Base charges are critical for water utilities’ finances given that the majority of utility expenses are fixed in the short term and require a stable revenue source to pay for them despite decreasing demands. The most common practice is for utilities to set a constant base charge for each customer class or vary the base charge by meter size. Yet, this assumes that every residential customer with a 5/8″ meter places the same fixed costs on the water system. A few utilities have determined that this was not the case and have structured base charges more creatively, resulting in varying base charges among customers of the same customer class. This post describes some of the less common structures of base charges.
Base charges by location
The fixed costs of supplying water to customers in different service areas may be sufficiently different, because of different treatment technologies used or because of larger and longer piped distribution networks, that the cost allocation creates unique base charges by physical location. This is frequently applied by municipal utilities that charge different base charges for customers outside town limits. A more unique example of this case is setting base charges based on the number of pumping or booster stations that water must flow through before reaching the customer. The Town of Cave Creek, Arizona, for example, charges residential customers with 5/8” water meters a monthly base charge of $50.00, or $58.00 if the water was boosted. This allows the utility to allocate the fixed capital (and related) costs of the pumping and booster stations to the customers that directly benefit from them. Determining which location-based charge should apply to each customer requires detailed and accurate maps of the distribution network and cost records in sufficient detail to conduct a more thorough cost-of-service calculation.
Base charges by the characteristics of the house or premise
In many places, larger homes generally have higher water demands because they house larger families or at least have more water fixtures. Higher demands translate into higher fixed costs to the utility. To allocate these fixed costs equitably across different residential customers, a few utilities set charges based on physical characteristics of the premise that are linked to water demand. It is more common to see system development charges or other one-time capacity charges vary by the physical characteristics of the premise, but even base charges can vary in this way. For example, base charges in the City of Aspen, Colorado are determined by the customer’s “Equivalent Capacity Unit” (ECU), among other factors. The ECU is a unit that estimates how much capacity is needed to supply water to a particular customer, relative to a standard water customer. The higher the ECU, the higher will be the base charge. ECUs for residential customers in Aspen are calculated by all of the following:
- the number and types of bathrooms, bedrooms and kitchens in the home,
- number and type of water fixtures (toilets, sinks, dishwashers, washers, tubs, saunas, pools, and more),
- size of irrigated areas,
- type of irrigating systems used, and
- water line size (to set the minimum ECU for each customer).
ECUs are also determined for non-residential customers, involving additional factors such as the number of seats in restaurants and theatres, square footage of office spaces, number of students in schools, number and type of washing bays in car washes, etc. Aspen calculates each customer’s ECU and multiplies it by $4.57 (or higher in other billing areas) to determine the monthly demand charge for the customer. This is added to a monthly fire protection and pumping charges to calculate the total monthly water base charge for the customer.
Base charges customized based on customer water use
The City of Davis, California attempted to implement a Consumption-Based Fixed Charge, but was ultimately narrowly voted down in a referendum. Nevertheless, there are examples of utilities that currently set base charges that vary by consumption amount, using different methods. Read about them here in a separate blog post.
Base charge as the sum of multiple charges
Several utilities break up the base charge into two or three specific charges that get summed together on a customer’s bill. For example, the City of Hickory, North Carolina charges a $4.26 customer charge plus a meter size-related $10.83 availability fee every month on water bills, for a total monthly water base charge of $15.09 for 5/8″ meters. Aspen, Colorado’s base charge is also split between the demand charge based on ECUs, pumping charges and fire protection charges. One benefit of splitting the base charge into two or more charges is that it allows the utility to more easily account for different fixed costs when setting rates, and determining a fair and equitable price for each type of cost. For instance, meter reading and billing costs are likely to be the same for all customers, but perhaps only a portion of the customer base is being served by a new treatment plant that has incurred debt for the utility. In this case, some customers will see a recurring, fixed debt recovery charge added in their base charge, while the other customers not benefiting from that new debt-financed treatment plant will not have to pay for it. Some utilities achieve the same effect by setting base charges by location, but an added benefit of separating the charges is the transparency provided to the customer on how their charges are being allocated by the utility.
Customer-specific base charges allow the utility to more equitably spread its costs among customers based on how much benefit each customer receives and what they cost the utility. These charges are also more difficult to compute, implement, and explain than applying the same base charge for all customers in the same customer class or using the same meter size. The case of the City of Davis, California demonstrates how important it is to achieve customer understanding and buy-in for base charges that deviate from the simpler forms that customers are used to. Utilities can implement certain strategies when communicating with their customers to help get the rates that they need.
Shadi Eskaf is a Senior Project Director at the Environmental Finance Center at UNC Chapel Hill.