Recently, during a sales presentation, I was presented with a rate scenario I’ve not encountered in my 35 plus years of working with utilities. Rather than billing new accounts activated in the same billing period starting at zero, this utility bills the new account by resuming where the old account maxed out in the rate table. For lack of a better term, I’ve decided to call this a block continuation rate.
For example, consider a hypothetical rate structure with three blocks – the first 3,000 gallons, next 7,000 gallons, and all over 10,000 gallons. If the customer who moved out used 4,000 gallons, and the new customer used 2,000 gallons, the new customer would be billed for their usage at the second tier, not the first tier, as is the practice for most utilities.
Rationale for the rate structure
In the 35 plus years I’ve been involved with utility billing, this is the first case I’ve experienced like this. Admittedly, this utility is a little unique. To provide some background, they only bill semi-annually (that’s every six months) and their rate structure is an increasing block rate as shown below:
They bill using this block continuation methodology so as not to lose revenue, given the length of time between billings and the number of potential new customers each billing period.
Below is a chart of the actual charges for two hypothetical customers at the same address, both with identical usage within the six month billing period, billed using both block continuation rates and traditional rates:
This revenue comparison is also plotted in the graph at the top of this newsletter. Up until 3,000 gallons, the two methodologies generate the same revenue, because the usage is all within the first tier. From 4,000 to 7,000 gallons, the rate structures start to diverge, maxing out with a revenue difference of $38.00 (the first 20,000 gallons for the new customer being billed at $1.90 more per thousand gallons using the block continuation rate). From 7,000 to 33,000 gallons, the difference remains $38.00.
I didn’t include it for illustration purposes, but the same thing occurs again with the second block at 34,000 gallons per month for each account, maxing out at 67,000 gallons for an increase in revenue of $248.00.
Multiply these differences by a few hundred new customers in a semi-annual billing period, and this begins to make a difference in revenue for the utility! This utility experiences a significant increase in revenue from using block continuation rates for two reasons – the length of time between billings and the large increases from one rate tier to the next. Billing more frequently with smaller increases between rate tiers wouldn’t have nearly the impact it does in this case.
Do you have unique or creative rates?
If you have seen similar rates, or other unique rate structures, please leave a comment at the end of this post. If you’re wondering how you effective your rates are, please give me a call at 919-232-2320 or e-mail me at email@example.com to learn how a business review could help.
© 2018 Gary Sanders