Streamline - Winter 2015 - (Page 26)

Rate Setting: It's Easy? 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 customers. 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, in theory. 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's more. 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 the utility. 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. http://www.GETTINGGREATRATES.COM

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?
Chronic Leaks
NRWA Recap
Throwing My Loop: Fresh Water
Booster Club
eLearning Benefits
Membership Application
Do You Know What Your VRWA Benefits Are?
2015-2016 Membership Directory
Board of Directors
VRWA Committees
VRWA Members Corner
Index to Advertisers/

Streamline - Winter 2015