity. Price elasticities do not v… • Each user class responds differently to rate changes. Price elasticities vary substantially acr… • The components of residential demand have different sensitivities to rate changes. Summer use i… • Water demand varies between peak and off-peak periods. Peak usage is more price-sensitive than … • Geography affects usage responses to rate changes, e.g., usage sensitivity to rate changes in t… • Consumer education programs affect price elasticities. • A key factor is the change in real water prices. Use is more affected by increases in real (adj… In the rate-setting environment, important elasticity issues concern the validity and importance … Examples To illustrate the importance of price elasticity in rate design, two hypothetical examples are pr… |
| 180 | The Residential Case For residential customers, it is assumed that the shift from the declining block tariff to the un… Given that the residential class formerly provided $600,000 of annual revenues, the water utility… The Large Industrial User Case For the large user, it is assumed that the shift from declining block tariff to uniform rate resu… The result of adopting the uniform rate is a use reduction of 30 percent for the large customer. … Summary The consequences of omitting price elasticity from the rate design process are becoming increasin… |
| 181 | 22 Chapter 22 Value-of-Service Pricing Value-of-service pricing suggests a departure from conventional rate-making methods. Instead of a… General Discussion Prices based on cost of service usually are considered efï¬cient and fair from the standpoint of e… The value of service can be assessed in part by analyzing customer demand patterns. The effects o… Implementing value-of-service pricing is complex and raises a variety of concerns about equity, e… Although not widely accepted or explicitly practiced, value-of-service pricing raises potentially… |
| 182 | Historical Perspectives The water industry has experienced persistent historical problems in conveying to stakeholders th… In a rudimentary way, old-fashioned flat rates based on the number of water- using ï¬xtures (which … Rates for monopolies have been governed by cost-of-service principles to avoid exploitation of ca… Recently, the traditionally monopolistic utility industries have been exposed to the forces of co… The trend toward competition has heightened awareness of customer service issues. Although this t… Advantages and Disadvantages This section discusses the advantages and disadvantages of value-of-service pricing in terms of s… Simplicity Value-of-service pricing is considerably more complex than other pricing methods. A reasonable me… Equity Value-of-service pricing is perceived as equitable by those who believe that prices should reflect… |
| 183 | Revenue Stability Value-of-service pricing might enhance revenue stability if a substantial share of revenues come … Conservation Value-of-service pricing can be consistent with conservation goals. Some analysts might ï¬nd, for … Implementation Implementing value-of-service pricing is difï¬cult and potentially costly. Implementation involves… Examples Value-of-service pricing can be demonstrated by a number of examples, some of which have been imp… Demand-Based Pricing Different customers demonstrate different responses to changes in prices and these patterns reflec… Reliability Pricing Reliability pricing can be used to offer some customers, usually large-volume customers, a price … |
| 184 | Quality-Based Pricing Drinking water must be treated to meet federal and state standards. However, these standards do n… Water-Reuse Pricing Another variation in water quality is between potable water and graywater. Prices vary for these … Property-Value Pricing In Great Britain, charges to unmetered customers are based on rateable property values; customers… Water distribution systems are, in part, designed to meet ï¬re-protection standards and this fact … Single-Tariff Pricing Single-tariff pricing applies a common rate structure to all water systems operated by the same u… Negotiated Rates Some water utilities have had occasion to negotiate rates with large-volume users, including whol… Summary Value-of-service pricing is a complex and controversial subject. Ideally, the price of water refle… Actual experience with value-of-service pricing is limited, and little guidance is available for … |
| 185 | 23 Chapter 23 Drought Pricing During drought situations, a water utility typically has two overriding objectives. One objective… The second objective is to maintain adequate revenues to meet system revenue requirements. To the… General Considerations While several forms of drought pricing exist, their common objective is to achieve a targeted red… Types of Drought Pricing The following is a discussion of several drought pricing options. General rate surcharge. One method for rate setting during a drought is to implement a drought surcharge on all commodity… |
| 186 | Public acceptance is likely to be greater for this option than for other options, because it is p… Individualized rate surcharge. Another approach is to apply surcharges to users whose water demands exceed a speciï¬ed percentage… Class-based rate surcharges. A variation of the surcharge approach is to establish quantity limits per customer for different … The target-setting can be performed in a reasonable and equitable manner for single-family and mu… It is more difï¬cult to set fair quantity limits for commercial and industrial customers than resi… Targeted rate increases. A utility could target certain customer classes for rate increases. Such classes would include th… Marginal cost rates. During a drought, a utility typically has limited water supplies. Presumably an additional water … |
| 187 | Marginal cost rates can be charged for all water use during a drought emergency. This approach is… The beneï¬ts of marginal cost pricing in a drought include the link between the implied need for a… Policy Issues In planning for droughts, a utility should anticipate budgetary effects in order to project reali… Customer acceptance and ease of implementation are other important considerations in selecting a … Having a drought pricing plan adopted in advance helps a utility to focus media attention constru… Implementation of drought pricing can be complicated, expensive, and time- consuming to plan and … |
| 188 | Historical Perspectives Rapid growth in urban demand, limited regional water supplies, and a growing public concern for e… Recent experiences of water utilities in managing droughts in the past decade provide a wealth of… Advantages and Disadvantages Drought pricing has the advantage of conveying a price signal to customers that helps to reduce o… A rate stabilization fund is an alternative to implementing drought pricing, assuming that demand… Example In this example, the rate approach during a drought is triggered according to the severity of the… During the ï¬rst phase of a drought, an equal rate surcharge is applied to all commodity rates. Th… |
| 189 | If the drought situation worsens, a marginal cost block rate is implemented (in addition to the s… Finally, if the drought situation became extreme, the utility might charge the marginal cost rate… This example for drought rate adjustments is summarized in Table 23-1. A utility should carefully… Table 23-1 Drought pricing example Notes: 1. Single-family rates assume a lifeline rate. 2. Multiple-family blocks are based on a s… |
| 190 | Summary Drought situations raise serious problems for most water utilities in terms of resource managemen… |
| 191 | 24 Chapter 24 Rate Surcharges A rate surcharge is a charge added to current rates to collect a targeted amount of revenue, gene… General Considerations A rate surcharge is, as the name implies, an amount charged in addition to the rates currently in… As with establishing all water rates, careful consideration should be given to implementing a rat… Some common reasons for implementing rate surcharges include the following: • supplying funds for signiï¬cant one-time ï¬nancial and cash-flow burden on the utility caused by a… |
| 192 | • paying for additional costs associated with emergency water supplies for severe drought conditions • developing a rate stabilization fund in anticipation of the need for a major rate change • prefunding a major capital project to minimize long-term rate impacts • providing timely revenue recovery and rate stability in connection with water distribution syst… The ï¬rst reason listed for implementing a surcharge involves emergency infrastructure repairs req… The second reason for a surcharge—to cover the additional costs associated with obtaining emergen… The next reason a surcharge may be implemented is in developing a rate stabilization fund. The pu… Another situation in which a surcharge may be effective is in accumulating funds for a major capi… Finally, surcharges are now being used to help water systems accelerate the pace of needed improv… |
| 193 | Historical Perspectives Rate surcharges have been used when a speciï¬c situation dictated the ï¬nancial need for such charg… Advantages and Disadvantages This section discusses the pros and cons of rate surcharges in terms of simplicity, equity, reven… Simplicity For the most part, rate surcharges are simple to understand, implement, and administer. Surcharge… Equity The issue of equity can often be addressed by considering the speciï¬c circumstances that create t… Revenue Stability By deï¬nition, a rate surcharge is assessed to collect revenues above those generated from existin… Conservation Depending on the situation and the reason for the surcharge, these rates can offer tremendous pot… Effect on Customers The effects of rate surcharges on customers vary in relation to the level of the surcharge and th… |
| 194 | Implementation Implementing rate surcharges should be easy and straightforward. In the planning process, the uti… Determining Rate Surcharges Determining rate surcharges is a fairly simple matter, but the method of collection can take many… Fixed Amount The surcharge is a ï¬xed amount or flat rate applicable to all customers, i.e., each customer’s bil… Volumetric This surcharge approach is typically more equitable and more commonly used. The volumetric charge… Inverted Block The inverted block method is more speciï¬c in the customers that it targets. In this method, the s… Percentage Bill This approach simply places a ï¬xed percentage surcharge on the total bill of the customer. The pe… Summary In certain situations, rate surcharges can be an effective means of ï¬nancially protecting the uti… |
