An interesting rate application…

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.

Revenue comparison

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 gsanders@logicssolutions.com to learn how a business review could help.

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© 2018 Gary Sanders

Do you separate your base charge…?

If your utility is like most, your rates include a base (fixed) charge in addition to the usage charge. The base charge, sometimes called an administrative fee, should generate enough revenue to cover the fixed costs associated with operating your utility. This includes things like the customer’s meter, the infrastructure necessary to provide service to the customer’s location, and reading the meter each billing period. Some water utilities charge different base charges according to the size of the meter under the premise that a larger meter costs the utility more to provide and maintain, both for the meter and the infrastructure to supply water to the meter.

Conversation with a customer

I’ve recently had a conversation with a customer who is considering separating the base charge from the usage component of his city’s water and sewer rates. There are pros and cons to doing this, so this issue will examine those.

Benefits of separating the base charge

The biggest advantage of breaking out the base charge from the usage charge is transparency for your customers. Showing each as a separate line on the bill more clearly communicates to your customers what they are being charged.

A second advantage of separating the base charge from the usage charge is it’s easier for your customers to see the impact of increased or decreased usage on their bill. This is especially true if you institute water conservation rates in times of drought and even more important if you have increasing block rates, so that your customers see the impact of their water consumption. If you’ve recently switched to increasing block rates and haven’t reevaluated how you bill for multiple units, you might want to read this.

The third advantage of splitting the charges is it’s now much easier to track the revenue generated from each component of your rate. Rather than seeing one combined total on billing registers and reports, you will now see separate totals for each.

Disadvantages of separating the base charge

The disadvantage to separating the base charge from the usage charge is customer education. This can be mitigated if you publicize the transition well enough but, in spite of your best efforts at educating your customers, some won’t realize the change is happening until they receive their first bill with the charges separated.

Several years ago, a customer that provides both water and sewer decided to break out the base charge from the usage charge for both services. This meant their customers went from receiving a bill with two line items – water and sewer – to a bill with four line items – water base charge, water usage, sewer base charge, and sewer usage. They didn’t publicize the change well and, needless to say, their phones rang off the hook. Customers, mistakenly thinking they were being charged for additional services, were irate. They ended up paying bonuses to their customer service representatives because of all the verbal abuse they took from customers!

So the moral of the story is, if you decide to do this, publicize it as much as you can well in advance!

Final week for the Utility Staffing Survey!

The 2018 Utility Staffing Survey will be closing on April 15 at midnight, so if you haven’t yet participated, this week is your last opportunity to do so. To complete the survey, please click here. This should take less than five minutes to complete. The results will be published in the next two Utility Information Pipelines.

Please feel free to share this survey with your peers at other utilities.

Thank you in advance for taking the time to complete the survey and for sharing it with other utilities.

Are your policies up-to-date?

If you are considering changing your rates or otherwise need help deciding how to best present information to your customers, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com to learn how a business review could help your utility.

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© 2018 Gary Sanders

How do you bill for multiple units?

In the two weeks since the last issue, I’ve seen a listserv post and had a subscriber e-mail me with similar questions.

Both dealt with billing multiple units (apartments or businesses) served by a master meter.

Best practice

Many utilities have policies that require newly constructed apartment complexes and shopping centers to meter each unit separately. However, many of these same utilities have master meters that have been grandfathered in.

If your utility doesn’t have a policy requiring individual meters for multiple unit buildings, I encourage you to adopt one.

Multiple unit billing methodologies

For those utilities that don’t have such a policy, or have grandfathered master meters, this issue discusses two common billing methodologies.

Assuming your rates have a base charge which includes a minimum usage level, below are the two most common ways I’ve seen multiple units calculated.

Average bill method

The first method is based on calculating the bill for a single unit with the average usage of all units.

To accomplish this, divide the total usage by the number of units and calculate a bill for the resulting usage. Then multiply the bill for a single unit by the number of units to arrive at the total bill.

Multiple minimums method

The second method involves multiplying both the base charge and included usage by the number of units.

To calculate a bill using this method, multiply the base charge by the number of units. Then multiply the usage included in the base charge by the number of units, and calculate a bill for the remaining usage. Finally, add the multiplied base charge to the usage charge for the total bill.

Which way is better?

The answer to this question depends on your rate structure.

