Streamline - Winter 2015 - (Page 26)
BY CARL BROWN, PRESIDENT, GETTINGGREATRATES.COM
FIxED CoSTS DoN'T change so they go in the minimum charge. Variable costs do
change so they go in the unit charge. Rate setting is easy.
Well, no, actually. Here's why.
So-called "fixed" costs actually change, at least over time and as the situation
changes. Variable costs also change. And another kind, capacity costs, change, too.
Put this in your memory bank: Fixed costs are related to the fact that you have
Take billing. In fact, take the stamp on the bill. The cost of that stamp is not fixed
because it does not change - it actually does change. It is fixed because you have
to put one stamp on each and every customer's utility bill to get the letter carrier
to deliver it. It doesn't matter whether that customer was the highest volume or the
lowest volume customer. Each customer's bill needs one stamp. That is a fixed cost,
because each customer gets a bill.
Fixed costs are related to the fact that you have customers.
Now, apply that idea to other costs:
the paper the bill is printed on, the
printer that printed it, the computer
and billing program that created it,
the clerk who ran the billing program.
And then there is the time spent by
anyone to do general administration
of the utility. It goes on and on. These
are all fixed costs that change, at least
over time. But whatever they total up
to right now, they should be parceled
out to all customers equally. At least,
26 S T R E A M L I N E * W i n t e r 2 0 1 5
Variable costs change. Well, all costs
change, but you already knew that.
Put this in your memory bank:
Variable costs are related to the volume of service received.
Take water delivered to a customer. The
cost of that water is not related to that
customer. It is related to the volume of
water delivered to anybody. Thus, on an
average cost basis, you would total up
all variable costs during, say, one year,
and divide by the total billable units of
water delivered during that year.
Variable costs are
related to the volume
of service received.
But, then, that is variable cost on
an average cost basis. There is also
variable cost on a marginal cost basis.
The calculation of marginal variable
cost is the same as that for the average
variable cost except that you discount
some of those costs by percentages
appropriate to the situation. Generally,
marginal variable costs are lower for
higher volumes (economy of scale),
but not always.
You guessed it. If we have marginal
variable costs then we also must have
marginal fixed costs. These behave
like the variable kind; they vary.
You might need to use marginal
costs for rate setting. Then, again, you
might not. It just depends.
Isn't rate setting easy? But wait,
There is another kind of marginal
cost that varies but it is often thought
of as fixed. That is capacity cost.
Put this in your memory bank:
Capacity costs are those incurred so
that the utility will be able to serve
customers throughout the range of the
demand that they may likely put on
This is what it costs to build the
facilities big enough and complex
enough to be able to serve customers
that use an unusually high volume of
the commodity or have high peaks in
their use. Or, maybe they just have a
really big meter.
Table of Contents for the Digital Edition of Streamline - Winter 2015
From the President: Performance Evaluation
From the Executive Director: Save the Date!
Professional or Job Holder: Which Will You Be?
Emergencies: Do You Have A Plan?
Finding Your Way
Hearing Protection – Keep Your Employees Safe
Economic Opportunity: USDA Rural Development/Virginia
Rate Setting – It’s Easy?
Throwing My Loop: Fresh Water
Do You Know What Your VRWA Benefits Are?
2015-2016 Membership Directory
Board of Directors
VRWA Members Corner
Index to Advertisers/Ad.com
Streamline - Winter 2015