| 195 | 25 Chapter 25 Indexed Rates Some utilities seek annual rate adjustments driven primarily by the need to keep pace with the ra… General Considerations Rate indexing allows for regular and relatively simple rate adjustments based on overall fluctuati… Some of the state public utility commissions that regulate water utilities have used indexing as … In the regulatory context, rate indexing also can be used with alternative rate- making methods (… |
| 196 | Price indexing might be considered for smaller utilities who need to make more frequent rate adju… Historical Perspectives Experience with rate indexing is relatively recent. Indexing for smaller systems is closely tied … Indexing for larger systems is related to alternative regulatory methods being explored for incre… Advantages and Disadvantages The following paragraphs examine the advantages and disadvantages of rate indexing in terms of si… Simplicity Simplicity is a key advantage of rate indexing. The simplicity of rate adjustments tied to inflati… Equity The equity of rate indexing depends on the equity of the initial rate structure, as differentials… Revenue Stability Rate indexing ensures that revenues grow at the rate of inflation, neither more nor less. If costs… Rate indexing is particularly problematic if historical underpricing has occurred or if signiï¬can… |
| 197 | Conservation Rate indexing can have mixed implications for conservation. Maintaining real water prices (that i… Implementation Changes in rates tied to the CPI can be implemented relatively easily and at a lower cost than fu… The ease of rate indexing might be attractive to utilities and rate regulators, but indexing shou… Example A simple example of rate indexing based on the rate of inflation is provided in Table 25-1. The pr… The British model of rate indexing is considerably more complex. Price limits are deï¬ned accordin… In the 1994 review, price adjustments were based on a K factor and deï¬ned simply according to ant… Table 25-1 Simple rate indexing based on inflation |
| 198 | Summary Price indexing through the use of an inflation adjustment might be useful for reducing the cost of… For larger water utilities, particularly regulated investor-owned utilities, rate indexing could … |
| 199 | Section VI Capacity and Development Charges |
| 201 | Chapter 26 Connection and Customer Facility Fees The cost of constructing lines and facilities to dedicate, expand, or extend service capability a… As water rates increase, separate capital charges are often considered as a way to relieve, reduc… It is common policy for government owned utilities to recover directly from the customer the cost… This chapter addresses policy, cost, and pricing assumptions and concerns related to establishing… • allocation of costs • capital cost component • calculation of charges |
| 202 | Figure 26-1 Typical water system components In viewing a water system’s capital charging practices, the source of supply, treatment plant, sy… A key step in determining customer facility fees is the appropriate allocation of costs. In most … When identifying the capital cost to be recovered through customer facility and connection fees, … |
| 203 | Example calculations of a basic model for both a connection fee and a customer facilities fee are… Allocating Costs The purpose of a cost allocation process in rate setting is to assign, as much as is practical, c… • Are there legal constraints on the ability of the utility to charge a connection fee or on the … • Should the costs of connecting new customers be included in the system revenue requirements for… • Should these costs be allocated to a speciï¬c customer class and recovered through rates for tha… • Should the cost be recognized as an incremental capital cost and recovered directly through a s… Utilities may choose to allocate and recover all, or a portion, of such costs through the general… To determine whether a speciï¬c capital fee should be established for a new connection, the utilit… • Frequency. Is the number of occurrences signiï¬cant enough to justify a speciï¬c connection fee? • Data availability. Is there reasonable and sufï¬cient information available to support a charge … • Justiï¬cation. Are costs sufï¬cient to justify creating such a fee? • Affordability. Is the magnitude of the calculated charge cost prohibitive to economically disad… • Consistency and predictability. Are the material costs and labor requirements relatively consis… • Equity. Would isolating of customer connection costs signiï¬cantly increase equity among customers? After evaluating these key issues, the utility may determine that a separate capital fee to recov… |
| 204 | Standardized Versus Customized Fees Usually, connection and customer facility fees for small customers are standardized because the i… Capital Cost Component After a utility has determined the need for separate capital fees to recover new connection costs… Another important consideration is whether it is necessary to install water meters. Measuring wat… • an equitable basis to charge customers for services • a history of water consumption • the means to evaluate growth and changes in water use patterns • the means to measure conservation • an indication of water loss or leaks • a method of establishing long term consumption trends • a method of establishing seasonal consumption trends Nonetheless, some utilities do not currently meter individual customer water consumption. The dec… Additional factors related to installing service line appurtenances may have a signiï¬cant bearing… |
| 205 | Typically, a residential service connection involves the installation of connection facilities (i… In contrast to the basic installation of a residential service connection, large, complex service… It is important to determine the portions of the connection and customer facilities that will be … Calculating Connection and Customer Facility Fees Direct Costs The ï¬rst step in determining connection and customer facility fees is to collect data on both dir… Labor costs Direct labor rates also need to be examined to determine the average labor cost of installation. … Equipment costs Equipment costs can be developed based on accounting data, including depreciation and maintenance… |
| 206 | Indirect costs Indirect costs should also be factored into the development of appropriate connection fees. These… Examples Tables 26-1 through 26-3 illustrate the calculation of a connection fee and a customer facility f… Table 26-1 Calculation of connection and customer facility fees |
| 207 | Table 26-2 Calculation of connection fees For this example, a one-year time horizon was used to project the fees. In some cases, a multi-ye… Table 26-3 Calculation of customer facilities fees |
| 208 | Table 26-1 provides a summary of the information obtained when gathering data to determine indire… The middle section of Table 26-1 lists typical materials and their per unit cost. In the example,… The current equipment costs shown in the third section of the table are based on average unit cos… Based on historical records obtained during the data gathering phase, the average time required f… The total average materials costs as developed in Table 26-1 are further developed in Tables 26-2… |
| 209 | 27 Chapter 27 Policies and Procedures for Water Service Extension Policies and procedures regarding cost responsibility for extending distribution mains and other … The provision of water service is characterized by several distinct functions: • water supply (surface supplies and groundwater) • source water conveyance through source water transmission lines and source water pumping • puriï¬cation and treatment facilities, including clearwell storage and high- service pumping • treated water transmission mains • booster pumping • treated water storage (elevated and ground) • distribution mains • connection facilities • customer facilities |
| 210 | General Considerations Generally, the utility is responsible for designing and building facilities that meet customer wa… In the design and construction of local facilities, the utility often forms a partnership with a … Because of the capital intensive nature of on site and off site facilities to serve developmental… Determining responsibility for the construction of certain facilities is an important issue relat… A number of related issues are important to this process. The basis for cost determination (that … |
| 211 | Utilities often require facilities to be oversized to provide for expected increases in demand fo… To summarize, the following issues should be addressed as a part of the service- extension process: • cost responsibility for design and construction • basis for cost sharing between the utility and the developer or applicant for service • basis for cost determination (actual cost incurred, pre established unit prices, or estimated c… • responsibility for the construction of facilities • need for performance bonds and warranty bonds • basis for assessments on the properties (e.g., total cost of new facilities or a portion of the… • credits provided (to a developer) based on the number of new connections for a deï¬ned period of… • oversizing of facilities to accommodate system demand beyond what is needed for the immediate e… • review and approval process for the development plan • requirements for mandatory connection to the water system Extensions for New Development For new developments on parcels of land that are undeveloped or where no infrastructure improveme… Distinguishing between on site and off site water facilities is essential. On site facilities are… The authority to review these issues rests with the regulatory body with jurisdiction over the wa… |
| 212 | Local governments typically require the developer to construct all on site facilities to speciï¬ca… However, public utility commission practice varies by state. Some commissions base the amount of … A utility should not risk public capital investment in supporting private development, unless suc… Off site investment can be delineated as: • facilities that predominantly or exclusively beneï¬t the applicant • facilities that beneï¬t the system (i.e., joint or common to all facilities) Utility investment in off site facilities that predominantly or exclusively beneï¬ts the applicant… If the developer is required to ï¬nance off site facilities that generally beneï¬t the entire syste… Performance Bonds If the developer or applicant for service proceeds with the construction of water facilities, it … |
