Finding the Path to the Next Rate Increase

Jeff Hughes is a Faculty member at the UNC School of Government and the Director of the UNC Environmental Finance Center. 

The EFC carries out a lot of research and produces a number of tools that track and analyze how much customers across the country pay for water services and the relationship of that payment to utility financial condition and other local factors influencing rate setting.   

The research on how much customers pay led to an increasing focus on how customers pay. The questions were the focus of a multi-year research project looking at pricing models and benchmarking information.

With each deep dive into the Art of Pricing, another research question surfaces and the EFC has now joined a new Water Research Foundation project research team studying the question of what communities do when they realize they need to adjust their rates – how do they communicate the message to their governing board and what process do they use to study and evaluate this core financial decision. What practices, processes, and messages have helped and what have fallen flat?

If all utilities approached this process similarly it would not be an interesting research question, but fortunately for our research team, they don’t. Processes vary from state to state and utility to utility with some processes dictated by rules and regulations but most guided by local communities.

As with most areas of the country, government owned water and wastewater utilities (Cities, Counties, Authorities, Districts etc.) in North Carolina use a variety of different rate setting approaches and processes to generate the revenue they need to support their operations. Ultimate responsibility for approving rates falls to the local governing board for each utility. Apart from the basic requirements that utilities should set rates based on the cost of service, utilities are free to customize their rates, fees, and charges as they deem appropriate subject to local needs, policies, and agreements. Utilities can create sub-committees, citizen advisory groups, or work groups to review fees if they wish but are not required to under statutes. The state’s Utilities Commission has no responsibility or oversight for governmental water and sewer utilities. As a result, rates and rate setting processes and practices differ significantly even for utilities within the same region. Take for example the processes used by the following three neighboring utilities that the EFC recently documented as part of another project:

Multi-jurisdictional Authority

The authority carries out a comprehensive review of rates on an annual basis with the expectation that rates are likely to be adjusted. The process begins in late fall with staff reviewing customer growth and customer consumption trends. Staff (under the guidance of the Chief Financial Officer) takes into consideration these trends and estimated future revenue needs to begin modeling rates for the coming year. In the recent past, customer usage has declined and staff may begin projecting sales decreases in the coming years will result in increased rates just to meet historic revenue needs.  Staff bring present preliminary analysis and recommendations to the Finance Committee early in the calendar year. The committee provides feedback which is taken into consideration to generate new analysis. The committee will review the new analysis and will carry it to the full board for review in a work session. After initial review by the board, the authority will hold a public hearing in March. Following the hearing, the committee will review once again and will make its final recommendations to the board. The board typically will make a final decision related to rates in April.

Fast Growing County

County Board of Commissioners has responsibility for approving utility rates and budgets. The County has not had a water rate increase change in fourteen years. Revenue needs during this period have gone up, but the County has been able to meet those needs through revenue growth from new customers signing on to the system.  At this time no rate modifications are planned in the foreseeable future. If a rate modification were to occur, it would likely be developed by staff and presented directly to the Board of Commissioners for review.

Rural Water System with Increased Capital Needs

This county carries out an annual review of rates as part of their budget process and there is a general expectation that there will be modest annual rate increases as long as there is reasonable evidence that increased revenue is needed to support the County’s water systems. During four of the last five years, the annual rate review process resulted in recommended rate increases in one or more of the districts.The process is led by the Public Works staff with the Public Works Director developing rate recommendations that are reviewed and acted on by the Board in late spring.

What happens in your utility?  Over the next year, the EFC and our partners will be researching these questions and the implications for different approaches, but in the meantime let us know what you think:

• Does the process matter? Does the message matter?
• Do you have a finance committee within your board structure?
• Do you have an advisory board outside the governing board that plays a role?
• How should customers be involved in the rate process?
• What messages work with the board, what messages fall flat?
• How often does your utility review rates?

Post us your ideas!