‘Tis the Season to Set Rates for Next Year

The fourth quarter of what seems like the longest year in history is upon us.  As utility decision makers review year-end revenue projections and sign off on expenditures for the coming year, it is also the time for the discussion of the rate schedule.  Rate changes can be a complicated and difficult discussion topic.  The COVID-19 pandemic has brought new challenges to life in general, and most utilities have not been immune from its effects. 

Pandemic or no pandemic, our communities need safe and reliable drinking water and wastewater services.  It is important for utilities to continue best financial management practices, which includes setting adequate rates to cover revenue requirements.  We have some suggestions as to how to approach this topic with decision makers and constituents:

  • Promote open cooperation and communication between departments in developing a strategy for budget and capital planning for the coming year. Having buy-in from all angles – Public Works, Engineering, Finance, and Water/Wastewater Utility Management – is important. 
  • Be prepared to discuss your current financial condition. How have revenues been impacted over the past nine months?  How much working capital do you have? Are you expecting additional impacts as we move into the winter months?  If funding reserves has been a tough sell, that may get easier once utility revenues return to normal. But for now, communicating how long you can support operations with the current rate structure and cash balances will be important for decision makers to understand as they consider making changes to rates.
  • Assess Revenue Adequacy for 2021. Can the current rates support necessary O&M and capital expenditures over the next year?  In many situations, the answer to that may be “no”. It is not unreasonable to need an inflationary increase, as inflation has not gone away.
  • Perform critical review of the capital plan. By critical we don’t mean to “slash” it. Can the current capital plan be adjusted?  It may be that some projects can be put on hold.  Many utilities have already been struggling to make up for years of deferred maintenance, so perhaps the Capital Improvement Plan (CIP) does not have flexibility. If that is the case, can alternate funding be considered? Even if you have been planning to use cash reserves for a project that must move forward, low-interest loans might be worth considering to reserve cash for emergency circumstances.
  • Advocate for ongoing policy discussions related to unpaid bills. How has the collection rate varied over the past nine months?  How does that compare to an average year? If not already doing so, consider what kind of rate relief measures you can afford to make – budget billing, waiving late charges, etc. Interestingly, at the AWWA Virtual Summit held in September, a common experience reported by participating utilities was that empathy was a very effective tool for increasing collection rates.  Many utilities reached out to individual customers or sent messages out to all customers with messages of support and willingness to work together through these difficult times. The overwhelming finding was that customers want to pay their bills, and they appreciate it when the utility shows the compassion to work with them.
  • Lastly, don’t lose site of the big picture. If you have capital and reserve funding goals and/or a multi-year rate strategy to work toward a full cost recovery rate structure, don’t let go of the long-term vision.  Keep it in front of the decision makers, and talk through adjustments you feel the utility can reasonably pause or downsize rate adjustments to provide some rate relief, if necessary, during the near-term while still staying on the path to achieving your financial goals.

Be well, Utility Leaders!