Editor's Note: This article, republished here by permission, is extracted from chapter 15 of How to get Great Rates, a book written by Mr. Brown. To learn more about how you should set your system's rates, attend one of the rate setting workshops Mr. Brown will conduct for Association members in May.
Summary
Rate setting has a beginning, middle and end, and it has some basic steps one must complete to do it well. Those steps encompass determining the state of mind of all involved and carrying out the four phases of rate setting.
Introduction
Here we are, wrapping up your indoctrination in rate setting. You have learned much about the process. Soon you must transition from learning it to actually doing it. If you don't do that, we have failed.
You may be one of those readers who wanted a checklist or an easy to use template to make this rate setting task sure and easy. I told you early on in this guide that there is no cookbook for this kind of work. Now you're thinking, 'He lied! He has a checklist.'
While there is no one size fits all cookbook for rate setting, there are some basic things you need to be aware of and do. These were discussed at some length earlier in this guide so they are summarized in bullet-point fashion here.
The Game Plan
Take stock of your frame of mind, and the frame of mind of your ratepayers.
Are you a short-range planning style of elected official or do you want to look out for your system's, and your community's, long-range best interests?
Are you a do-it-yourselfer and good at rate analysis or should you farm this task out?
Are you good at presenting a difficult message, like 'our rates need to double,' and are your ratepayers inclined to listen to such a message?
Determine your system's financial situation
If you got a comprehensive analysis by a specialist within the last three years, review that analysis. Is the system on track financially compared to the analysis predictions? If so, skip down to the section on Phase 4. Otherwise, read on.
Phase 1 Set goals
Make a first cut decision about where you want your operating ratio, coverage ratio, affordability index, and other indicators and balances to be. The analysis will refine these so don't labor over this task.
Decide if you want to use advanced asset management strategies, which ones, when and how. Again, don't labor over this.
Phase 2 Do or get a comprehensive rate analysis
If you or someone else associated with your system has been trained in comprehensive rate analysis, you're good at it and you are inclined to do it, do your own rate analysis. Otherwise, seek outside help.
If an assistance provider like your rural water association or a state technical assistance agency has a rate analysis specialist who can do your analysis promptly and you are inclined to use them, do so if their service will yield the best return on investment.
If none of the above works for you, seek the services of a rate analyst using the strategies in this guide. Acquire their services smartly and promptly.
Work closely with your rate analyst to make sure they get good data to work with, that they clearly understand what you are trying to do, and to make sure that you clearly understand the actions that the analyst recommends you take.
As an example, part of a comprehensive rate analysis appears in Appendix VI. You can also view this analysis at http://carlbrownconsulting.com/Victoria.pdf .
Phase 3 Do the initial rate adjustment
Inform your decision-making body, and then your ratepayers, what the analysis results indicate they should do with rates, fees, policies and other issues. In all likelihood, your analyst's service will include doing this for you.
Based upon feedback from your decision-makers, prepare proposed changes to the rate ordinance or draft a rate resolution, as appropriate, that will enact the new rates if passed.
Present the ordinance or resolution to the decision-making body for their consideration.
Pass an ordinance or resolution. Also make all recommended changes to policies and procedures. Start with the high-dollar and most critical items first. However, if an item or issue is particularly difficult or time consuming to solve, temporarily skip it, solve other issues quickly then return to the difficult issue. Don't let a small but difficult issue hold up progress on other fronts.
Make the needed changes to your rate chart, your billing software program, Web page and wherever else it is necessary to effectuate the new rates.
Continue or begin to set aside funds as recommended for equipment replacement, capital improvements and the like.
After the new rates go into effect, do checks to see that the system's finances begin to perform as modeled.
Phase 4 Do follow up rate adjustments
Periodically, preferably annually at the beginning of each new fiscal year or near the anniversary of the initial rate adjustment, adjust rates incrementally. If the financial indicators from the analysis closely match the actual performance of the system, adjust rates by the percentages or amounts recommended in the comprehensive analysis for that year. If variances are larger, make larger adjustments on an equivalent percentage basis. When the analysis and actual performance cease to match well, it is time for a new comprehensive analysis start at Phase 1 again.
Conclusion v
Like all other rate analysts, my livelihood depends on your using me. But you should strive to use me, or them, only once every three to five years or so. The first Phase 2 rate analysis recommendations will probably have you raise rates a lot and restructure rates severely because your rates are currently way out of whack. The second Phase 2 exercise, if you adjusted your rates properly the first time around and have since kept them current, should primarily be a rate restructuring. Hopefully it will be a light one at that. If you are preparing for an approaching capital improvement or some other large event and it was not modeled in the previous Phase 2 analysis, sure, rates will need to go up a lot, as well.
You will enjoy the greatest success if you can spend almost all of your time in Phase 4 and little time in the other phases. Frequent but small adjustments will be well received by your ratepayers. And, such adjustments will enable you to maintain a nice, even funding stream for your system with few problems.
Recall that early in this guide I made the point that people don't think of you at all unless there is a problem. Eliminate the problems, they won't think of you and, voila, you have success!
Your Charge
Having learned how to get great rates, you now have a decision to make. Are you going to actually do this stuff? Or, are you going to think, ?Gee, that was kind of interesting. Maybe someday someone in the system should look into this rate adjustment thing further.'
I hope you will just do it, do it well and do it promptly. 'Time is money,' 'sooner is better than later,' 'the only thing we have to fear' and all those other great adages apply to rate setting, too.
Jump in. My experience tells me you will discover this. It looks overwhelming now. It will look easy when it is done.
Author Bio and Contact Information
Carl Brown is President of Carl Brown Consulting, LLC ; specializing in water and sewer system rate analysis and rate setting, asset management program development and training nationwide. Mr. Brown may be contacted at Carl Brown Consulting, LLC , 1014 Carousel Drive, Jefferson City, Missouri , 65101 , Phone (573) 619-3411 , E-mail carlbrown@mchsi.com. Web site: www.carlbrownconsulting.com.