| 213 | Oversizing Facilities In certain instances a utility may require a developer to oversize water distribution facilities … To determine how much additional capacity is needed, an engineering hydraulic analysis must be un… Requirements for additional capacity often are deï¬ned through formal agreements between the utili… • the actual cost of work performed • an agreed on unit price for actual quantities placed in service • a dollar amount agreed to in advance of construction When the developer is required to provide the initial, or up front, ï¬nancing for oversizing, ther… Before the utility enters into these contractual agreements, appropriations for such work may nee… • pay as you go funding (often referred to as equity funding or the use of current earnings produ… • bonds (typically revenue bonds) • retained earnings The process described ensures that capital costs associated with extending service to new develop… |
| 214 | Designing and Constructing Water Mains for Redevelopment For areas that are changing dramatically in land use and density, local policies dictate whether … Redevelopment usually occurs where there is a change in land use and density but streets are not … Extensions to Serve Developed Areas Served by Individually Owned Wells The utility may be responsible for designing and constructing water distribution facilities to se… The utility may elect to extend service to such previously developed areas to respond to some or … • abandonment of contaminated wells (usually documented or required by the local or state health … • insufï¬cient flow of well water • property owners’ petition for service • property owners’ offer to contribute to the cost of the extension In many cases, property owners petition the utility to extend service because of either water qua… |
| 215 | A utility may develop a policy for extending service by requiring that a certain percentage (i.e…. When a utility decides to extend service, several signiï¬cant policy issues should be addressed in… • requiring all property owners to connect to the public system (e.g., Does the utility have a ma… • handling later connections if all property owners are not required to connect to the new distri… • giving the utility authority to assess property owners for water system improvements • determining responsibility for the cost for extending service • assessing fees for new connections and timing of collection • requiring cross connection control, such as backflow prevention devices, to protect the integrit… • establishing water rights and source water protection issues Mandatory Connection Policy Some government owned utilities have a mandatory connection policy that applies to cases in which… The requirement to connect can be mitigated by allowing a period of time, e.g., 12 months, for cu… Who Pays the Extension Cost? Generally, the utility provides the necessary funds to pay for designing and constructing service… |
| 216 | As mentioned above, property owners may ï¬nance the extension with a one- time fee or a series of … |
| 217 | 28 Chapter 28 System Development Charges A growing number of water utilities employ system development charges to assign to future custome… • pay as you go ï¬nancing through user rates • debt ï¬nancing • system development charges (SDCs) • up front reimbursement from developers • stock issuance Debt ï¬nancing requires future repayment from revenues, often through user rates, and equity ï¬nanc… Throughout the United States, SDCs (also referred to as impact fees or plant investment fees) are… Though new development in a water utility’s service area may be viewed as positive, the appropria… |
| 218 | Selecting a Method Based on Financial Goals and Objectives The ï¬rst step in implementing SDCs should be to identify the objectives to be achieved by the man… • have new development pay its own way • fund major system expansion • generate sufï¬cient cash to fund a portion of capital improvements • minimize debt • equitably recover capital costs from current and future customers • maintain appropriate level of retained earnings and cash reserves to meet other capital needs o… Though SDCs can be used to minimize the amount of debt ï¬nancing required for capital expansion, t… Some groups have opposed the use of SDCs. Frequently, opposition results from a lack of understan… The implementation of SDCs should be guided by • compliance with any local and state legal and regulatory requirements • ï¬nancial objectives of the utility • generally accepted water utility industry ï¬nancing and pricing practices • maintaining fairness between existing and future customers • uniform and consistent methodology An SDC is a ï¬nancial commitment on the part of both the utility and the development community. De… |
| 219 | Legal Issues Related to Methodology The preliminary planning to establish an SDC should include a review of the legal authority and i… Many states govern the system development and impact fee practices of municipal agencies. Some st… • study state statutes or state public utility commission rules of practice (many state legislatu… • review the relevant case law for commission and judicial decisions influencing capital charge pr… • seek competent legal advice, particularly when litigation risks are uncertain • evaluate the underlying criteria important to a speciï¬c water system or jurisdictional environment Table 28-1 provides examples of state statutes governing the use of system development charges an… Legal issues addressed in court opinions and rulings help establish procedures for implementing S… Some water utilities are under the authority of a regulatory utility commission. Regulatory commi… Methods of Calculating SDCs The two basic methods for calculating SDCs are the equity method and the incremental cost method…. The equity method is based on the principle of achieving capital equity between new and existing … |
| 220 | Table 28-1 Examples of state statutes governing the use of system development charges and impact… |
| 221 | The incremental cost method is based on the concept of new development paying for the incremental… Equity (Buy in) Method The goal of the equity method is to achieve an equity position between new and existing customers… System equity A key component in developing an equity method SDC is determining system equity. The major compon… System assets For SDC purposes, one measure of the valuation of the system assets is the original value of the … System liabilities and equity Balance sheet liabilities and equity that are recognized in the equity valuation encompass outsta… Equity sources Equity in the water system established by existing customers can accrue from various sources, inc… System usage An analysis of existing system usage is necessary to determine the equivalent units of current cu… |
| 222 | Table 28-2 Equivalent meter factors Column 3 of Table 28-2 shows equivalent meter ratios expressed in terms of the ratio of rated met… SDC determination For purposes of the example SDC calculation under the equity method shown in Table 28-3, the aver… Though meter equivalent ratios may be computed for meters larger than 3 in., the use of these rat… Incremental Cost Method The incremental cost method assigns to new development the incremental cost of system expansion n… Determining SDC To calculate SDCs under the incremental cost method, the practitioner must determine various fact… Service area The service area must be determined before the SDC can be computed. Commonly, the total service a… The delineation of the utility service area is important for growth planning and for assessing ca… |
| 223 | Table 28-3 Illustrative determination of system development charge using the equity method Planning period The SDC planning period is needed to project the growth and service requirements of the system. T… Growth rate and magnitude of expansion A projection of the future system growth is an integral part of the incremental cost method. The … |
| 224 | Growth rates usually are estimated in terms of population, employment, and commercial or industri… Capital improvements plan for system expansion After the projected growth and future demands for the system are established, the capital improve… SDC related capital improvements should be restricted to common use facilities; generally, they d… When long term ï¬nancing is required to provide funding for a part of the capital improvement plan… Excess capacity in the existing system available for future development The efficient economic expansion of the system often requires that improvements be built in incre… |
| 225 | Determining development units To calculate the SDC, the projected system growth in demand must be converted into common units. … Most SDC related facilities are designed on the basis of annual average day use, maximum day dema… When charges are collected at the time of service initiation, meter size is often used as a basis… The meter size approach may be easiest to explain to customers. It is based on the potential maxi… If collection of the SDC is made at the time of platting, the service unit usually is based on an… An example of the calculation of an SDC on an incremental cost basis is shown in Table 28 4. For … |
| 226 | Table 28-4 Illustrative determination of system development charge using the incremental cost me… Reimbursement Policies Utilities frequently require developers to construct facilities that provide service beyond the r… Credits are reductions to all or part of SDCs. The credits may be allowed for any contributed inf… A development agreement is another method used for contribution of utility infrastructure. The de… Reimbursement contracts often are used by water utilities for infrastructure contributions. These… |
| 227 | Economic Development Issues The utility should be aware of the possibility of deterring growth of its service area or custome… The practitioner must consider the effect of SDCs on competition for new development. Some utilit… Assessing SDCs The utility must decide which new customers will be assessed and when the assessment will occur. … • new plats • unplatted properties • previously platted properties • new service • additional service Timing Assessments Timing of the SDC assessment and collection has both ï¬nancial and administrative impacts. Typical… At the time of platting Many utilities assess and collect SDCs at the time of platting a new development. This approach a… At the issuance of the building permit Some utilities assess and collect the SDC at the time the building permit is issued for new devel… At the time service is requested Other utilities assess and collect SDCs at the time service is requested. Usually, this is when t… |
