11

Evaluating a Rate Structure:Evaluating a Rate Structure:How to Complete a Rate AnalysisHow to Complete a Rate Analysis

Rose StubberfieldRose Stubberfield

22

What is RCAP?What is RCAP?

RRural ural CCommunity ommunity AAssistance ssistance PProgramrogramTechnical assistance provided at no cost to rural Technical assistance provided at no cost to rural communitiescommunities

less than 10,000 in populationless than 10,000 in population low to moderate incomelow to moderate income

To assure safe drinking water and sanitary waste To assure safe drinking water and sanitary waste disposal for the low income, rural communities and disposal for the low income, rural communities and individuals in Indianaindividuals in IndianaNational non-profit organization formed in 1972National non-profit organization formed in 1972Federal and State fundedFederal and State funded USDA Rural Development - Rural Utilities ServiceUSDA Rural Development - Rural Utilities Service US Health and Human ServicesUS Health and Human Services US EPAUS EPA

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Rate AnalysisRate Analysis

Is your community charging enough for Is your community charging enough for water or sewer?water or sewer?

Do revenues and fees cover all expenses Do revenues and fees cover all expenses and debt?and debt?

Do you have adequate financial reserves? Do you have adequate financial reserves? (Do you have (Do you have ANYANY financial reserves?) financial reserves?)

Are your rates fair? (Is one user group Are your rates fair? (Is one user group subsidizing others?)subsidizing others?)

44

Rate AnalysisRate Analysis

These are the key questions we will be These are the key questions we will be answering in this presentation . . .answering in this presentation . . .

55

What This Presentation CoversWhat This Presentation Covers

Introduction / Types of Rate StructuresIntroduction / Types of Rate Structures

Developing the DataDeveloping the Data

Key RatiosKey Ratios

Key DataKey Data

Running ScenariosRunning Scenarios

Conclusions / Keys to SuccessConclusions / Keys to Success

66

Why Analyze Rates?Why Analyze Rates?

Small towns face a greater challenge in Small towns face a greater challenge in providing services (such as water and providing services (such as water and sewer) because they have a smaller user sewer) because they have a smaller user base to pay for it.base to pay for it.

It is critically important for small towns to It is critically important for small towns to periodically evaluate rates to ensure that periodically evaluate rates to ensure that revenues cover expenses. revenues cover expenses.

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Key QuestionsKey Questions

Are revenues covering current expenses?Are revenues covering current expenses?Will revenues cover future expenses?Will revenues cover future expenses?Is there money available for unexpected Is there money available for unexpected expenses?expenses?Are we planning ahead for the future?Are we planning ahead for the future?Are the rates fair?Are the rates fair?Are we financially able to build new facilities?Are we financially able to build new facilities?Are we going to apply for grants and/or loans?Are we going to apply for grants and/or loans?What if the economy, inflation, or interest rates What if the economy, inflation, or interest rates change?change?Is population increasing or declining?Is population increasing or declining?

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Evaluating Types ofEvaluating Types ofRate StructuresRate Structures

Types of rates to consider:Types of rates to consider: Flat rateFlat rate

A flat rate on a per user basis, no matter what the level of A flat rate on a per user basis, no matter what the level of usage is by individual users.usage is by individual users.A common wastewater rate structure in Indiana where usage A common wastewater rate structure in Indiana where usage is not metered.is not metered.

Proportional-to-use ratesProportional-to-use ratesA rate that is based on a level of usage.A rate that is based on a level of usage.More on these rates in the next slide. More on these rates in the next slide. Recommended structure for two reasons: (1) The most fair; Recommended structure for two reasons: (1) The most fair; and (2) Easy for users to understand.and (2) Easy for users to understand.

Arbitrary RatesArbitrary RatesJust that . . . Arbitrary.Just that . . . Arbitrary.

