Rate Setting Strategy Provides Long-Term Benefits to Utilities

For many communities, the only time much thought is given to utilities is when there’s a problem. If a utility performs its services seamlessly, it goes unnoticed. The ability to do this depends on adequate funding. Many utility programs are still being funded by local property tax, but this system is proving unsustainable; as improvement projects become necessary, towns often forego supporting them in order to fund other programs with more immediate needs. Creating a rate setting strategy and switching to a user fee funding system can provide utilities with much-needed stability.

Planning for change

A number of communities nationwide have switched over to billing residents a separate rate for their utility services, and for good reason. This system offers a much more equitable means of paying for services; households that conserve pay less than households or organizations with a higher rate of use. It also provides towns with additional grant and loan options that aren’t available to municipalities that use property tax-based funding systems.

Rate setting often begins by identifying utility needs over the next ten years through a capital improvement plan, which provides a planning schedule and prioritizes repairs and upgrades. It also lays out what a balanced budget would look like for a given timeframe, outlining cost-saving strategies and options for obtaining funding to defray costs for the planned projects.

Conducting a rate study as the next step safeguards against over- or under-charging for utility services. Rate studies look at fees paid in nearby municipalities and statewide to develop a comparable financial model. This is where the help of an expert can be extremely useful. An experienced team can provide data-supported rates and accurate estimates of future revenues while keeping in mind expected growth and the cost of capital improvements. A consultant can also offer advice for improvement on management and billing processes to ensure precision in measurement and user fee implementation.

Towns or utilities reluctant to change to a user fee system likely have concerns about upsetting their user bases by introducing another monthly cost. There may indeed be some level of resistance at the outset, but this system ultimately benefits everyone involved, and it’s important to communicate that to residents. The success of rate-setting projects depends upon the community being fully informed and engaged prior to and during changes that will affect them. A public outreach program can offer an explanation of reasons, methods, and potential impacts of changes being made. The most effective of these programs take a multi-pronged approach used a variety of media options including print, social media, television, and public presentations that answer common questions.

Putting rates into effect

Once the overall revenue requirements have been projected, the second piece of the rate setting process revolves around examining the utility’s user base and designing a revenue generation model that meets the organization’s needs. There are a wide variety of models, and the ability to set rates confidently with each model is largely dependent upon what type of data is accessible, such as billable water consumption or sewer consumption data from users in the community.

Additionally, many utilities code their accounts with customer classifications, which allows for differentiation between residential and non-residential usage. This gives them the option of choosing from two different rate models: straight usage or customer class usage.

Next, rates need to be calculated that will allow the utility to become self-funding with rate stability for three to five years after the initial rate establishment. Planning to receive a bit more revenue than needed for the first couple of years is beneficial for two reasons. First, it will allow for a minimum of three years of level rates before a rate revision is needed, and second, it will allow the utility to establish an operating reserve balance to help prevent rate spikes resulting from revenue shortfalls in the future.

With a user fee plan in place, every household pays a fair portion of the costs of service. Rates can be locked in for up to five years to allow residents to plan, and property taxes can be reduced with utility funding subtracted. With a carefully thought-out plan, this funding system can be a proactive way to keep utilities running smoothly.


Jay Sheehan Business Development Leader Operations & Management

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