| 228 | The timing of collection involves two conflicting issues that must be reconciled. First, the utili… Timing differences exist between user rates and SDCs. Many major projects related to system expan… Administrative and Accounting Procedures The utility should adopt general administrative and accounting procedures that assure the collect… Administrative Issues Utility managers should develop procedures to administer the SDC program, including establishing … Reimbursements Some utilities have policies to reimburse contributions when facilities are later used by others…. Refunds The utility should consider refunds of SDCs under the following circumstances: • When service is not provided in a reasonable period of time after the charges are paid. • When collected charges are not spent on system expansion within a reasonable time period. |
| 229 | Interest income The utility may wish to dedicate interest income from SDCs to the SDC accounts. This helps to off… Income taxes For investor owned utilities, SDCs are generally included as ordinary taxable income for federal … Regulatory issues Under the utility approach to rate making, most regulatory commissions exclude contributions of f… Accounting Issues Collection Because SDCs are imposed to recover the cost of new development, proper accounting of receipts is… Receipts The utility should account for SDC receipts with the same procedure used for contributed faciliti… Expenditures SDCs should be expended in a manner consistent with the ï¬nancial goals and basis for which the ch… Updates of the SDC Analysis As development occurs and the economic mix of the community that the utility serves changes, grow… |
| 231 | 29 Chapter 29 Dedicated-Capacity Charges Charges to dedicate a portion of the capacity to future and existing customers in the form of an … Availability Charge Some systems impose a periodic charge, called an availability charge, on frontage or similar basi… Even when the utility has an effective program for customer contribution of capital outlays for a… The availability charge typically is applied to property owners of beneï¬ting properties not conne… |
| 232 | For rural water systems or systems with mature service areas, the availability charge may be used… The availability charge also applies where the majority of costs of public ï¬re protection service… Other suitable applications of the availability charge may be identiï¬ed, but the principal need f… In establishing the form and amount of the availability charge, the utility must determine the sp… After the utility determines total costs, it must deï¬ne the appropriate unit basis for applying t… One of the difï¬culties a utility may encounter with availability charges is enforcing payment. Be… Table 29-1 Example calculation of availability charge |
| 233 | Contract Demand Charge A contract demand charge may be an appropriate cost recovery option to consider when a customer o… A contractual payment for a given demand not only protects all other customers from the ï¬xed cost… Implicit in this type of a dedicated capacity charge is the need for both parties to enter a long… Customers contracting for a given capacity should agree to pay the ï¬xed costs related to that cap… The contract typically requires the utility to commit capital and operating resources and set asi… The charge could consist of a ï¬xed monthly charge to recover capital costs associated with the de… |
| 235 | Section VII Fire Protection Charges |
| 237 | Chapter 30 Rates for Fire Protection Service Fire protection service differs from other services provided by the utility. Essentially, this is… Section II of this manual presents examples of the allocation of costs to fire protection and to … The example presented in section II allocates all costs to public fire protection and proposes re… This chapter examines additional issues in fire protection cost allocation and is intended to sup… |
| 238 | Historical Perspective The concepts, policies, procedures, and practices related to fire protection service charges have… In 1955, D.A. Root and T.R. Camp determined that systems without a fire protection function shoul… In 1961, the Maine Water Utilities Association Committee on Fire Protection Charges published a r… In 1987, the Maine Public Utilities Commission adopted the use of this curve. Its regulations sta… In general, three approaches have been used in allocating costs to fire protection. They include • allocating primary cost to general water service, with incremental costs allocated to fire prot… • allocating primary cost to fire protection service, with incremental costs allocated to general… • allocating costs to general water service and fire protection service on a proportional basis The use of each approach results in a significantly different allocation to fire protection servi… Public Versus Private Fire Protection Utilities typically provide fire protection services in two distinct ways. The first level of ser… |
| 239 | Figure 30-1 Percentage of total revenue allocated as fire protection service cost |
| 240 | Because utilities provide both public and private levels of fire protection service, they typical… Regulated Versus Nonregulated Utilities In theory, there should be no difference between how regulated and nonregulated utilities allocat… In practice, this is often not the case. Municipally owned and operated utilities (typically not … Investor-owned utilities (which are typically regulated) are not as concerned with municipal poli… Determining Fire Protection Costs Section II of this manual presents information about commonly used methods to determine the porti… Unit Costs The allocation of rate base, under the base-extra capacity method from section II of this manual,… The total allocation to fire protection service, including the direct fire protection allocations… To determine the amount of each category allocable to fire protection service, it is necessary to… |
| 241 | Table 30-1 Allocation of rate base using the base-extra capacity method (test year) |
| 242 | Table 30-2 Allocation of depreciation expense using the base-extra capacity method (test year) The potential maximum-day and maximum-hour demands that result from providing fire protection ser… For this example, a fire demand equal to 4,000 gallons per minute (gpm) with a duration of four h… To determine the maximum-hour units of service, the same 4,000 gpm fire is assumed to have a dail… |
| 243 | Table 30-3 Allocation of O&M expense using the base-extra capacity method (test year) Table 30-4 Distribution of costs to fire protection service |
| 244 | Table 30-5 Allocation of fire service costs to public and private fire service The unit costs in line 1 of Table 30-4 are multiplied by the units of service in line 2 to derive… Public/Private Fire Service Allocation Total fire service costs can be further allocated to public and private fire protection service b… Demand factors for each size service are multiplied by the number of connections of each size to … The example presented in Table 30-5 distributes the allocated fire service cost, excluding the di… |
| 245 | Public Fire Protection Charges After the costs associated with public fire protection are determined, a method must be found to … Charges to Municipalities In most cases, water utilities assess the public fire protection charge directly to one or more m… Hydrant charges The most common method to recover costs is to assess the total public fire protection cost to the… To determine the per-hydrant charge, the total public fire service allocation from Table 30-5 ($1… Inch-foot hydrant charges For purposes of allocating public fire protection costs between two or more communities, charges … To determine the quantity of piping used to provide water to hydrants, a measure that reflects bo… |
| 246 | Table 30-6 Calculation of public fire protection charges The calculation of a combination of inch-foot and hydrant charges is shown in the lower portion o… Table 30-6 shows the resulting calculation of hydrant and inch-foot charges for two communities. … |
| 247 | In most areas, assessing public fire protection charges to the municipalities, which in turn reco… Another problem that many utilities encounter when developing public fire protection charges is r… Direct Public Fire Protection Charges Direct charges to individual properties can be used to overcome the problem of recovering public … Rather than charging the municipality based on the number of hydrants or hydrants and inch-foot o… An alternative direct-charge mechanism is a fixed charge that is unrelated to water use included … Another method is to have fixed charges by customer class, with the larger properties (associated… |
| 248 | Table 30-7 Private fire service charges Private Fire Service Charges Table 30-5 presents the allocation of total fire service costs to public fire protection and priv… Charges Based on Service Size The most common method of charging for private fire service is to base the charge on the size of … Table 30-7 provides a calculation of private fire service charges based on service sizes. As pres… Additional Considerations Another methods of charging for private fire service include charges based on the number of sprin… Section III of this manual discusses customer service charges. These charges consist of two compo… |
| 249 | Some customers install their own storage facilities for fire fighting purposes. These storage fac… Because the utility often must maintain the service connection to a customer’s private fire servi… Emerging Issues Recently, a separate allocation of costs to private fire service and the resulting charges to cus… The alternative view is that customers with private sprinkler connections do indeed receive a ser… The debate about the appropriateness of assessing charges for private fire protection and the app… • the benefits of private fire connections increase (by savings lives and extinguishing fires mor… • more municipalities require private sprinklers for certain buildings • water service costs increase |
| 251 | Section VIII Wholesale Rates |
| 253 | Chapter 31 Wholesale Rates Water Service Wholesale service may be deï¬ned as “a situation in which water is sold to a customer at one or mo… In providing wholesale service, most utilities are dealing with a few high- consumption customers… Determining Cost of Service A cost analysis is required to determine revenue requirements of wholesale water service and to a… Section II of this manual describes cost allocation methodologies. These methods emphasize that t… |
| 254 | Table 31-1 Customer class demand factors Typically, rates and rate structures for wholesale customers must be developed for many political… Table 31-1 illustrates that the maximum-day and maximum-hour demand factors for wholesale water s… |