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Evaluating Types ofEvaluating Types ofRate StructuresRate Structures

Types of proportional-to-use rates to consider:Types of proportional-to-use rates to consider: Decreasing block rateDecreasing block rate

Cost per “x” gallons decreases the more water or wastewater Cost per “x” gallons decreases the more water or wastewater is usedis usedMost common water rate structure in IndianaMost common water rate structure in Indiana

Single block rateSingle block rateCost per “x” gallons costs the same regardless of the amount Cost per “x” gallons costs the same regardless of the amount of water or wastewater is usedof water or wastewater is usedMost common metered wastewater rate structure in IndianaMost common metered wastewater rate structure in Indiana

Increasing block rateIncreasing block rateCost per “x” gallons increases the more water or wastewater Cost per “x” gallons increases the more water or wastewater is usedis usedEffective rate structure for encouraging conservationEffective rate structure for encouraging conservation

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Developing Needed DataDeveloping Needed Data

Hand Calculations:Hand Calculations: Can be done. Initially faster than a database Can be done. Initially faster than a database

or spreadsheet. In the long run slower as or spreadsheet. In the long run slower as EVERY calculation must be done by hand.EVERY calculation must be done by hand.

Develop a spreadsheet or databaseDevelop a spreadsheet or database With basic information on cash in and out and With basic information on cash in and out and

a few equations a spreadsheet can be a few equations a spreadsheet can be developed. Negative is “reinventing the developed. Negative is “reinventing the wheel” factor. Positive is designed specific to wheel” factor. Positive is designed specific to system.system.

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Developing Needed DataDeveloping Needed Data

Use an Existing SpreadsheetUse an Existing Spreadsheet There are a number of existing spreadsheets There are a number of existing spreadsheets

that can be used (two examples are included that can be used (two examples are included in this presentation). No reinventing the in this presentation). No reinventing the wheel but not a precise fit for any one wheel but not a precise fit for any one community. Very helpful for running community. Very helpful for running comparisons and “what if” scenarios that are comparisons and “what if” scenarios that are much more difficult with paper calculations.much more difficult with paper calculations.

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Developing Needed DataDeveloping Needed Data

Use some kind of accounting softwareUse some kind of accounting software Simply examples include Intuit’s QuickBooks Simply examples include Intuit’s QuickBooks

or Microsoft’s Money. The positive is that or Microsoft’s Money. The positive is that these software programs take into account all these software programs take into account all accounting needed and can be user friendly. accounting needed and can be user friendly. Negative is that they are not a precise match Negative is that they are not a precise match for a water or wastewater utilities accounting for a water or wastewater utilities accounting needs. needs.

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Key RatiosKey Ratios

Operating ratio.Operating ratio.

Coverage ratio.Coverage ratio.

Affordability index.Affordability index.

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Key RatiosKey Ratios

Operating RatioOperating Ratio

Total System Operating Income /Total System Operating Income /

Total System Operating Expenses =Total System Operating Expenses =

Operating RatioOperating Ratio

Does not include debt, that comes later . . . Does not include debt, that comes later . . .

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Key RatiosKey Ratios

What to include in the income for What to include in the income for operating ratio:operating ratio: User feesUser fees Hook-up and impact feesHook-up and impact fees InterestInterest Cash carry-over and fund transfersCash carry-over and fund transfers And income not dedicated to something elseAnd income not dedicated to something else

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Key RatiosKey Ratios

What to include in the expenses for What to include in the expenses for operating ratio:operating ratio: AdministrationAdministration Wages and benefitsWages and benefits UtilitiesUtilities SuppliesSupplies Other operating expensesOther operating expenses

No debt! That comes next . . . No debt! That comes next . . .

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Key RatiosKey Ratios

What does the operating ratio mean?What does the operating ratio mean? = 1 and the system is breaking even.= 1 and the system is breaking even. <1 and the system is losing money (in the red)<1 and the system is losing money (in the red) >1 revenues are ahead of expenses (in the >1 revenues are ahead of expenses (in the

black)black)

1.15 is a normal target for systems with 1.15 is a normal target for systems with >2,000 connections>2,000 connections

1.35+ is better for smaller systems with 1.35+ is better for smaller systems with <1,000 connections <1,000 connections

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Key RatiosKey Ratios

Coverage Ratio:Coverage Ratio:

Income Available for Debt Service /Income Available for Debt Service /

Annual Debt Service Expenses =Annual Debt Service Expenses =

Coverage RatioCoverage Ratio

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Key RatiosKey Ratios

What does the coverage ratio mean?What does the coverage ratio mean? It is an indicator of the system’s financial It is an indicator of the system’s financial

ability to repay debt.ability to repay debt.

<1 and banks, bond buyers, and lending <1 and banks, bond buyers, and lending agencies are unlikely to lend the system the agencies are unlikely to lend the system the money.money.

1.25 is a normal target for larger systems.1.25 is a normal target for larger systems. 1.90 can often be preferred for smaller 1.90 can often be preferred for smaller

systems.systems.

