Difficult economic times make water and utility rate increases more difficult to institute. When consumers attend meetings to discuss service rate increases, emotions typically run high. Water Rate Consultants constantly advise clients to keep their customers advised of ongoing issues so that when instances that might necessitate a service rate increase occur, it won’t come as a complete surprise.
All too frequently, utility service providers fail to effectively communicate why rate increases might be necessary or they fail to effectively plan so as to keep rate increases to a minimum. Understanding the utility “Revenue Requirement” is central to any discussion of water or utility service rates.
The term “Revenue Requirement” usually refers to the amount of money or income necessary for the utility to continue paying its operating costs. These costs include personnel and staff costs, maintenance and other normal, day-to-day expenses. The Revenue Requirement though, also includes debt service payments for any loans or financial agreements the utility has entered into.
If the utility operations didn’t change very much, the Revenue Requirement for that entity wouldn’t change very much either. In reality, utility operations change like any other business. System and equipment breakdowns are inevitable and each instance takes money to correct. In short, many things can impact a utility’s Revenue Requirement, including: System Failures Plant and Equipment Upgrades Changes in Regulatory Environment
An unexpected plant or system failure requires the utility to quickly fix the system. This can mean significant and unexpected expenditures. Plant improvements and equipment replacement projects can be planned in advance and often include some type of external financing to pay for. External requirements such as changing environmental rules may also require the utility to come up with additional funding to pay for required modifications.
Each utility that must meet one of these challenges usually experiences an increase to its Revenue Requirement. Many organizations simply pass costs on to consumers in the form of rate increases. In the case of big projects, the costs are high enough to justify funding the project using debt instruments. Debt service escalates the Revenue Requirement, but spreads the cost over time. When small providers serving a few thousand customers are faced with replacing a treatment plant costing several million, it makes sense to manage these costs over time. Passing on huge costs to the consumer base in the short term would be difficult.
Financing methods are frequently used to pay for major system replacements or plant upgrades. This makes an increase to the organization’s Revenue Requirement inevitable because of the increased debt service requirements. Still, borrowing to fund major facility upgrades or replacement projects is occasionally the best option.
Utilities try to get the most useful service life from all plant and equipment, but over time, the risk of failure for some facilities may increase. Financial planning for future replacement costs as well as for unforeseen emergencies is the best solution to keeping customer rates under control. Communication with customers about these issues is imperative to keeping the user base informed.
Author Jason Mumm is highly respected among Water Rate Consultants. Operator of StepWise Advisors, Jason has years of financial consulting experience to each client engagement. A specialist in planning for facility upgrades, replacements or emergency events, Jason’s unique experience and soid base of experience makes him an important part of any Water Rate consulting Organization.
