Each year, AE2S Nexus conducts a survey of water, wastewater, stormwater, and solid waste utility rates throughout the region consisting of Minnesota, Montana, North Dakota, South Dakota, Wisconsin, and Wyoming. AE2S Nexus is happy to announce that Utah will be included in the 2016 utility rate survey. In fact, AE2S Nexus is currently working on a special rate survey for the Utah chapter of the American Public Works Association (APWA).
The annual AE2S Nexus North Central Region Utility Rate Survey includes water rate structures reported by survey respondents, as well as a comparison of the total cost for 6,000 gallons of water consumption by residential accounts for each utility respondent. The following article illustrates how the reported rate structures have changed over the past eight years, and compares the effective cost per volume of water reported for surface water and groundwater systems.
Water Rate Structure Trends
Water systems around the region assess charges to services in a number of ways. Based on a review of data collected for the AE2S Nexus 2015 North Central Region Utility Rate Survey, it is most common for the rate structure to consist of a combination of fixed and volumetric charges, with very few systems charging only a fixed rate or only a volumetric rate. As a quick review, the most common rate structure components include:
- Flat Fee: Each account is charged a fixed monthly fee, regardless of the amount of water used.
- Declining Block: A rate structure in which the unit price of each succeeding block of usage is charged at a smaller unit rate than the previous block(s).
- Constant Block: A structure in which the unit price is consistent, regardless of how much water is used.
- Inclining Block: A rate structure in which the unit price of each succeeding block of usage is charged at a higher rate than the previous block(s).
Over the years, systems participating in the survey have moved away from flat and declining block structures, with a noted increase in the use of constant block and inclining block structures. This is likely due largely to pressures related to source water availability, conservation initiatives, and an overall effort to minimize required capital investment in additional capacity for systems. Figure 1 compares the reported percentages of rate structures over the last eight years based on data provided by North Central Utility Rate Survey respondents.
Figure 1: Reported Historical Water Rate Structures
It should be noted that the survey respondents vary each year. But overall, 95 percent of the survey respondents reported using a fixed component within the rate structure in 2015. Survey respondents reporting the use of a fixed and variable water rate component accounted for greater than 91 percent in 2015. Of the remaining nine percent, two percent reported only using constant block volumetric rates. This illustrates the recognition that the majority of system costs are fixed, encouraging utilities to strive for high revenue stability. By including a volumetric component to the rate structure, utilities can strive to generate a stable revenue stream from the fixed rate and also provide consumers with control over the portion of the bill correlated with actual water use.
While declining block structures can be beneficial for economic development activities, data gathered for the AE2S Nexus Rate Survey over the past eight years shows the reported occurrence of the declining block structure has dropped from 9.1 percent in 2008 to 5.2 percent in 2015. This trend has been noted nationwide as climate change, drought conditions, and water conservation have become leading issues for the industry, and as regulatory and funding agencies have encouraged (if not required) water pricing strategies aimed to promote responsible water use and underscore the value of this resource. Figure 1 shows that the most common rate configurations reported by survey respondents are the combination of a fixed and either a constant block or inclining block component.
Based on data trends, it appears that many utilities in the region are proactively making changes to water rate structures to balance revenue stability and responsible water use. In recent years, we have seen a reduction in rate structures that do not send a price signal to users and an increase in rate structures that impose a constant or increasing rate to each increment of water sold. In this manner, utilities are compelling users to think about water use.
The data shows the majority of utilities are implementing both a fixed monthly revenue stream and a volumetric revenue stream that is directly tied to the amount of water that is sold. Potential challenges may be experienced when factors such as decreasing demand and affordability begin to affect water sales. It is important to frequently review demand projections to identify any potential revenue shortfalls due to decreased water sales. It is also advantageous to fund and maintain a healthy operating reserve account to manage periods of revenue shortfalls.
For further information on the North Central Utility Rate Survey, visit www.ae2snexus.com or contact Miranda Kleven, AE2S Nexus Financial Analyst, at Miranda.Kleven@ae2s.com.