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Key RatiosKey Ratios

A useful way to look at these two ratios:A useful way to look at these two ratios:

A strong A strong operating ratiooperating ratio will take care of the will take care of the coverage ratiocoverage ratio..

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Key RatiosKey Ratios

Affordability Index:Affordability Index:

Fees for a 5,000 gallon per month user /Fees for a 5,000 gallon per month user /

Median Household Income (MHI) for the Median Household Income (MHI) for the rate paying area =rate paying area =

Affordability IndexAffordability Index

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Key RatiosKey Ratios

What does the affordability index mean?What does the affordability index mean? <0.5% Rates are “very” affordable<0.5% Rates are “very” affordable 0.5% - 1.5% Rates are “fairly” affordable0.5% - 1.5% Rates are “fairly” affordable >1.5% Rates are considered “high”>1.5% Rates are considered “high”

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Key Data - RevenuesKey Data - Revenues

Revenue Components to Include:Revenue Components to Include: (Number of Users Per Class) x (Rate)(Number of Users Per Class) x (Rate) Fees and Service ChargesFees and Service Charges Hook-up ChargesHook-up Charges Interest IncomeInterest Income Other Revenue (Insurance Reimbursements, Other Revenue (Insurance Reimbursements,

Rental Charges, Bank Reconciliation, Sale of Rental Charges, Bank Reconciliation, Sale of Assets)Assets)

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Key Data – RevenuesKey Data – RevenuesExample of Revenues Portion of SpreadsheetExample of Revenues Portion of Spreadsheet

from “Show Me Rate Maker” from “Show Me Rate Maker”             

Operating Incomes      

  User Charges (Actual or Projected Receipts)  

  Surcharges        

Working Capital Carried Over From Previous Year

  (for Operating Expenses)    

  Working Capital Interest Earned (or Paid)  

  Hookup Fees Devoted to Operating Costs    

  Other Charges (late payments, forfeited deposits, etc.)

  Transfers From Capital Improvements Reserve

  Withdrawals From Debt Reserve    

  Debt Reserve Interest Earned (or Paid)  

  Withdrawals From Other Reserves    

  Other Reserve Interest Earned (or Paid)  

  Other Income fund transfer from General Revenue

  Other Income  

  Other Adjust. (+ or -) Describe

Total Actual or Projected Operating Revenues 

2525

Key Data – RevenuesKey Data – RevenuesExample of Revenues Portion from Jarocki- Example of Revenues Portion from Jarocki- Environmental Finance Center SpreadsheetEnvironmental Finance Center Spreadsheet

Water Rates [assumes increase based on new customers]Fees and Service ChargesHookup Charges [Enter Average Charge]Revenues Derived from Rental Charges hydrant rentalInterest IncomeOther Revenues

TOTAL REVENUES AVAILABLE (Lines 6 through 13)insurance reimbursement, bank reconcilliation, sale of truck

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Key Data - ExpensesKey Data - Expenses

Expense Components to Include:Expense Components to Include: AdministrationAdministration Wages and benefitsWages and benefits UtilitiesUtilities SuppliesSupplies Other operating expensesOther operating expenses

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Key Data – ExpensesKey Data – Expenses Example of Expense Portion of SpreadsheetExample of Expense Portion of Spreadsheet

from “Show Me Rate Maker” from “Show Me Rate Maker”

Item

Total Annual Cost for 

Each Item

Fixed Cost 

Percen-tage for 

Each Item

Costs Adjusted for Surcharge-able Service 

& Water Loss

Adjusted Fixed Cost

Salaries & Benefits for Administration Staff $6,000 100% X $4,486 = $4,486 Billing, Office Operation & Utilities, Rent & 

Other Overhead $4,000 100% X $2,990 = $2,990 

Insurance & Bonding $1,000 100% X $748 = $748 Accounting, Legal, Engineering & Other 

Professional Services $900 100% X $673 = $673 

Debt Repayment & Related Expenses $12,000 50% X $12,000 = $6,000 

Debt Reserve Payments $0 50% X $0 = $0 

Other Reserve Payments $200 0% X $200 = $0 

Salaries & Benefits for Operations Staff $12,000 0% X $8,971 = $0 

Electricity & Utilities for Operations $8,500 0% X $6,355 = $0 

Operating Supplies & Equipment $4,500 0% X $3,364 = $0 

Chemicals $2,000 0% X $1,495 = $0 

Equipment Leases $0 0% X $0 = $0 

Regular Maintenance & Repairs $8,500 0% X $6,355 = $0 

Auto & Other Rolling Stock $3,000 0% X $2,243 = $0 

Permits, Training $1,500 0% X $1,121 = $0 

Taxes and Franchise Fees $3,000 0% X $2,243 = $0 

Payment to R & R Account $12,900 0% X $9,644 = $0 

Surchargeable Services (Adjustment) N.A. N.A. X $2,000  = N.A.

