Finance

Utility Fees And The “Revenue Requirement”

The process for raising utility and water service rates frequently involves emotional meetings between customers and providers. As nobody likes to see their monthly expenses increase, these meetings are difficult for both provider and customer. Water Rate Consultants are often hired to help utilities manage costs and keep rate increases to a minimum.

The process for raising utility and water service rates frequently involves emotional meetings between customers and providers. As nobody likes to see their monthly expenses increase, these meetings are difficult for both provider and customer. Water Rate Consultants are often hired to help utilities manage costs and keep rate increases to a minimum.

All too frequently, utility service providers fail to effectively communicate why rate increases might be necessary or they fail to effectively plan so as to keep rate increases to a minimum. Understanding the utility “Revenue Requirement” is central to any discussion of water or utility service rates.

The Revenue Requirement for a service utility is usually referred to as the amount of cash revenue necessary to support ongoing utility operations. In other words, the operating costs of management, maintenance and general overhead would constitute a particular utility’s revenue requirement. This includes all amounts paid for personnel costs as well as for servicing any debt incurred for facility improvements or replacement costs.

Of course if all utilities never had any major plant failures and if all operating costs remained constant, the Revenue Requirement wouldn’t change much over time. As many customers have seen though, a constant level of activity is difficult to achieve. Utilities frequently experience system failures or have plant and equipment simply reach the end of useful life. Many things can change a utility’s Revenue Requirement. Among these are: System Failures Plant and Equipment Upgrades Changes in Regulatory Environment

An unexpected plant or system failure requires the utility to quickly fix the system. This can mean significant and unexpected expenditures. Plant improvements and equipment replacement projects can be planned in advance and often include some type of external financing to pay for. External requirements such as changing environmental rules may also require the utility to come up with additional funding to pay for required modifications.

Each utility that must meet one of these challenges usually experiences an increase to its Revenue Requirement. Many organizations simply pass costs on to consumers in the form of rate increases. In the case of big projects, the costs are high enough to justify funding the project using debt instruments. Debt service escalates the Revenue Requirement, but spreads the cost over time. When small providers serving a few thousand customers are faced with replacing a treatment plant costing several million, it makes sense to manage these costs over time. Passing on huge costs to the consumer base in the short term would be difficult.

Financing methods are frequently used to pay for major system replacements or plant upgrades. This makes an increase to the organization’s Revenue Requirement inevitable because of the increased debt service requirements. Still, borrowing to fund major facility upgrades or replacement projects is occasionally the best option.

Most service utilities extend the service-life of existing plant and fixtures, sometimes far beyond what might be reasonable to expect. Comprehensive financial planning to meet future needs as well as to handle unexpected events and emergencies is the key to maintaining a steady customer rate structure. Frequent communication with utility users can then keep customers informed.

Author Jason Mumm is highly experienced among Water Rate Consultants. Owner of StepWise Advisors, Jason has years of financial management experience to each client engagement. A specialist in planning for facility upgrades, replacements or emergency events, Jason’s unique experience and soid base of experience makes him an important part of any Water Rate Management Organization.