| 255 | Another consideration in cost analysis is recognition that a wholesale customer typically provide… Factors that affect the relative demand, or load, factor exhibited by a wholesale water customer,… • Wholesale purchaser’s customer-class characteristics • Wholesale purchaser’s distribution system arrangement • Number and location of booster pumping stations operated by the wholesale purchaser • Number, location, and size of distribution storage reservoirs operated by the wholesale purchaser • Limitations imposed by the selling utility’s own transmission and distribution system Types of Service Cost allocations vary according to the type of service provided to a wholesale customer. Types of… Firm Commitment Contract In this type of contract, the supplier agrees to provide water to the wholesale customer with the… Because a ï¬rm commitment contract requires the utility to build facilities for wholesale customer… Surplus Water Contract In surplus water contracts, the utility agrees to provide to the wholesale customer only water th… |
| 256 | Emergency Reciprocal Contract An alternative method of contracting with a wholesale customer with its own water supply is throu… Typically, the utility that constructs, maintains, and operates the emergency connection charges … Peak Requirement Contract A peak requirement contract commits the supplier to stand ready to provide service during peak us… Finally, interruptible service is rarely used for wholesale customers. The need for predictable r… Rate Design Wholesale rates should be designed to recover the costs of providing service based on usage, patt… Typical Wholesale Rate Designs The more typical wholesale rate designs are uniform volume, seasonal, declining block, and demand… Uniform volume rate A widely used rate structure for wholesale customers is a uniform volume rate to recover the cost… |
| 257 | Where the wholesale purchaser has other supply options, a minimum-purchase (take-or-pay) requirem… Seasonal rate This rate structure allows the utility to recover costs associated with high demands imposed by t… Declining block rate Traditionally, this rate structure has targeted large commercial and industrial retail customers … Demand rate The use of demand rates has been less common in the water industry than in the electric industry…. In essence, this rate structure allocates, or, from a costing standpoint, reserves, a portion of … |
| 258 | When capacity is reserved, any excess capacity used could be billed at a penalty rate, discouragi… A demand rate is one option generally acceptable in all states and provinces. The major restricti… A demand rate is similar in complexity to seasonal rates. To allocate costs properly among wholes… Unless the utility already has metering facilities to determine hourly and daily demands for both… Utilities plan the size of most facilities used by wholesale customers to meet maximum-day or max… Rate methodologies that recognize the demand characteristics of individual customers or customer … |
| 259 | While demand rates can effectively reduce peak usage, they may not be as effective as seasonal ra… Some utilities using demand rates have a ratchet, or penalty, clause in their contracts that hold… The demand component of a demand-type rate is somewhat higher under the commodity-demand method o… To the extent that costs of providing service are related to peak demand, a uniform volume rate b… Developing and implementing demand rates requires some effort. However, where the wholesale class… Example Based on data from the tables in section II of this manual, Table 31-2 shows the unit cost, units… In this example, the wholesale customer class has an annual use of 230 mil gal. This is an averag… |
| 260 | Table 31-2 Wholesale customer class units of service and annual allocated costs by two methods Unit costs in Table 31-2 provide a basis for developing rates applicable to the wholesale custome… Under these charging methods, particularly the base-extra capacity method, the maximum-day or max… The application of rates to a wholesale customer is illustrated in Table 31-3. For simplicity, th… In certain circumstances, a utility may bill demand charges to wholesale customers based on their… At times, a utility may have excess supply, treatment, and transmission capacity. This may be a r… |
| 261 | Table 31-3 Wholesale customer class annual bill calculation Other Rates Off-peak rates generally do not apply because most wholesale customers receive peak service on a … A single inverted-block rate for all classes usually is not equitable for wholesale customers bec… |
| 263 | Section IX Miscellaneous and Special Charges |
| 265 | Chapter 32 Miscellaneous and Special Charges In recent years, water utilities have begun to unbundle some of the costs of miscellaneous ancill… Several factors are involved in cost unbundling. First, any practice that matches a customer’s ra… As general water rates increase because of water resource limitations, development costs, new pla… The combination of fairness and improved efficiency make miscellaneous services charges an attrac… This chapter examines the following issues related to miscellaneous and special service charges: • The basic legal authority for miscellaneous user fees and charges • Factors to consider in establishing user fees and charges • A general outline of the steps necessary to calculate fees and charges for full-cost recovery |
| 266 | • Common types of charges used in the water utility industry (Not all charges apply to all water … Each utility must determine what types of charges are appropriate to its operations. Through awar… Definition of Charges for Services Charges for services, also sometimes referred to as user fees, are broadly defined as charges to … Water rates are a type of service charge and are generally the primary source of revenues for a u… Typically, charges for miscellaneous services are used only where • the user or customer is readily identifiable • the unit of use and its costs can be determined with reasonable accuracy • the utility wants to encourage or discourage certain behavior As a matter of policy, generally, the service for which a separate charge is applied is not compu… General Principles for Establishing Charges In deciding whether to establish various service charges, a utility should consider general polic… • Beneficiaries of a service should pay for that service. • Services provided for the benefit of a specific individual, group, or business should not be pa… • Services provided to persons or entities that are not customers of the utility should not be pa… • Services for which there are charges are generally voluntary. • The price of services may be used to change user behavior and demand for the good or service. • The level of service charges should be related to the cost of providing service. |
| 267 | Example An example of a situation that would justify establishing service charges is a water utility that… Associated with recreational uses are additional costs for rangers, trail maintenance, parking an… This example illustrates that a utility often provides goods or services for individuals who may … Legal Authority for Service Charges The legal authority to impose various fees and charges often is included in a utility’s authorizi… Generally, local governments are given wide latitude in establishing fees to pay the cost of indi… • The utility must, in exchange for payment of the fee, provide a direct benefit to a party in a … • The fee must be optional, with the party given the option of not using the government service. • The charge must compensate the specific government entity for the provided service only fees re… Judicial opinion has held that the burden of proof in showing that charges for services are not v… In the case of many government-owned water utilities, water service is furnished to the property … Such rates or charges, if not paid when due, shall constitute a lien upon the premises served and… |
| 268 | In general, the enabling legislation specifies that bills must be paid within a definite number o… When a utility holds the property owner responsible for payment of water bills, it must develop e… Selecting and Implementing Charges There are a number of issues and factors that should be considered in evaluating whether specific… Policies Related to Service Charges The principle of unbundling costs for miscellaneous services dictates that those who use a servic… 1. To permit an identified group to participate in services it might not otherwise afford. 2. To provide benefits for groups beyond the immediate recipients of a service. 3. To influence behavior or use of the service. Frequently, governing boards or councils have policies that address public access to important se… Following are important questions to answer before implementing miscellaneous charges or special … Are proposed charges for miscellaneous services equitable? An advantage of service charges is that they increase equity in the sharing of utility costs by d… |
| 269 | Is the good or service readily identifiable and measured? Goods and services should be defined in a way that (1) clearly identifies and distinguishes them … Can those who will benefit from the provision of specific services be readily identified? In considering a particular service charge it is important to evaluate who will benefit from the … Is the service related to the performance of the utility’s primary business activity? It would not be appropriate to charge for a service if the service affects the quality of water o… What is the full cost of providing the good or service? The key to establishing a service charge is determining the cost of providing the service. The ba… What costs are incurred in administering the levy, collection, and accounting of charges for misc… If the cost to administer a service charge greatly exceeds the cost of providing the service, the… How will the charge or fee for a good or service affect the demand for the service? The degree to which demand is affected by the fee level is referred to as the price elasticity of… |
| 270 | Are there legislative, legal, or regulatory constraints under which the utility is required to op… A utility considering implementing new service charges should evaluate any legal or regulatory co… Clearly, a system of charges for miscellaneous services can offer many advantages to utilities. T… Cost Basis and Rationale for Miscellaneous and Special Service Charges Determining cost and estimating the demand for a service are key functions in the proper implemen… • measure the cost of service • plan the expenditures associated with the service • evaluate the cost/benefit ratio of the service charge • project revenues from the service It is impossible to accurately price the service if utility managers are unable to accurately mea… Determining the Cost of Providing Service If a utility does not have the accounting capabilities necessary to develop cost data for each ac… The following steps can be used to determine the full cost of specific services. The specific ana… |