Water Loss (Adjustment) N.A. 100% X $15,113 = $15,113 

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Key Data – ExpensesKey Data – Expenses Example of Revenues Portion from Jarocki- Example of Revenues Portion from Jarocki- Environmental Finance Center SpreadsheetEnvironmental Finance Center Spreadsheet

EXPENSES

Operating and MaintenanceSalaries and Benefits 18679Purchased power* 141Chemicals and Testing* 6576Contracted work-non grant related work 1819Materials, Supplies, and Parts 7542Wellhead protection plan 2000Miscellaneous* 0

   Total Operating and Maintenance (Lines 17 through 23) 36757

General and AdministrativeRent 920Postage* 1201Insurance 3299Membership dues 132SBA audit 2035 0Miscellaneous* 0

   Total General and Administrative (Lines 26 through 32) 7587

Other ExpensesOther Deductions, Fees and Expenses Income Taxes Public Utilities Excise Tax [enter to override excise tax rate] Sales Tax, Gross Tax 2764

   Total Other Expenses (Lines 35 through 38) 2764

Subtotal Expenses (Lines 24, 33 and 39) 47108

Emergency Reserve *According to NETC, Emergency Reserve is 1/8 of non-debt expenditures (Jarocki calls this Operating reserve/OMGA reserve)Operating Reserve should be sufficient to OMGA Reserve Target 5889meet 1/8 of annual O&M expenses, plus Current Year OMGA Reserve Balance 0general and administrative expenses (OMGA) Required  OMGA Reserve Amount 5889

Budgeted OMGA Reserve Amount 0

TOTAL EXPENSES (Lines 40 + 45)  47108

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Running a ScenarioRunning a Scenario

FIRST: Key data has been obtainedFIRST: Key data has been obtained

SECOND: Software has been selectedSECOND: Software has been selected

THIRD: Data entryTHIRD: Data entry

FOURTH: Analysis and scenariosFOURTH: Analysis and scenarios

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2 Keys to Successful Rate Setting2 Keys to Successful Rate Setting

Key to Success #1: Set the rates higher Key to Success #1: Set the rates higher that you think you will need them to be. that you think you will need them to be.

This extra money will help weather This extra money will help weather unexpected “bumps”—an upturn in costs, unexpected “bumps”—an upturn in costs, a downturn in revenue, an unexpected a downturn in revenue, an unexpected equipment failure.equipment failure.

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2 Keys to Successful Rate Setting2 Keys to Successful Rate Setting

Key to Success #2: Analyze rates often Key to Success #2: Analyze rates often and adjust them as needed without delay.and adjust them as needed without delay.

Somewhere between annually and every Somewhere between annually and every two years is best. This ensures reality two years is best. This ensures reality meets projections and detects needed meets projections and detects needed changes before a crisis arrives.changes before a crisis arrives.

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2 Keys to Successful Rate Setting2 Keys to Successful Rate Setting

And when the local officials say:And when the local officials say: “You “You want me to set the rates HIGH want me to set the rates HIGH andand recheck them often!!!”recheck them often!!!”

You say:You say: “Planning ahead will keep a “Planning ahead will keep a crisis away. The negatives of ONE crisis away. The negatives of ONE financial crisis will overshadow ANY short financial crisis will overshadow ANY short term savings from setting rates low.”term savings from setting rates low.”

