When Rates Lag Everyone Loses - Should Utility Rates be Election Fodder?

During election season it’s not uncommon to hear politicians stump for lowering utility rates or advocating against increases. For some voters, increases in utility fees are synonymous with property tax increases. But there is a difference. In proper use, utility fees should solely support a solvent enterprise fund devoted to routine operation, maintenance, debt service and capital outlay of that utility.

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So what happens when utility fees are kept artificially low preventing sufficient revenue generation? Operations are minimized, maintenance goes unperformed, loans are undertaken to make emergency repairs, and replacement of equipment is delayed. It becomes a downward spiral that becomes increasingly difficult to emerge from and, unfortunately, it’s the utility customers who bear the brunt of poor utility service. If this sounds familiar, all is not lost. The following are some ways that utilities can begin to regain control of these often daunting situations.

  1. Reduce Expenses – Investigate whether some relatively simple adjustments can be made to reduce administrative expenses, such as printing and postage through the implementation of online services. Ensure that vehicle and shop supplies are being logged by employees so they can be tracked and assigned to customer work orders. Can purchase of treatment chemicals be reduced by ordering higher volumes and splitting quantities with neighboring utilities? Can transfers to other funds that should be self-supporting be reduced or eliminated? In our experience, an in depth look at internal operations can reveal some low hanging fruit.

  2. Look for Other Revenue Sources – Rather than raising rates, look for alternative means to supplement revenues. For instance, ‘System Development Fees’ paid by new customers can offset the costs of providing necessary utility expansions. ‘Tap Fees’ at a minimum should be set high enough to recover the costs of labor and materials incurred by the utility provider. ‘Surcharges’ for treating high strength waste streams can offset the additional costs incurred for transforming the waste to domestic levels. Supplemental fees should be appropriately set to recover those activities.

  3. Prepare an Asset Management Plan – It is difficult to manage the unknown. Utility providers should locate their assets, inventory their features, assess their condition, and prioritize their repair, rehabilitation or replacement. Incorporating this vital information into a Capital Improvements Plan can help strategize and accurately budget annual expenditures to continue providing top notch service to customers.

  4. Conduct a Rate Study – A thorough Rate Study can reveal if revenue is being captured in the most efficient way. Rates should be tailored to fit the types of customers being served. Otherwise, misaligned rates generate very little revenue and can result in unintentional loss of customers. We can take some notes from the retail and consumer markets who have mastered the understanding of their customers’ value and willingness-to-pay in exchange for a desired service. ‘Stitch Fix’ is an online apparel provider that offers sliding fee structures based on the frequency of orders and quality of the clothing. Now imagine a ‘Stitch Fix’ for utilities – a customized rate outfit based on the consumption patterns of its customers! Lastly, if a utility provider is unsure of how its rates compare to its neighbors, the UNC School of Government offers a comprehensive Rate Dashboard for this very use.

  5. Explore Regionalization – Economies of scope and scale are tenants of Econ 101, and in some situations, can be very applicable to utility providers just as they are to providers of other goods and services. Simply put, higher numbers of customers sharing the same fixed costs results in a lower rate per customer. When utility rates become unbearable for a small service area, utility providers are wise to consider working closely with neighboring utilities to consolidate management, operations and maintenance.

This election season voters had plenty of decisions to make at the polls. Utility rates often become fodder for election season as well, but perhaps it’s not the rate itself that should be focus of the fodder. Utility providers might instead assess the level of service and quality their customers expect, anticipate what it costs to sustain this, and consider whether or not they are charging accordingly.

Imagine A Day Without Water

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A Brief History

North Carolina’s first public water system was developed in the Town of Salem (now Winston-Salem) in 1778. By 1888 there were still only 12 cities with water supply systems in North Carolina, a mix of private water companies and publicly-owned utilities.

But as of 2015, the number of public water systems had exploded to approximately 6,151 in North Carolina alone, with a significant percentage of these systems (88%) dedicated to serving less than 500 people. This decentralization, intended to provide elements of control to these communities, makes it very difficult to cover costs, as water treatment plants and distribution systems benefit greatly from operational efficiencies of scale. These often unsustainable costs mean that reliable and high quality potable water, while not exactly thought of as a scarcity in our area of the country, is in fact a hard-earned luxury that is sometimes subsidized with Federal or State funds and carefully managed to continue meeting water quality standards.  

So What Can We Do About It?

In our ‘imagining a day without water’ series, our engineers continue to develop solutions to protect the communities we call home. As we work with many systems spread across river basins and groundwater aquifers throughout the State, we’ve come to know the devoted operators who ensure that their water treatment plants remain sophisticated in their operation and perform to exacting standards. Since small system operators work equally hard to maintain their plants’ performance levels, many of their communities are considering mergers or structured, formal, sharing relationships to improve the quantity, quality and cost of water. And to help facilitate this, the North Carolina Department of Environmental Quality provides grant funds to assist these communities with a professional evaluation of potential mergers or regionalization of water and sewer systems. These are invaluable financial resources that should be recognized and protected.

Over the past 80 years, we have watched the ecological and political environments change as we help both large and small communities provide for their citizens, and we have performed many feasibility studies of water system mergers or regionalization efforts in response to those evolutions. The efforts of water advocates such as the US Water Alliance  makes a world of difference, but the truth is we still fall short of depicting water in our great country as a precious resource. So on this Imagine A Day Without Water, we think it is appropriate to give thanks to the hard-work and dedication of the advocates, the staff, and the legislators who understand and promote partnerships to prepare for the future of water in North Carolina. In return, we will continue to imagine a day without water, so you don’t have to.