# Streamline - Fall 2016 - 28

Cost-Based Rates, Part 1 BY CARL BROWN, PRESIDENT, GETTINGGREATRATES.COM YOU WANT "COST to serve" user rates. Really, you do. It is pretty easy to convince an angry ratepayer or a judge that cost to serve rates are fair. That can't be said of lots of other structures in use today. This is the essence of cost to serve rates: If a customer causes the utility to incur a cost, that customer should reimburse the utility for that cost. Simple concept. Not so simple to execute. This rate calculation process should have two main parts: cost "classification" and cost "allocation." This article will cover classification. Allocation will come along next time. Most costs for a target time period, usually in the near future, need to be classified as "fixed," "variable," "capacity to serve" or some combination of the three. Fixed costs are converted to a minimum charge. Variable costs are converted to a unit charge. And capacity costs are converted to some combination of tap-on fees and surcharges to the minimum charge. Let's start with the minimum charge. Basic fixed costs: These are related to the fact that someone is a customer. I, for one, usually recommend recovering fixed costs with meter size-based minimum charges composed of two elements: * One is the basic fixed cost to make any level of service available to any customer. Billing, general administration and similar costs that are the same for all customers, regardless of size, are basic fixed costs. In small utilities with a uniform customer base, it is reasonable to consider all fixed costs to be basic fixed costs, resulting in one minimum charge for all. * The other major fixed cost is the cost to provide excess or unusual system capacity (peak flow). It is most logical and mathematical to divvy these costs out to customers on the basis of water meter size. That is because the ability of different water meter sizes to sustainably pass high flows (as determined by American Water Works Association studies) relate well to the cost of building infrastructure big enough to handle peak flows. Surchargeable fixed costs: These are related to the fact that a particular customer has a certain capacity to demand flow or service, regardless of how much flow or service they actually use. With this structure, the smallest meter size customers end up paying the lowest minimum charge. Large meter size customers pay proportionately more. The other main category of costs, variable costs, should be recovered with unit charges. The easy examples of variable costs are electricity to pump water around and chemicals to treat the water. More water used by customers equals more electric and chemical expense. Variable costs: These are related to the volume of service received. Unit charges come in three basic flavors. Each is appropriate in different situations: * Conservation rates - Many systems need, or their administrations simply like, the notion of encouraging 28 S T R E A M L I N E * F a l l 2 0 1 6 http://www.GETTINGGREATRATES.COM

From the President: Life Decisions
From the Executive Director: Communicating – Networking – Team Work!
The 2016 VRWA Expo
Leaks/Water Loss – Everyone’s Problem
How to Reduce FOG in Your System
Succession Planning
Dominion Coal Ash Ponds
Cost-Based Rates, Part 1
Coming Back from the Edge
Capital Projects: Savings or Debt?
When to Repair or Replace Pipe
NRWA Recap
Throwing My Loop: Where Do You Live?
VRWA Members Corner
eLearning Benefits
Membership Application
Benefits for VRWA Members
Board of Directors
VRWA Committees
Streamline - Fall 2016 - cover1
Streamline - Fall 2016 - cover2
Streamline - Fall 2016 - 3
Streamline - Fall 2016 - 4
Streamline - Fall 2016 - 5
Streamline - Fall 2016 - 6
Streamline - Fall 2016 - 7
Streamline - Fall 2016 - 8
Streamline - Fall 2016 - From the President: Life Decisions
Streamline - Fall 2016 - 10
Streamline - Fall 2016 - From the Executive Director: Communicating – Networking – Team Work!
Streamline - Fall 2016 - The 2016 VRWA Expo
Streamline - Fall 2016 - 13
Streamline - Fall 2016 - 14
Streamline - Fall 2016 - 15
Streamline - Fall 2016 - 16
Streamline - Fall 2016 - 17
Streamline - Fall 2016 - 18
Streamline - Fall 2016 - Leaks/Water Loss – Everyone’s Problem
Streamline - Fall 2016 - 20
Streamline - Fall 2016 - How to Reduce FOG in Your System
Streamline - Fall 2016 - 22
Streamline - Fall 2016 - Succession Planning
Streamline - Fall 2016 - 24
Streamline - Fall 2016 - Dominion Coal Ash Ponds
Streamline - Fall 2016 - 26
Streamline - Fall 2016 - Reporting on Your System
Streamline - Fall 2016 - Cost-Based Rates, Part 1
Streamline - Fall 2016 - 29
Streamline - Fall 2016 - Coming Back from the Edge
Streamline - Fall 2016 - 31
Streamline - Fall 2016 - Capital Projects: Savings or Debt?