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*** Projected rate increases if *** Projected rate increases if current rate structure continuescurrent rate structure continues

Current  Year Year 2 Year 3 Year 4 Year 5 Year 6

END OF YEAR BALANCE $14,809 $11,722 $7,913 $2,461 ($3,787) ($11,751)

Revenues - Expenses

[Result should be equal to or greater than 0]

FORECASTED NET REVENUES AVAILABLE $121,702 $64,367 $61,807 $57,614 $52,689 $46,057

ADDITIONAL REVENUES NEEDED $0 $0 $0 $0 $3,787 $11,751

REVENUES NEEDED TO MEET BUDGETED EXPENSES $106,893 $52,645 $53,894 $55,153 $56,476 $57,808

Revenues needed to meet Operations,

Capital, Reserve and other Expenses

PROJECTED MONTHLY BILL (Estimated average) $11.91  $11.98  $11.91  $11.91  $12.90  $15.00 

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*** Projected end-of-year balances *** Projected end-of-year balances with current rate structurewith current rate structure

1 2 3 4 5 6

$14,809

$11,722

-$11,751

-$3,787

$2,461

$7,913

-$15,000

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

Year

End of Year Balance

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*** In addition, the lowest volume users are paying *** In addition, the lowest volume users are paying a high proportion of revenues….a high proportion of revenues….

Equitability of current user rates

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Low Middle High

User Class (by volume)

% of usage

% revenue (current)

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*** What does this mean for Bay *** What does this mean for Bay Area residents?Area residents?

Current water bills are not high enough to Current water bills are not high enough to sustain a healthy utilitysustain a healthy utilityIf rate increases are postponed, rates increases If rate increases are postponed, rates increases will become unavoidable just for the utility to will become unavoidable just for the utility to break evenbreak evenWith no reserves, the town cannot plan ahead With no reserves, the town cannot plan ahead for emergencies and changes in regulations for emergencies and changes in regulations The lowest volume users (usually elderly users) The lowest volume users (usually elderly users) are paying more than they should beare paying more than they should beThe solution: to evaluate the rate structureThe solution: to evaluate the rate structure

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*** The selected alternative*** The selected alternative

Increasing block structureIncreasing block structure

Reduced minimum gallons per monthReduced minimum gallons per month Will decrease from 2,500 to 1,500Will decrease from 2,500 to 1,500 Minimum bill will also decline from $6.85 to $4.50Minimum bill will also decline from $6.85 to $4.50

The new rate structureThe new rate structure First 1,500 gallons: $3.00/1,000 gallonsFirst 1,500 gallons: $3.00/1,000 gallons Next 8,500 gallons: $3.15/1,000 gallonsNext 8,500 gallons: $3.15/1,000 gallons All use over 10,000 gallons: $3.31/1,000 gallonsAll use over 10,000 gallons: $3.31/1,000 gallons

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*** What are the benefits of the new *** What are the benefits of the new rate structure?rate structure?

Will generate revenue to cover all Will generate revenue to cover all operating expenses and reserves for operating expenses and reserves for emergenciesemergencies

Encourages water conservationEncourages water conservation Reduces the burden on water and sewer Reduces the burden on water and sewer

systemssystems

Reduces the burden on lowest volume Reduces the burden on lowest volume usersusers

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Equitability of proposed user rates

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Low Middle High

User class

% of usage

% of revenue(low ered min)

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Equitability of current user rates

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Low Middle High

User Class

% of usage

% revenue (current)

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*** Estimated end-of-year balance under *** Estimated end-of-year balance under new rate structure with 6% reservesnew rate structure with 6% reserves

1 2 3 4 5 6

$14,809

$16,822

$13,121

$16,250

$17,583$18,062

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

Year

End of Year Balance

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*** How will it impact my rates?*** How will it impact my rates?

Households that use <1,500 Households that use <1,500 gallons/month will pay the new minimum gallons/month will pay the new minimum bill of $4.50bill of $4.50The average household (about 4,000 The average household (about 4,000 gallons/month) will now pay $12.37/month gallons/month) will now pay $12.37/month (up from $9.37/month)(up from $9.37/month)Higher volume users will see a larger Higher volume users will see a larger increaseincrease 12,500 gallons: from $23.13 to $39.5412,500 gallons: from $23.13 to $39.54 26,000 gallons: from $41.77 to $84.2026,000 gallons: from $41.77 to $84.20

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*** Important things to know:*** Important things to know:

The price of clean water for the highest The price of clean water for the highest volume users will increase from $0.001 volume users will increase from $0.001 per gallon to $0.0033 per gallonper gallon to $0.0033 per gallon

Users can reduce their bills by practicing Users can reduce their bills by practicing water conservationwater conservation

The new rates will take effect on January The new rates will take effect on January 11

The new rate structure may require future The new rate structure may require future adjustmentadjustment