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.