Streamline - Fall 2016 - 33
Streamline - Fall 2016 - 34
Streamline - Fall 2016 - When to Repair or Replace Pipe
Streamline - Fall 2016 - 36
Streamline - Fall 2016 - 37
Streamline - Fall 2016 - 38
Streamline - Fall 2016 - 39
Streamline - Fall 2016 - NRWA Recap
Streamline - Fall 2016 - 41
Streamline - Fall 2016 - 42
Streamline - Fall 2016 - 43
Streamline - Fall 2016 - 44
Streamline - Fall 2016 - Throwing My Loop: Where Do You Live?
Streamline - Fall 2016 - 46
Streamline - Fall 2016 - VRWA Members Corner
Streamline - Fall 2016 - 48
Streamline - Fall 2016 - eLearning Benefits
Streamline - Fall 2016 - Membership Application
Streamline - Fall 2016 - Benefits for VRWA Members
Streamline - Fall 2016 - 52
Streamline - Fall 2016 - VRWA Committees
Streamline - Fall 2016 - cover3
Streamline - Fall 2016 - cover4
http://www.nxtbook.com/naylor/VRWQ/VRWQ0119
http://www.nxtbook.com/naylor/VRWQ/VRWQ0418
http://www.nxtbook.com/naylor/VRWQ/VRWQ0318
http://www.nxtbook.com/naylor/VRWQ/VRWQ0218
http://www.nxtbook.com/naylor/VRWQ/VRWQ0118
http://www.nxtbook.com/naylor/VRWQ/VRWQ0417
http://www.nxtbook.com/naylor/VRWQ/VRWQ0317
http://www.nxtbook.com/naylor/VRWQ/VRWQ0217
http://www.nxtbook.com/naylor/VRWQ/VRWQ0117
http://www.nxtbook.com/naylor/VRWQ/VRWQ0416
http://www.nxtbook.com/naylor/VRWQ/VRWQ0316
http://www.nxtbook.com/naylor/VRWQ/VRWQ0216
http://www.nxtbook.com/naylor/VRWQ/VRWQ0116
http://www.nxtbook.com/naylor/VRWQ/VRWQ0415
http://www.nxtbook.com/naylor/VRWQ/VRWQ0315
http://www.nxtbook.com/naylor/VRWQ/VRWQ0215
http://www.nxtbook.com/naylor/VRWQ/VRWQ0115
http://www.nxtbook.com/naylor/VRWQ/VRWQ0414
http://www.nxtbook.com/naylor/VRWQ/VRWQ0314
http://www.nxtbook.com/naylor/VRWQ/VRWQ0214
http://www.nxtbook.com/naylor/VRWQ/VRWQ0114
http://www.nxtbook.com/naylor/VRWQ/VRWQ0413
http://www.nxtbook.com/naylor/VRWQ/VRWQ0313
http://www.nxtbook.com/naylor/VRWQ/VRWQ0213
http://www.nxtbook.com/nxtbooks/naylor/VRWQ0113
http://www.nxtbook.com/nxtbooks/naylor/VRWQ0412
http://www.nxtbook.com/nxtbooks/naylor/VRWQ0312
http://www.nxtbook.com/nxtbooks/naylor/VRWQ0212
http://www.nxtbook.com/nxtbooks/naylor/VRWQ0112
http://www.nxtbook.com/nxtbooks/naylor/VRWQ0411
http://www.nxtbook.com/nxtbooks/naylor/VRWQ0311
http://www.nxtbook.com/nxtbooks/naylor/VRWQ0211
http://www.nxtbookMEDIA.com