What should a utility manager do in order to convince a board or council of elected officials of the need to raise water rates? We identified 10 actionable tips based on statistical analysis of survey results of more than 1,400 local governments across the United States that were successful in raising water rates.
About the study
In June 2016, the Water Research Foundation published the “Rate Approval Process Communication Strategy and Toolkit”, a resource that provides communication strategies, scalable tools, and specific messages that utilities can use to gain support during their rate approval process. As part of a national team that developed these resources for water utilities (including Arcadis Consulting, Raftelis Financial Consultants, and ABT Associates), the EFC partnered with ICMA to conduct an original survey of local governments across the United States (both utility staff and elected officials) in 2014. The survey identified what utility staff presented to the governing boards/elected officials during successful rate requests, and what elected officials and utility staff found useful in the process, including rate case communication needs and information most critical to a successful rate case.
In a previous blog post, we described the survey and presented general results from 1,408 utilities that requested a water rate increase in the recent past. We noted that nearly half of the utilities requested a rate increase that would not have provided revenues to maintain a strong fiscal condition and meet most capital needs – i.e. to pay for operations and most capital costs. In a second blog post, we summarized what information utility staff shared with the elected officials when requesting the rate increase, and whether the information was considered to be important.
For this blog post, we determine key factors that were characteristic of the utilities that were more successful in requesting and/or receiving a higher rate increase than other utilities[1]. This analysis was conducted using rigorous statistical methods (multivariate regression models). These factors were all statistically significant, even after controlling for other relevant factors. We interpret the results into actionable tips for utility staff and managers that would like to request, and receive approval for, a higher rate increase to cover the cost of operations and most capital needs (assuming that higher rate increases are necessary). These tips statistically worked for more than 1,000 utilities nationwide.
10 Tips for Getting Higher Rates Approved:
1. Ask for more
It almost goes without saying that the first step to receiving a higher rate increase is to ask for it. Elected officials are unlikely to raise rates higher than what the staff ask for, so it is up to the staff to be bold and ask for a full rate increase when it is necessary. The statistics from the survey support this intuitive notion. Among 1,330 utilities, 92% indicated that their requested rate adjustment was ultimately approved and – more importantly – the rate increase that was approved was within 10% of the final rate increase that was requested for nearly all of these utilities. Thus, utilities that requested a higher rate increase eventually received a higher rate increase than utilities that requested a low rate increase. There was nearly a 1-to-1 relationship between the rate increase requested and the rate increase approved, even after controlling for all other factors.
Because the rate increase requested and rate increase approved were nearly always the same, the question of “how to achieve a higher rate increase?” is essentially the same as asking “how to request a higher rate increase?” In our study, we determined that the following rules based on factors that were statistically-significantly correlated with utilities that asked for high rate increases (and therefore that received higher rate increases).
2. Build trust between the elected officials and staff
We asked utility staff to rate their working relationship with the elected officials on a 5-point scale. For every unit increase in positive working relationship, there was, on average, a 50% increase in the likelihood that the staff requested a rate increase that covered both operations and most capital costs (as opposed to just a rate increase to cover basic operating costs), controlling for all other factors. Improving staff-board relations may take time, but the stronger the working relationship, the more likely that both parties will be on the same page taking care of the utility’s financial health.
Interestingly, the frequency of meetings between staff and elected officials did not affect the rate increases requested/received in the survey, beyond the effects of the strength of the working relationship. In other words, it was more important to have a strong working relationship than to have more frequent meetings if those meetings do not improve the working relationship.
3. Use experienced staff to oversee the rate increase process
The statistical analysis shows that if the person making the official rate request (e.g. city manager, utility director, finance director, etc.) had 10 more years of service than someone else, they were 16% more likely to ask for a rate increase that covered both operations and most capital costs, controlling for all other factors. Greater experience might be equated to greater knowledge and ability to communicate effectively with the elected officials, increasing the ability to ask for a full rate increase when necessary.
