Stacey Isaac Berahzer is a Senior Project Director for the Environmental Finance Center at the University of North Carolina, and works from a satellite office in Georgia.
In many states, ask a water utility manager the hardest part of her job and she will probably say it is facing the board/council/commissioners to ask for yet “another” rate increase! But, rate increases should happen “slowly, but surely.” At least under normal circumstances, the recommended practice is to raise rates by a little, but often enough to keep up with the rising costs of managing water resources and running a utility. So, this is, in essence, more bad news for the shy manager… not only should he request rate increases from his governing body, but he should do so often!
While, some governing bodies have the experience to see the importance of frequent, incremental rate increases, it seems this is the exception. In most cases, members of governing bodies are so overwhelmed with all their important responsibilities, that water rates are not seen as enough of a priority during their term in office, (not to mention how voting to raise rates may affect their chances of reelection if the public is uninitiated about the value of water service.)
One way to address this dilemma of standing in front of the governing body every year with “hat in hand ” is to find a way to get a series of rate increases approved at one time. Under specific circumstances, some utilities have convinced their board to approve multi-year increases, as in the case of New Orleans’ recent approval for the next eight years . But some utilities have been able to go even further. The Henry County Water and Sewer Authority in Georgia raises rates every year by 5% (on both the base and consumption components of the rate structure). The utility’s board passed the following resolution a few years ago:
“Beginning October 1, 2008 and on the first day of October of each year thereafter, the water and sewer rates in effect as of September 30th, 2008 and each year thereafter shall be increased by 5 percent. The 5 percent rate increase shall be computed each year by increasing the previous year’s rates by 5 percent. Said rates shall remain in effect until modified, amended or terminated by the Authority.”
Before utility managers get too excited though, please note the word “Authority” in the name of this utility. In Georgia, an “authority” is a form of governance that generally lends a utility more leeway in management decisions than the more traditional city or county-owned utility model. That said, Gwinnett County, GA was able to take a similar approach with its “2009 Water and Sewer Rate Resolution.”
Similarly, Mesa Consolidated Water District in California passed Resolution 1384 which covered rate increases from 2010 to 2014 as seen here:
Private Utility Example
For a private water company example, EPCOR Water Services Inc. (EWSI) operates the water system according to Performance Based Regulations (PBR) found in the City of Edmonton Waterworks Bylaw. The PBR approach provides the benefits of:
- Assuring customers that their utility must meet performance standards
- Ensuring customers receive stable and predictable rates over the five year period (there is a five year rate filing with annual progress reports reducing the amount of materials to be produced annually)
- Protecting customers from unexpected rate increases, as EWSI bears the risk of greater than expected cost increases
- Encouraging EWSI to keep costs low and to find more innovative and efficient ways to improve the operations of its system
The diagram below is taken from the PBR Progress Report for 2011, and illustrates how the various component of the PBR conceptual framework inter-relate.
“Inflation” is perhaps the most challenging piece of the above framework for the utility to get a handle on. The table below shows the specifics of how inflation was determined:
For 2011, this process meant that the increase in monthly fixed service charges reflected the PBR inflation factor adjustment of 1.36% (consistent with the consumption charge).
Conclusion
One area for further consideration is: Do multi-year rate increase resolutions have any relevance in states where a rate case must go before some type of public service commission to approve the rate increase? Or, are public service commissions already used to hearing the case for the “series of smaller increases” vs. a one-time increase.
To conclude, here are some general tips to get multi-year rate increases approved:
- Have solid financial projections – these can show decision-makers the possible effects of NOT doing frequent, small rate increases, such as not meeting bond covenants
- Keep it small – rate increases of less than 5% seem to be more palatable, perhaps because they are somehow associated with inflation in people’s psyche. Double digit increases are usually a tough sell, though sometimes necessary, especially for larger, older cities
- Tag it to a related indicator – some utilities have adopted a policy to raise their rates as some standard indicator increases, e.g. Griffin, GA tags its water rates to the Municipal Cost Index
- Others?? leave us a comment below or send an email directly to berahzer@unc.edu
The advantages of multi-year increases seem fairly obvious for the utility manager, but are there potential problems with this approach? Could this method be diluting the power of a governing board too much?
We received the following comment from the Finance Director from Henry County, GA:
“This has worked well for us. Many cities and counties wind up enacting huge rate increases to make up for going several years with no increase. We are pretty much in the middle of the metro-Atlanta pack for the cost of 6,000 gallons of wtr & swr. But the way we get there, by a manageable increase each year, is a lot easier for the customer to handle than an occasional huge increase.”
We have a policy of “smooth” rate increases. Our increases are usually between 3%-5%. This gets the public and the Board used to seeing increases every year. Increases are small enough to not cause a public outcry or receive media attention, which in turn makes Board members happy. I do not really agree with making a standard arbitrary increase every year, like the 5% example above. Why do they need that every year? Rates should be based on the cost of service the utility incurrs. Every rate increase for every year should be justified and thoroughly explained to the public.