| 271 | Step 1: Define the Service to Be Provided The first step in determining the cost of a service is to clearly define the service being provid… The next two steps are necessary to determine the cost of services that require the use of facili… Step 2: Identify Capital Investments Made in Order to Provide the Service Once the specific service is clearly defined it should be apparent whether or not capital costs m… Determine an appropriate allocation of capital costs. To avoid adverse rate impacts to utility cu… Step 3: Estimate Direct Labor Costs Employee wages and fringe benefits may represent a significant portion of the cost of providing s… |
| 272 | Accounting records can be used as a checklist to ensure that all costs associated with a project … Work activity can also be measured through interviews, detailed work logs or time sheets, or dire… Labor costs should include full costs of salaries and fringe benefits. Total annual wages and ben… Step 4: Determine Other Direct Costs In addition to labor costs, many services result in either the consumption of materials or the us… Field services may require the use of vehicles and equipment. If the utility has internal service… Other direct costs to be considered in developing service charges are external costs, which are t… Step 5: Determine Indirect (Overhead) Costs Indirect costs related to specific goods or services are determined by considering the level of c… The use of a cost allocation plan is one way to determine indirect costs. These plans are frequen… |
| 273 | A number of approaches can be used to prepare a central service cost allocation plan that, under … Single tariff/consolidated rate method or multiple rate approach These methodologies are regarded as acceptable cost allocation methodologies within OMB A-87. The… Single step-down approach This approach is occasionally used in the prepara tion of some basic plans. In this methodology, … Cross allocation approach Some state controllers have, over a period of years, suggested a cross allocation methodology for… Step down-double allocation approach In this methodology there are two steps. In the first step, the central service departments alloc… In the absence of a complete cost allocation plan, utilities can develop indirect cost estimates … Determine indirect costs To determine the cost of providing a good or service, all direct and indirect costs associated wi… Annual review of miscellaneous charges and related costs Charges for miscellaneous services should be considered within the annual budget process, with re… |
| 274 | Fee policies can be considered in a broader context than a single fee program when all service ch… Sample Service Charge Calculation The procedures for calculating unit costs used as the basis for charging for a particular activit… Under a time-study procedure, the utility (1) identifies those operations needed to complete the … Examples A variety of miscellaneous charges in the water utility industry include collection and delinquen… A summary of several service charges follows. This list is intended to illustrate the broad range… |
| 275 | Field Service Charges The more common types of field service charges and fees relate to activities associated with wate… Turn-off and turn-on fees A utility may charge to turn off or turn on water service. Typically, this activity occurs under … In the first example, follow-up turn-on charges are common because they are easy to administer an… The turn-on charge can be imposed for a new service turn-on, seasonal turn-on, other situations w… Employee travel time to the customer’s premises, actual labor costs involved in operation of the … Field collection charge Often, utility service personnel are permitted to collect delinquent water bills at the customer’… Some large urban utilities have reconsidered the benefits of on-premises collection because of pr… |
| 276 | Repair of damaged facilities On occasion, a customer will operate a service and, in the process, make the stop box inoperative… Routine clean-outs and dig-ups of stop boxes or meter pits sometimes are undertaken without a sep… Special meter readings and final readings A fee may be charged when customers request a special meter reading or ask that a meter be reread… A final-bill reading is a common type of special reading. This may occur when a home or business … Meter resetting fee A charge may be made to a customer for resetting a meter when the meter has been removed at the r… Appointment charge In certain instances, a customer may request a field- service call at a specified time during the… To promote effective customer service, many utilities try to schedule service calls within a wind… Meter testing charge Water bill complaints that are not resolved by telephone may necessitate that a meter be reread o… |
| 277 | Determination of financial responsibility for meters that test outside the prescribed accuracy ra… Backflow-prevention testing Periodic backflow-prevention testing is required by many utilities to assure the integrity of the… Pressure testing If a customer requests that the water pressure at a service be tested, a utility can dispatch a f… Fire-flow test Occasionally, customers may request verification of fire-flow capabilities at a given location. T… Water audits Commercial, industrial, and residential water audits performed by utility personnel are becoming … In areas where water audits are in high demand, it may be desirable to establish a small nominal … Temporary hydrant meters Water uses from public fire hydrants, for purposes not related to fire fighting such as street wa… |
| 278 | Office Service Charges Some of the more common types of office service charges include the cost of setting up a new acco… New account or transfer charge Depending on the level of activity and overall costs, a new applicant may be charged an initial a… An account fee for new construction can incorporate additional office expenses incurred for admin… An administrative fee can be used to recoup the added cost of processing a new water-service canc… Whether one fee is used for all activities or separate fees are developed depends on the amount o… Collection-related charges The following service fees pertain principally to the collection and billing functions of the wat… A late-payment charge can be an incentive for prompt payment. This charge recognizes the time val… |
| 279 | A returned-check charge is made when a check is not honored by the customer’s bank, regardless of… Some utilities are authorized to issue a lien certificate following reasonable attempts to collec… Some utilities provide individual water bills to tenants of a master metered complex, such as an … Account status at property sale In some locations, a title or escrow company will verify account status when a property is sold. … Meeting agendas and related materials The public meetings of a utility’s governing body (board of directors, city council, etc.) should… |
| 280 | Before a utility implements any charges for public information documents, a review of applicable … Public documents Utilities frequently receive requests for recent studies and reports, public information material… Construction plans, drawings, and maps Developers, other utilities, cities, and others occasionally request plans, drawings, or maps of … Consultation services Some utilities impose hourly rates for consultation services rendered by staff to persons other t… Service Application, Engineering, and Inspection Fees Many types of water service application, engineering, and inspection fees are used in the water u… Because processing an application incurs costs even if no construction work is performed, the uti… The amount of application fees will vary and, as with all service charges, should be based on a c… |
| 281 | Main inspection, filing, and contract fees When preparing a main-extension agreement, a fee may be charged for filing the application, devel… Administrative fee for service-connection inspection Where a new service line stub-in is connected to the distribution system before service is requir… Cross-connection inspection A periodic inspection fee is used to recover costs associated with high-risk installations to ens… Engineering design fee Where substantial engineering design and study are required to provide new facilities, the cost o… When facilities are constructed, these extraordinary costs may be capitalized as part of the tota… Contract Work and Merchandise Sales A service charge is assessed when the utility performs work on a customer’s premises, such as rep… |
| 282 | Through contract work and merchandise sales a utility may be in competition with plumbers or supp… For many services, special fee schedules can be developed. Alternatively, the utility may charge … Some of the areas in which a utility might undertake contract work and merchandise sales are desc… Service line repairs Normally, the maintenance of service lines beyond the water meter is the customer’s responsibilit… Leak detection Though leak detection of the utility’s system is a responsi bility of the utility, detecting leak… Service tap installation Most utilities have a fee schedule for installing taps into the main when connecting to customer … Meter installation In large developments, it is common for developers to install water meters and meter boxes at new… Meter size change When a customer with an existing service and meter, such as a 1-in. service line with a 5’8-in. o… |
| 283 | Some utilities receive requests to downsize water meters, frequently to lower the monthly or bimo… Main location services Utilities are frequently asked to locate water mains for other utilities or in conjunction with n… Main relocation services Occasionally, a utility’s water mains need to be relocated to make room for other utilities or in… Remote meter reading device installation For the convenience of the customer, some utilities provide an outside remote meter reading devic… Backflow-prevention device installation Some water services require the installation of backflow-prevention devices. Usually, these are t… Miscellaneous work Often, a developer will provide a development map with elevations that subsequently are changed. … Sale of water meters and meter boxes In instances where developers install water meters for new service connections, the utility may w… Sale of ULV toilets and other conservation devices With increased emphasis on water conservation, many utilities have instituted programs to encoura… |
