Utility Ratemaking & Management
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Goal: Rates That Reflect Your Priorities Rates should reflect each community’s balance of sustainability Social Fair & equitable distribution of costs Promote public policy objectives (affordability and economic development) Environmental Promote resource conservation Fund cost of regulatory compliance Economic Satisfy operating costs Fund asset management Meet financial policies Provide fiscal stability Service existing & new debt 3
Ratemaking Process Helps Overcome Challenges to Sustainability Recent economic conditions set many communities back Accelerated trends of declining water usage Reduced revenues/lack of increases required deferral of Actual Client’s Financial Plan Before Hawksley engagement maintenance/capital Non-discretionary programs funded through reserves Cost of operations and regulatory compliance continues to rise Recovery is very difficult given current environment Political will and stakeholder resistance to increases in rates Deferrals of key programs are/will have significant consequences in terms of level of service and quality of life Rate studies educate the public about the challenges facing utilities and the consequences of the status quo Studies are done with stakeholder involvement and usually result in sustainable solutions that are acceptable to the public 4
Core Steps of Utility Ratemaking Process Fundamental Components 1. Revenue Requirement 2. Cost of Service 3. Rate Design 4. Stakeholder Education Revenue Requirement Analysis: Compares revenues to operating & capital costs to determine adequacy of existing rates Cost of Service Analysis: Allocates the revenue requirements of the system to customers in a fair and equitable manner Rate Design Analysis: Considers the level and structure of rates that will collect revenue requirements from each customer class Stakeholder Education: Explains the status quo, key issues/objectives, drivers of adjustments, and comparisons to local and national trends 5
Consider Efficiency & Needs: May Not Need to Perform All Steps Each Year Cost Analysis & Revenue Rate Design Outreach Requirements Allocation • Evaluate Objectives • Fee & Policy Review • Operating Costs • Define Classes of • Conservation Users • Adjustment Drivers • Capital Costs • Identify Structures • Fair & Equitable • National Trends • Financial Policies • Customer Impacts • Comparison to Current • Local Practices • Debt Coverage Revenue Recovery • Reserves 6
Selecting the Right Rate Structure For You Identify structure that meets your needs: Conforms to industry practice Meets all legal requirements Easy to administer/understand Elasticity of demand & weather Conservation and affordability Stakeholder input/concerns Critical considerations: Understanding the drivers and distribution of system costs Integrating financial considerations Reserve policies & revenue stability 7
Most Common Rate Structures Uniform Rate Structure Same rate regardless of usage Rate Most common rate structure Usage Declining Block Rate decreases for higher levels of usage Typically used to encourage economic Rate development and minimize bills for large users Was a very common and successful way of creating cost-based rates for customer classes Usage within a single rate schedule 8
Most Common Rate Structures Inclining Block Rate increases for higher levels of usage Rate Intended to encourage water conservation Typically applied to single-family residential customers due to consistent usage within the class Usage and to irrigation-only meters Rarely appropriate to apply to non-residential customers Pyramidal Block Rate Rate increases then decreases with higher usage Intended to provide water conservation at lower usage levels and reduced impact on larger users Usage Allows for single structure that accommodates large users 9
Most Common Rate Structures Seasonal Higher rates in peak times of year Summer Rate Winter May be appropriate for communities with customer classed that demonstrate seasonal usage patterns Usage Unique Tiers or Water Budgets Forms of inclining block rates based on specific Rate customer behavior or pre-determined efficient use allowances Different blocks based on usage allowance per Usage customer, class, lot size, or other factors Structure used to focus higher rates on peak usage or to encourage wise use of water 10
North Carolina Rate Structures (Source: February 2015 UNC EFC Rate Survey) Our Conclusions: 1. Many systems still have uniform rates 2. Large systems have inclining block rates 3. Non-residential structures are more varied 4. Not many seasonal rate structures (Other) 11
Understanding Cost Allocation is Important in Selecting Rate Structures Cost Analysis & Revenue Rate Design Outreach Requirements Allocation • Evaluate Objectives • Fee & Policy Review • Operating Costs • Define Classes of • Conservation Users • Adjustment Drivers • Capital Costs • Identify Structures • Fair & Equitable • National Trends • Financial Policies • Customer Impacts • Comparison to Current • Local Practices • Debt Coverage Revenue Recovery • Reserves 12
Cost of Service Allocation Process Evaluate Allocate Review Analysis/Use Historical Customer Revenue of Output Classes Requirements Customer Data • Examine customer • Evaluate existing • Identify cost of • Compare allocations to class usage customer classes service & offsetting current revenue • Identify peak use • Water: Peaking factors revenue (misc. fees) • Use as basis for and type of customer • Allocate to systems setting rates by class • Sewer: Strength and and then to functions • Rate structure and/or volume • Distribute costs to level of rates unique to • Consider industry users in proportion to each class practices & local issues contribution to each system function 13
Utilize Available Industry Resources AWWA Manual M-1 Includes methods of detailed cost allocations to functions and ultimately to customers in proportion to their contributions to each system component Very data intensive Commonly utilized by larger systems AWWA Manual M-54 Costs are less granularly allocated to customer classes through rate structure Data readily available from utility billing systems, such as meter size, dwelling units, and annual and monthly customer use, are used to establish rate structures that more generally apportion costs to customers Most common approach by small systems 14
Cost of Service Determines Revenue to Be Recovered By Customers Allocate costs to system Water Cost of Service Wastewater Cost of Service → Source of Supply → Treatment & Disposal functions & review Cost Functions → Treatment → Collection Cost Functions → Transmission → Reclaimed Water customer types → Distribution → Chemical Oxygen Demand → Meters & Services → Suspended Solids Apply methods/criteria → Billing & Collection → Phosphorus best suited for data, Customer Classes → Residential → Ammonia Customer Classes → General Service → Residential circumstances & goals → Residential Irrigation → General Service → General Irrigation → Reclaimed Water Review analysis → Wholesale → High-Strength/Industrial collaboratively → Wholesale Key issues, allocation criteria, Residential Commercial Total Rev (000's) Rev (000's) Rev (000's) sensitivity of assumptions, etc. Water - FY16 Current Rate Structure 17,803 16,131 33,934 Establish revenue to be Inside 17,565 11,507 29,072 Outside 21 72 93 recovered by rates for Irrigation 217 4,140 4,357 Hydrant - 412 412 each customer class Water - FY16 COS Allocation 18,207 15,727 33,934 Compare to current rates Inside 18,000 10,941 28,941 Outside 23 87 110 Irrigation 184 4,330 4,515 Hydrant - 368 368 15
Trend: Ensuring Linkages of Cost of Service to Conservation Rate Structures Water Cost of Service Goal : Capacity costs to higher → Supply → Treatment Components → Transmission & Pumping demands when they occur → Customer Billing → Meters & Services Can be easily done with seasonal or inclining block structures → Base Demand → Maximum Day Demand Functions Goal : Price incentive to → Maximum Hour Demand → Customer Billing conserve when most → Meters & Services discretionary use occurs Non-Peak → Base Demand → Customer Billing Typically done in tandem with a fixed → Meters & Services charge for revenue stability → Base Demand Ensures cost recovery if demand → Maximum Day Demand Peak → Maximum Hour Demand declines/changes → Customer Billing → Meters & Services 16
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