THE COURAGE OF DECISIONS

Recently, I came across this Chinese proverb:

"A wise man makes his own decisions; an ignorant man follows public opinion."

Over the years of my practice, I have seen both municipal-owned and investor-owned water and wastewater utilities which have declined, or deferred, to make needed rate increase decisions.

Proper rate-making principles require that rates be set to recover the full costs of service to serve the different classes of users receiving service.

Obviously, most customers generally do not favor rate increases. Public opinion frequently is that any proposed increase in rates is to be opposed, no matter what the causes may be for the increase. In response, frequently utility management-whether a city council or corporate board of directors-seeks ways to appease that public opinion by declining or postponing a rate increase decision.

Increases in costs of service can be driven by various factors, including increases in operating cost, particularly for labor, chemicals, and energy; debt service and reserve requirements; increasing environmental regulatory expense, such as compliance with new standards and testing demands; and infrastructure replacement or upgrade projects.

Given such cost drivers, how do some utility managements avoid charging rates sufficient to recover increased costs of service? Sometimes, municipal utilities have used general municipal funds or reserve funds to subsidize increased operating costs or have deferred maintenance or infrastructure projects. At times, investor utilities have deferred filing with their regulatory commission for rate increases, absorbing the resulting lower earnings or also deferring maintenance or infrastructure projects.

Such decision inaction in response to perceived public opinion can adversely affect the financial health of the utility and its quality of service. Further, when management may finally decide to raise rates, an increase of huge proportions may be required-an unpopular step to say the least. I have seen rate increases of 100% proposed because management deferred making rational cost of service decisions in the ordinary course of operations.

A wise utility management will make its own rate decisions based on cost of service principles and at regular intervals, such as every two or three years. Such a rate protocol facilitates the utility's financial health and ability to provide good service and mitigates impacts on customers.