| 284 | Wheeling Charges Wheeling is the conveyance of water not owned or controlled by the utility through the utility’s … General Policy Issues There are several general policy issues that should be considered in the development of a wheelin… A comprehensive review of all system operations and how they are likely to be impacted by a wheel… Cost of Service and Fair Compensation To the extent that a party requesting wheeling service pays for the costs incurred by the utility… Customer Equity One of the foremost concerns of determining a wheeling charge should be customer equity. From a c… |
| 285 | Summary The discussion of charges for miscellaneous and special services provides general guidance for ap… Each utility operation is unique to a certain extent. For that reason, an appropriate combination… The significance of the revenue/cost/use pattern is also an important considera tion. Administrat… |
| 287 | Section X Implementation Issues |
| 289 | Chapter 33 Public Involvement Definition Designing water rates through a structured public decision process contemplates an interactive ex… The interactive nature of public involvement in water rate making demands the use of communicatio… General Considerations and Policy Issues Public involvement is not required to design water rates that meet utility requirements. In fact,… • the magnitude of potential impacts on community stakeholders • the extent to which options may reflect community values • the extent to which the utility can (and is willing to) cede decision-making responsibility to … |
| 290 | Beyond these general considerations, the development of water rates raises a number of important … • How should revenue responsibilities be distributed across customer classes? • Should variances from cost-of-service based rates be eliminated, and if so, over what time period? • Should subsidies be provided to support economic development? • Should water rates be structured to encourage water conservation, and if so, what conservation … • How should water rates be structured to address affordability concerns? Resolution of these policy issues often involves balancing conflicting community values. For examp… Public involvement in utility rate development recognizes that affected parties are more likely t… Historical Perspectives Water rate development, like most utility decision-making, historically has been a relatively clo… For water rate changes that preserved relatively low-cost water service, as was largely the case … |
| 291 | Figure 33-1 Ten-step approach to public involvement Public Involvement Planning Heightened public interest in water rate development has increasingly led to implementation of pu… The ten-step process highlights the importance of effective planning of public involvement progra… Step 1: Frame the Problem Water rate development, by deï¬nition, involves determining the appropriate distribution of revenu… |
| 292 | Step 2: Identify Constraints Water rates are required to serve speciï¬c functions—most notably, generating adequate revenues to… Step 3: Identify and Describe Decision Steps and Project Milestones These rate making constraints reflect the need to develop rate options that can gain the acceptanc… Careful delineation of how public involvement efforts will affect formal rate adoption steps is p… Step 4: Identify and Understand Potentially Affected Stakeholders Alternative assignments of class revenue responsibilities and rate designs will impact customer b… |
| 293 | Importantly, stakeholder groups are not typically deï¬ned by the customer class groupings used to … Step 5: Determine Vulnerability and Must-Resolve Issues Public involvement in water rate making is fundamentally a tool for utility managers to gain acce… In any case, public involvement programs for water rate making should be focused on speciï¬c rate … Step 6: Determine the Appropriate Level of Public Involvement Answers to Step 5 will indicate the extent to which public involvement may help resolve critical … |
| 294 | Step 7: Select Processes and Techniques Once the appropriate level of public involvement has been determined, utility managers can select… For example, cost-of-service studies focus on relatively complex issues of inter- class revenue d… For complicated rate issues, public involvement approaches may also include distribution of infor… Step 8: Develop a Public Involvement Work Plan The above-described steps involved in planning a public involvement program contemplate a number … If the utility fails to coordinate these activities effectively and to properly support a public … |
| 295 | Step 9: Implement and Monitor the Work Plan Insofar as facilitation of public involvement activities is not the primary background of most ut… • Utility representatives must be able to communicate effectively and respectfully with stakehold… • Communication on the status of public involvement and rate development tasks must be regular an… • Responses to information requests should be carefully reviewed and checked against other inform… Step 10: Manage Change Public involvement programs for water rate development will typically support some form of rate s… Communications Tools Applying the ten-step (or similarly comprehensive) process to developing public involvement strat… Bill Inserts/Stuffers Brief letters or small-sized inserts that are distributed with each customer’s bill offer a way t… |
| 296 | Newsletters Topic-speciï¬c newsletters may be published and distributed to key community groups or mailed to a… Speakers’ Bureau/Community Group Presentations A less expensive, and often more informative, vehicle for disseminating information to interested… Information Line A 24-hour telephone line with a recorded message can inform the public about rate study events, s… Print and Broadcast Media Relations Announcements of the times and dates of public hearings and work sessions on rates should almost … Internet Site Internet sites may be used to allow access to a wealth of information about water rate issues. In… This listing may serve as a “menu” of public communications options. Some, but likely not all, of… |
| 297 | Evaluating Communication As noted, successful implementation of public involvement programs is promoted through continuous… Summary Several factors, most notably substantial increases in system revenue requirements and conservati… |
| 299 | 34 Chapter 34 Legal Considerations Regardless of whether a water utility is government- or investor-owned, unless a tariff design an… Jurisdiction of Economic Regulation of Water Utilities Authority over regulation of rates and rate design of water utilities differs depending on whethe… |
| 300 | General Legal Standards In order to be upheld by the courts, rates, whether set by a municipal body or an investor-owned … A basic tenet of the law involving municipal rate setting is that rates established in a lawful m… The rate differential is but one factor to be considered in determining unjust discrimination. Th… Factors to Consider in Determining if Rates Are Unreasonably Discriminatory Both the reasonableness of and the presence of unjust discrimination in a rate setting contract a… |
| 301 | In concluding that there was a reasonable basis for surcharging a group of customers for water se… Unreasonableness will be shown where the discrimination rests on the nonresident status of the us… A city’s first duty is to its own inhabitants who order and pay for municipal plant directly or i… |
| 302 | Courts have noted several factors that justify increased rates to residents residing outside of t… In interpreting two provisions of the Municipalities Authorities Act in Township of Racoon v. The… Recent Court Decisions A review of the cases decided recently reveals that in the municipal rate setting arena, as in ot… In Brydon v. East Bay Municipal Utility District, it was the owners of single family residences w… |
| 303 | The courts are cognizant, not only of environmental conditions, but also of economic conditions i… The issue presented was: “Is it unreasonably discriminatory to restructure rates because one enti… The court referenced the leading Louisiana case of Hicks v. City of Monroe Utilities Commission. … The municipal corporation has two classes of powers: one public (governmental) and one private (p… Although obligated to maintain a uniform nondiscriminatory rate among its customers, a municipal … |
| 304 | The underlying public policy rationale for approving discounted rates to a certain customer (Gara… In one recent case, those challenging a city’s rate structure claimed that certain rates or fees … In this case, the court also rebuffed a challenge to rates that were higher to those outside the … In this case, appellant offered no evidence beyond the mere fact that the residential rates (insi… |
| 305 | Summary Whether one reviews the municipal rate setting cases from a historical or a current perspective, … |
| 307 | 35 Chapter 35 Data Requirements One of the key factors in developing supportable utility rates is the availability of sound, accu… Customer Records From a rate making standpoint, probably the most important area in which the utility should maint… Number of Customers As a starting point, most utilities do maintain certain standard customer related statistics. The… |
| 308 | Metered Consumption Another common customer statistic that is often maintained is metered consumption by meter size o… In order to design and evaluate different rate structures against a utility’s goals and objective… Another important reason to keep detailed records of metered consumption by class of customer and… |
| 309 | Billed Revenue Data A third customer statistic that is important in the development of rates, and that is commonly ma… Billing information by individual customer is also important to be retained in the utility’s bill… Peak Period Demand Data Additional customer information that is extremely beneï¬cial to the rate practitioner in cost of s… Most often the information on customer class demands is based upon system- wide coincidental maxi… |
| 310 | Other Data Requirements Another element of customer records that is not typically maintained by water utilities, but is b… One ï¬nal area of customer record keeping that is, in effect, a fallout of the information discuss… A consideration that is particularly important during the implementation of any adjustment in the… In establishing the necessary adjustments to rate levels to meet the utility’s revenue require me… |
| 311 | Plant Investment Also important in developing supportable rates is to have accurate and sufï¬ciently detailed plant… An associated element of plant investment that is useful in designing certain alternative rate fo… Operation and Maintenance Expenses As discussed in the section above on Plant Investment, detailed records of historical operation a… |