When most utilities had decreasing block rates (the more you use, the less you pay per unit), the average bill method was very popular. The rationale behind this method being more usage is billed at higher rates, resulting in a larger bill and more revenue for the utility.

If your utility has shifted to increasing block rates but still uses the average bill method, you may want to reevaluate your policy because it may have unintended consequences.

Is it time to review your policies?

If you haven’t reviewed your policies recently, it may be time to do so. Give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com to learn how a business review could assist you.

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© 2013 Gary Sanders

Have you heard about this…?

If you’re paying close attention, you’ve realized it has only been one week since you received the last Utility Information Pipeline. I’m making an exception this week so that I can let you know about an upcoming seminar that I’m excited to be a part of. Other than listing my upcoming speaking engagements in the sidebar to the right, I haven’t previously publicized any of them individually.

The Topics in Financial Management of Water and Wastewater Utilities course on February 29, 2012 in Lake Junaluska, North Carolina is different. This course is presented by the Environmental Finance Center at the UNC School of Government and the Local Government Training Program in the Department of Political Science and Public Affairs at Western Carolina University. This is a one day course focusing on the financial management of water and wastewater utilities targeted at managers, finance directors and board members.

Several staff members from the Environmental Finance Center will present various sessions on designing and setting rates and the relationship between rates and customer usage. The EFC’s Rates Dashboard will also be highlighted in one of the sessions. I’m proud to have been invited to present my Improving Revenue Collections for Utilities presentation as part of the course.

If you are located in western North Carolina (or if you can get there) I strongly encourage you to consider attending the Topics in Financial Management of Water and Wastewater Utilities course. The experience will be worth much more than the $35 registration fee!

Reminder about the Utility Fee Survey

If you haven’t yet completed the Utility Fee Survey, I encourage you to please consider doing so. If you missed the e-mail, you can read about the Utility Fee Survey here and take the survey by clicking here.

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© 2012 Gary Sanders

How often do you review your rates and fees…?

In my experience, most utilities review their rates regularly – in many cases, every year. While they may not conduct a full rate study each year, utilities that review their rates annually are best prepared to insure that their revenue needs will be met every year. If your utility is one that reviews your rates each year, I congratulate you. If not, I strongly encourage you to do so.

Do you review your fees as frequently as you do rates?

Now that you are in the habit of reviewing your rates annually, how long has it been since you’ve revised your fees? So, it’s been a little longer, has it…? In my interactions with utilities, I find that many do not revise their fees nearly as often as they review their rates.

Fees provide most utilities with their second largest source of revenue, so why not review them frequently? When I ask that question, I often get an answer along the lines of “that’s what we’ve always charged” – a variation on what I call the TTWWADI (that’s the way we’ve always done it) syndrome. Look at it this way – if these utilities took the same approach to rates, they would be out of business!

User fees impact only users of the service

Rate increases impact all customers, but user fees, by definition, only affect the users of the service. Accordingly, fee increases usually don’t generate the negative publicity that often accompanies a rate increase.

For example, who, besides the individual being charged the fee, is going to get upset if you charge customers who write bad checks the maximum amount allowed by law in your state?

Does your cut-off or reconnect fee cover your costs?

In an earlier Utility Information Pipeline issue (you can read it here if you missed it) I wrote about cut-off fees and some factors to take into consideration when determining if your cut-off fee adequately recoups the cost of administering the cut-off and subsequent reconnection. If you haven’t analyzed your cut-off fee recently, I recommend that you do.

Are you missing out on additional sources of revenue?

Do you charge an application or connection fee when a new customer applies for service? If not, you are missing out on a potential source of revenue. You incur a cost for the time it takes to process a new customer’s application and to send a field technician out to read the meter, so why not recover that cost by charging the customer a fee?

Likewise, if you have customers who repeatedly complain about their bill and request that you re-read their meter, do you charge for this? Some utilities have a policy of one free re-read. After that, if the customer requests their meter be re-read and the original reading is determined to be correct, the customer is charged for the re-read.

What about security deposits…?

While you are looking at updating your fees, should you also take a look at how much you charge for a security deposit? As rates increase, security deposits must also increase accordingly to keep pace or else you risk incurring bad debt. I wrote in more detail about this in Issue #15 and you can read it here if you missed it.

Is it time to review your rates and fees…?

If you haven’t reviewed your rates and fees lately, it may be time to do so.

If you have any questions about fees, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com.

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© 2011 Gary Sanders