Get a free consultation to discuss your needs
Events & Presentations
Tiers or Tears: Designing Cost-Based Increasing Block Rates
October 30, 2015
American Water Works Association Fall Conference, Las Vegas, NV Presenter: John Farnkopf, Senior Vice President
The recent San Juan Capistrano appellate court opinion calls for designing increasing block rate structures that “correspond to the actual cost of providing service at a given level of usage.” Although this controversial opinion supports tiered rate structures, it has led water agencies to question the basis for their rates. Regardless of the pending legal status of this opinion, it draws attention to the need to set rates that are cost based and not arbitrarily influenced by other policy objectives such as rewarding efficiency and discouraging waste, which heretofore was a common industry practice. This presentation will explain how to evaluate tiered rate structures to determine whether they reflect the cost of service from lowest to highest use.
Methods will be presented for determining the size of each tier (i.e., where the breakpoints are located between tiers) using customer billing data, operational criteria, and water supply availability. The use of bill distribution curves will be explained for identifying natural breakpoints that define levels of service. Methods will also be presented for setting the rate for each tier that reflects the cost of providing service within each tier using cost allocation formulas based on base and peak usage, rather than on qualitative factors. Methods will also be presented for evaluating the price increments between tiers and how the rates for each tier compare with the lowest and average prices.
These methods will be explained within the broader context of a conventional rate study that includes revenue requirement projections and cost of service allocations to each customer class. Typical customer bills will be used to evaluate whether the impact on customers is proportional to the cost of providing service, which has emerged as a key legal requirement. The mathematical definition of proportionality will be presented and methods for gauging whether impacts are proportionate or disproportionate will be provided.
The presentation is designed to provide quantitative tools in a methodical framework that expands the techniques currently available in rate-making manuals and in general use in the industry. These techniques reflect the special needs of setting rates in semi-arid areas like California and Nevada where rates need to be integral with surcharges, penalties, and other restrictions that encourage efficiency and reduce waste during droughts.
The presentation will emphasize the necessity for simplicity, which aids understanding and acceptance and reduces the risk of challenge. The presentation will also provide practical guidance in meeting the legal burden of proof, which was lacking in recent litigation over rates such as San Juan Capistrano and Palmdale. By the end of the presentation, rate analysts and attorneys should be equipped to evaluate whether any changes in tiered rates are advisable and what alternatives are available for making refinements to improve legal defensibility.