ADEQUATE RATES ARE IMPERATIVE

A municipality is considering hiring a consultant to prepare its first cost of service study since 1985 for its water utility. A large government-owned water utility uses reserve funds to subsidize operating expenses so that rate increases to satisfy revenue requirements are deferred. A small municipal water utility refuses to turn off water to customers who do not pay their bills because officials do not want to upset their neighbors.

What do these examples have in common? A general principle of public utility law is that rates must be reasonable and not unreasonably discriminatory. The only acceptable methodology to assure compliance with this principle is to base rates and rate design on a current, comprehensive cost of service study. Such a study will assign costs to the cost causers so as to avoid any cross-subsidization and unreasonable discrimination as between classes of customers. The study also will develop revenue requirements using test year principles and recommend appropriate rate design to recover those revenue requirements.

Deferring needed rate relief based upon perceived appeasement of customers will benefit neither customers nor the utility. Instead, it can result in deferral of necessary maintenance and capital improvements, with adverse consequences for quality of service.

Prudent management will realize that appropriate recovery of revenue requirements can only be achieved with timely rate adjustments founded upon cost of service analysis. Moreover, frequent review of costs and resulting application of smaller rate changes can militate against rate shock controversies that likely will arise from occasional proposed large rate increases.