Streamline - Summer 2012 - (Page 39)
A Proper Rate –
BY CARL BROWN, PRESIDENT GETTINGGREATRATES.COM
VirginiaFact from Fiction RATES Program Separating
Editor’s Note: It is important for everyone who makes rate setting decisions to understand the following principles. However, do not feel overwhelmed because the Virginia RATES Program produces analysis results that include all of these principles and much more. You may access the Program at Carlbrownconsulting.com/general/VirginiaRATES.pdf.
WHEN SETTING RATES,
Your goal should be to ﬁgure out what part of the system’s capacity costs were incurred just to provide every customer with a base volume of ﬂow.
one of the key assumptions you must make concerns what a “fixed” cost is. Fixed costs are those that don’t change, right? Wrong! Progressing upstream from the stamp, every minimum charge should cover the cost of the postcard or invoice and envelope used to convey the bill to the customer, the printer that printed the invoice, the computer and billing program that calculated the invoice, the time the clerk used to operate the program, and so on. If a service costs the utility money, the utility should recover that cost from those who use that service if that makes good business and community administration sense. – From “How to Get Great Rates” That seems clear enough. Now it gets a little fuzzy. The clerk, his billing program, computer, printer, paper and such must be housed somewhere. That space costs money. Thus, one customer’s share of that space should be billed in the minimum charge. That is, a proportionate share of the mortgage or rent for the building that staff and its tools are housed in; heat, air conditioning, electricity and upkeep needed for that space, and so on. If it is related to billing, it needs to go into the minimum charge. Stamp: Fixed cost Electricity: Variable cost, mostly Debt service: Mixed and situation-specific
This article is going to explode some myths, but don’t take it personally. The author’s intent is to educate, not castigate. Fair, adequate and appropriately simple or complex utility rates: “great rates.” These are built upon good mathematics, good assumptions and what some call “salesmanship.” Some costs change gradually. Some change rapidly or erratically. But all of them change. Thus, in rate setting you shouldn’t think in terms of a cost’s tendency to go up or down. Use the following benchmarks instead. “Fixed” costs (badly named) are those that are related to the fact that someone is a customer. “Variable” costs, then, are related to the volume of the commodity. It’s that simple, kind of. Bill fixed costs to customers Bill variable costs to the commodity Consider this fixed cost: the postage stamp. The price of a stamp is not fixed. It changes. However, every bill; whether high or low, takes one postage stamp ... except for the bill for that complex customer that takes 20 pages to detail. That one takes more stamps – just a reminder that “fixed” costs are not fixed. Everyone’s minimum charge should cover the cost of their stamp or stamps, plus their other customer-related costs.
Table of Contents for the Digital Edition of Streamline - Summer 2012
From the President
From the Executive Director
Summer Conservation Considerations
Southampton County: A Story of Progress
Board Members Quiz
Conference 2012 Highlights
The Town of Lebanon-One Small Step for Man
Drakes Branch Distribution System Upgrade
A Proper Rate-Virginia RATES Program
Missing Water Found
Throwing My Loop
Do You Know What Your VRWA Benefits Are?
Welcome New Members
Board of Directors
Index to Advertisers/Ad.com
Streamline - Summer 2012