News Release From:
University Extension Center
Courthouse Room 201
Palmyra, MO 63461
(573) 769-2177
Contact: Community Development Specialist, David Hill

Water Sense (S E N S E) Makes Dollars and Cents (C E N T S)

Many people take clean, safe drinking water for granted. This seems to be especially true if one receives public water. How much is taken for granted about considerations in setting water rates? Good financial managers take a look at the books or spreadsheets quite often. As December roles around even more attention is paid to the bottom line. The last opportunity to see how well the budget was planned, but little time to recover from red ink.

Water system managers and municipal officials do the same types of things in determining your water bill. At least one a year they look at current rates and consider what is needed to maintain the financial health of the water system. This doesn't always mean that rates are increased annually. It simply means those responsible for your system do a detailed review of operating costs, needs to improve or expand service, inflationary factors affecting equipment and supplies along with any other factors that might influence rates.

How do managers conduct a good rate review you might ask? How do they know income needed to meet water system expenses for the year? How should rates be structured to meet expenses? All considerations for good managers. What do they need to know to set a fair rate? This is accomplished by collecting detailed information about a water system's income and expenses over the past several years, its customer base, annual water production and sales and funding needs of pending capital improvement projects. It is impossible for managers to know exactly how much income a system will require any given year, but calculations based on this information provides a good estimate.

Ensuring that income covers costs is the primary goal, but not the only goal, of a rate review. There are other considerations. Rates should be structured in a way to ensure customers pay equitable fees for service received. Costs involved with providing water service to a retired couple, for example, are different from costs of serving a local grocery store or car wash. Customers' bills should be proportional to the system's cost of providing service. Understanding of water rates tends to go hand in glove with the customers inclination to accept them. Rate structures should be simple to understand.

Rates are directly affected by the changing customer base and regulations even as they are being set. Small systems in a stable environment might get by for several years with the same rates, but this does not negate the good management practice of frequent rate reviews. If rates suddenly jump or are constant for several years more attention may need to be given to maintenance and subtle changes in consumption and customer profiles.

Information needed for water rate studies varies with the type of rate structure and customer categories a system uses. Some systems divide customers into categories, such as residential, industrial, commercial, agricultural and institutional while others charge all customers the same rates. Managers normally look at the following information during a rate review:

1) system expenditures; 2) system revenue; 3) total number of service connections and a breakdown of connections in each customer category; 4) annual amount of water produced; 5) annual metered sales divided by customer categories; 6) fund balances; 7) prioritized listing and cost estimates of future major maintenance projects and proposed capital improvement projects.

This information is drawn from a variety of sources. The current budget and budgets for the previous five years offer a lot. Census data income statistics are helpful along with engineering documents showing age and condition of the system.

Other factors besides the "calculated rate" are often consider using the calculations as a starting point from which to adjust according to community priorities. Attempts can be made to soften the impact on low-income residents through the rate structure or by looking for ways to reduce operating costs or capital expenses. Delays might need to be made in planned capital projects or less expensive alternatives considered.

"Rate shock" might be avoided by enacting increases over period of years if their is an adequate reserve to provide a financial cushion while implementing required system improvements. In addition to "rate shock" and local political or social concerns, legal and regulatory requirements should be considered as a cost when considering rate changes. All of the considerations in water system rate setting should be ongoing as a part of the management decision-making process. As with the personal and business financial picture December may be too late to affect consequences that become very real around April 15 each year. By December ample time may not remain to find or let alone implement an alternative management strategy. Understanding water bills and how you are served helps reduce leaks in system management as well as the distribution system to maintain a good rate structure. Stay informed and participate constructively remembering, the best surprise is no surprise.