4. Use a third party to present the rate adjustment request
The rate increase requests were 34% higher, on average, when they were requested by an external agent (i.e. a consultant), than when presented by city managers, controlling for all other factors. Hiring a rates consultant to present to the elected officials may add an additional level of objectivity and professional confirmation that some officials may seek, particularly in the case when a significant rate increase is being requested. We also found that rate increase requests were 13% higher, on average, when they were requested by the Utility Director than when presented by city managers.
5. Include information about anticipated capital needs
If utility staff presented information about the anticipated capital expenses for the utility to the elected officials when making the request for a rate increase, they were nearly three times as likely to request a rate increase that covered both operations and most capital costs than when utility staff did not share information about capital expenses. Explaining to the elected officials how the higher rates will be used to pay for capital expenses that have already been carefully planned helps the utility make a successful rate case.
6. Describe the impact of the rate increase on the physical assets
When utility staff presented information about the physical condition of the water system, they requested rate increases that were on average 20% higher than similar utilities that did not share information about the condition of their assets. Similar to the previous point, explaining how the higher revenues will be used to fix current problems – like the three main breaks that happened in the last few months – or prevent an imminent failure is important. Showing photos from the field or bringing in samples of deteriorated pipes helps the elected officials visualize the extent of the problems and why the rate increase is necessary.
7. Link rate requests to long-term plans
When utilities explained how the rate increase requests aligned with a Master Plan or Strategic Plan for the town or utility, they were on average 36% more likely to ask for rate increases that covered both operations and most capital costs. Relating how the higher revenues will be used to achieve specific tasks that support the community’s mission or strategic goals that the elected officials champion helps place the rate request in the broader context that the officials operate in.
8. Describe the impact to the customers in a clear manner
Almost every utility in the survey indicated that they described the effect of the rate increase on customer bills when presenting to the elected officials. However, describing the increase on the “average bill” is often not sufficient information. For example, the effect on customers of a “5% increase on the average bill” is different for a utility where the average bill is only $10/month than for a utility whose average bill is $100/month. Utilities should consider describing the effects of the rate increase request to key customer groups that the elected officials are concerned with. Some examples include how the rate increases affect residential vs. non-residential customers, low water-users vs. high water-users, and inside customers vs. outside customers differently. For instance, a 15% rate increase “on average” might be more acceptable to some elected officials if they understand that it means only a 5% increase to the bills of low water-using residential customers.
9. Get the public involved
In the survey, utilities indicated the level at which the public was involved in the last rate adjustment request at five different levels, ranging from “not at all” through “participation in meetings held during the rate adjustment process.” We found that for every increased level of public participation, there was on average an 8% higher rate increase requested – and subsequently approved – by the utilities, controlling for all other factors. Raising the public’s awareness of the potential rate increase early and increasing public participation in the process and buy-in before the elected officials’ final vote helps alleviate the political pressure to avoid rate increases.
10. Comparisons help
Often, elected officials want to know how the utility’s current or proposed rates compare to those of other utilities. In this survey, we found that utilities that compared their rates to nearby utilities’ proposed rates, on average, asked for 20% higher rate increases than utilities that did not compare rates. Rate comparisons should be performed thoughtfully and additional information, such as the utility’s financial performance, should be shared at the same time to avoid a race to the bottom of the rate comparison chart. We have developed online Financial Sustainability and Rates Dashboards to assist utilities in performing such comparisons and benchmarking in front of their governing boards.
Additional Resources
The key results of this analysis are summarized in the report published by the Water Research Foundation, along with four action areas and 10 steps in developing a long-term communication strategy. The report is complemented with 14 scalable and ready-to-use tools to support utilities and governing boards throughout this process. One of these tools is a new “Rate Case Visualization Tool for Water Utilities”, which is an Excel tool designed to provide an easy-to-understand and visually-pleasing snapshot/infographic of a utility’s financial and operational performance for use in communicating with elected officials. The tool is available for free for Water Research Foundation members. Utilities may request assistance from the EFC to use this tool.
Acknowledgements
Jordan Paschal, Mary Tiger and Jeff Hughes contributed significantly to this analysis.
[1] We ran several multivariate regression models and are reporting only on variables that were correlated with requesting/approving higher rate increases, statistically significant at the 5% level, controlling for all other factors.