Washington State and Sound Rate Structures

The June 2012 edition of the Boise State EFC Environmental News contained the following article on rate setting…thanks to our EFC colleagues for showcasing Washington’s common sense approach!

 “Below is an excerpt from a great piece written by Karen Klocke, the infrastructure finance lead at the Washington State Department of Health’s Office of Drinking Water. Though some of the information is specific to Washington State, I’ve left it in in the interest of continuity, and because rules/regulations/statutes may be similar in your state. Key take aways here are: keep rates simple (see #5) and you can balance conservation with predictable revenues.

Setting Water Rates

No community water system wants to raise rates. However, the goal of every public water system is to provide customers an uninterrupted supply of safe, reliable, fairly priced water now and in the future.  To do that, your system needs to be financially viable. A key to financial viability is the amount of revenue coming through your door. And, of course, your system’s rates determine your income.

Tips for developing a sound rate structure

1. Rates must cover the full cost of producing, treating, storing, and distributing water to customers. This includes debt service, financial reserves, operation, maintenance, all regulatory compliance costs, and inflation.

2. Rates must be adequate and fair. Adequate means the rate is high enough to cover all system costs. Fair means each customer type or class pays its fair share of the costs.

3. Do not use water system revenues to pay for other municipal services. Using water revenues for other purposes, and not maintaining adequate financial reserves for future expenditures, will increase your long-term operating costs.

4. Customers should know what the rates are. This information should be in your annual Consumer Confidence Report and water bill.

5. Your rate structure should be easy to understand. In general, the rate structure for a system with fewer than 5,000 connections should have no more than three user classifications and no more than five consumption blocks.

6. Examine your rate structure once a year as part of your budget development process. Water rates have a short life span.

7. Use good budgeting practices and customer records to support your rates. It’s tough to develop a fair and adequate rate structure if you don’t know expenses and revenues from previous years or how much water you’re selling to each customer.

8. Your rate structure should be easy to administer. Customers need to understand their rates to support them. Make careful, thoughtful decisions that balance the needs of both small and large users in your service area.

9. Consider the need to conserve. Washington’s Water Use Efficiency (WUE) Rule requires municipal systems to set water saving goals, implement water saving measures, and report progress to us each year. Conservation can help maintain storage levels and help you avoid paying peak power rates that some electrical companies charge during “heavy use” times.

10. Calibrate and replace meters as needed. Meters are the cash registers of your utility. If the meters are inaccurate, you may be losing revenue! The WUE Rule requires you to calibrate and replace your meters periodically. Make sure you have a plan and budget to calibrate or replace them.

Rates and water use efficiency

We often hear water systems say they can’t conserve water because it negatively affects their revenue. When your rates encourage conservation, people generally use less, which results in less revenue. However, it is possible to encourage conservation and generate the revenue your system needs-take another look at the tips above.

ASDWA encourages you to consider sharing these tips with your water systems…and invite your EFCs to help with rate setting issues.

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