| 312 | In designing certain types of rates, again including seasonal, inverted, and off- peak rates, it … Revenue Stability and Sufï¬ciency The principal objective of any rate structure should be to maintain the ï¬nancial stability of the… During the course of the year, many utilities have seasonal demands on their system caused by cli… Customer Survey Information As a ï¬nal element of the data requirements and information that may be of assistance to the utili… |
| 313 | Summary Many utilities maintain records, data, and statistics of the nature and detail described in this … Table 35-1 Data requirements checklist Table continued next page. |
| 315 | Appendixes |
| 317 | Appendix A Development of Capacity Factors by Customer Class Perhaps one of the most puzzling “mysteries” in the art of rate making is the determination of ap… The system-wide demand data that are necessary to undertake the analysis include: (1) the highest… |
| 318 | The system demands for this example are the same as used in the example in chapters 7 and 8 of th… In terms of the necessary information regarding customer class billed consumption, the following … Maximum-Day Capacity Factors The first step in determining the capacity factor by customer class is to calculate the ratio of … Residential 4.75 mgd/2.65 mgd = 1.79 Commercial 1.70 mgd/1.30 mgd = 1.31 Industrial 3.09 mgd/3.00 mgd = 1.03 The ratio of the overall system coincident maximum-day demand (11.55 mgd) to the average daily de… For purposes of this example, it is assumed that for the commercial and industrial customers the … |
| 319 | Multiplying the results of the analyses and factors described above to arrive at an initial estim… In order to test the reasonableness of the maximum-day capacity factors, the noncoincidental dema… The test of the system diversity, utilizing the above capacity factors, is demonstrated in the fo… As indicated by the above analysis, the initial maximum-day capacity factors computed for the ret… Maximum-Hour Capacity Factors The determination of maximum-hour capacity factors by customer class is similar to, and builds up… For industrial customers, the relationship of maximum-hour and maximum-day capacity factors is la… |
| 320 | The relationship between the maximum-hour demand and maximum-day demand for the residential and c… The initial determination of the maximum-hour capacity factors for the residential, commercial, a… The diversity test to indicate whether the maximum-hour capacity factors developed above are reas… As indicated by the above analysis, the maximum-hour capacity factors computed for the retail cus… These discussions demonstrate techniques for the development of noncoincident maximum-day and max… |
| 321 | Assume that someone comes up with the concept that efficiencies, economies of scale, and reductio… The question at hand is, now that there is a smaller, more efficient, and less costly system, how… In using noncoincident customer class demands for the distribution of costs, this allows the incl… Another consideration in using noncoincident demands occurs when there is wholesale service or ot… The use of capacity factors by customer class based upon the estimated relative demands for each … Some practitioners prefer to make use of coincident customer class demands rather than using nonc… A basic principle inherent in the rate methodology contained in this manual is the concept of cos… |
| 322 | The potential benefits of using coincident capacity factors may be best illustrated by two simple… How is this benefit to be distributed to users in the form of cost allocations? Systems are typic… Another example illustrates that coincident peaking factors in cost allocations may aid conservat… The examples and explanations regarding the determination of customer class maximum-day and maxim… |
| 323 | An important technical decision in performing cost allocations by customer class as described in … |
| 325 | B Appendix B Equivalent Meter Ratios In the overall rate setting process, there is often the need to establish a minimum threshold or … There are different ways in which to measure or compute equivalent ratios for larger meters as co… |
| 326 | In determining the ratio of the cost of installing various sizes of meters relative to the cost o… In the cost allocation examples in chapter 8 of this manual, the costs of meters and services wer… Based, in part, on information developed in section VI of this manual, the following are the tota… The safe operating flow, or capacity, of a particular size of meter is essentially the limiting f… In section VI of this manual, the maximum safe flow or capacity of 5’8-, 1-, 11’2-, 2-, and 3-in…. It is important to understand and recognize the types of costs that are to be recovered using equ… |
| 327 | The selection of equivalent meter ratios is dependent upon the purpose for which the ratios are t… |
| 329 | C Appendix C Bill Tabulation Methodology The summarization or tabulation of customer bills provides a useful basis for identifying and ana… A bill tabulation shows the number of customer bills rendered at various levels of water usage du… |
| 330 | In the example presented here, bills are tabulated for one customer class for a continuous 12 mon… Bill Summarization The first step in tabulating customer bills is to separate billing records into customer classes,… The bill tabulation process is initiated by selecting the smallest meter size for a particular cu… It is important to summarize bills for each identified customer in all customer classes unless a … To illustrate the bill summarization procedure, hypothetical customer billing account records and… |
| 331 | Figure C-1 Hypothetical customer-account billing records |
| 332 | Figure C-2 Example of a water-bill tabulation sheet |
| 333 | Beginning with customer account number 115147, shown in Figure C 1, a tick mark is made on the li… Once the bill tabulation is complete for each meter size by class, the number of tick marks or bi… After all bills and associated usage have been summarized for each meter size and class, total cu… Development of Cumulative Billed Usage After tabulating the number of bills and usage for each customer class by meter size, the next st… |
| 334 | Figure C-3 Development of cumulative billed usage residential class—annual number of bills and u… Usage blocks summarized should be selected in part to coincide with the existing rate blocks. Thi… The number of bills issued for water usage corresponding to the various consumption blocks is sho… Once the number of bills is summarized by usage block, the bills are accumulated up in column 3 o… Column 4 represents the total use of bills stopping in each usage block and corresponds to the nu… |
| 335 | The total water use of bills stopping in each usage block shown in column 4 is accumulated, begin… While the accumulated usage shown in column 5 provides a measure of total customer class water us… The cumulative billed usage of all 5’8 in. residential customers may be developed at this point b… Once the bill tabulation has been completed for all customer classes, the cumulative usage (shown… |
| 336 | Figure C-4 Metered water-use condition (example) |
| 337 | Application of Bill Tabulation for Rate Design The bill analysis, once verified for accuracy, provides a useful tool for rate design. The usage … If it becomes necessary to change existing blocks in order to more equitably recover allocated co… Construction of a curve for the hypothetical residential customer class is shown in Figure C 4. T… Similar curves can be developed for each customer class and meter size. In some instances, it may… It is generally useful to plot all customer class curves on the same graph as an aid in the selec… |
| 339 | D Appendix D Example of Citizens Advisory Committee Guidelines The Citizens Advisory Committee (CAC) will primarily serve to advise the utility’s rate study pro… • CAC members will be appointed by the utility’s governing board and will be selected to assure r… • CAC meetings may be open to the public and may include a period for general public comment. • Members of the CAC will not hold “voting” positions or adopt recommendations under majority rul… • CAC discussions will review rate making options for water rates to reflect, to the extent pract… |
| 340 | • Project team decisions will be reported to the CAC once determined but will not be subject to r… • Project team support of CAC activities will be limited to provision of information necessary fo… The CAC will discontinue once the rate study project is completed and water and wastewater rates … |
| 341 | Glossary accelerated depreciation accrual basis ad valorem tax advance for construction ancillary charge annual operating revenue requirement availability charge base costs base-extra capacity bill frequency analysis bond covenants bonded debt |
| 342 | budget capacity capacity factor capital expenditures capital program cash basis cash needs approach commodity costs (variable costs) commodity demand commodity-demand rate connection charge construction work in progress (CWIP) |
| 343 | contract demand contribution in aid of construction (CIAC) cost allocation cost of capital cost of common stock cost of debt cost of preferred stock costs of service coverage ratios curb cock curb stop |
| 344 | customer classification customer costs debt debt service declining block rates dedicated capacity demand costs demand patterns depreciation depreciation rate |
| 345 | discounted cash flow (DCF) model dividend payment equity equivalent customer equivalent meter and service ratio expenditures extra capacity costs fire protection charges firm service flat rate flotation costs functional cost components |
| 346 | future capacity government owned water utility gross receipts tax indenture inverted block rates investor owned water utility least squares method lifeline rates marginal cost rates minimum bill net revenues available for debt service |
| 347 | off peak rates payment in lieu of taxes peak load pricing rates rate base rate blocks rate making process rate schedule raw water return on rate base revenue bond seasonal excess use charges seasonal rates self sustaining water enterprise service charge service connection service line |
| 348 | standby service system development charge system development charge facilities test year treated water unit cost unit of service uniform volume charge unmetered or flat rate user charges utility approach wheeling charge wholesale service customers working capital |
| 349 | Index Note: An f. following a page number refers to a figure; a t. refers to a table. |
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AWWA G430 2024
AWWA G430-24 Security Practices for Operation and Management Published By Publication Date Number of Pages…
