How Water and Sewer Rates Are Set

The Commission sets water and sewer rates based on an analysis of a utility’s earnings. The most recent year for which complete financial data is available is usually chosen as the “test” year. The earnings achieved in that year are compared to a rate of return, which is a rate based partly on market interest rates that a utility would be earning based on its level of investment in utility plant that serves customers. Utilities are only allowed to earn a return on investments that are actually being used in providing utility service to customers. It is through the allowed rate of return on plant investment that the utility has the opportunity to earn a profit. In addition, the utility is allowed to recover the prudent and necessary expenses incurred in running the business. The Commission, in reviewing a water or sewer utility’s request for a change in rates, carefully reviews all expenses as well as investments made to ensure the company is run in the most prudent and economical manner possible, consistent with the utility’s obligation to provide safe service.

A customer water bill is typically based on the use of water meters, where service is measured to determine the amount to be billed. Usually the water bill consists of two charges: a fixed customer charge, and a variable consumption charge. The fixed portion of the bill sometimes is calculated to recover the fixed costs of the utility, such as labor and return on capital investments. However, particularly with smaller systems, the fixed portion of the customer bill is calculated to provide revenue stability to the utility where seasonal differences in consumption may occur as with seasonal occupancy. Providing full recovery of fixed costs through the fixed portion of the bill may unfairly penalize seasonal customers who have no consumption during parts of the year. The consumption charge of a water bill is based on periodic readings (such as monthly or quarterly), and is the most effective way to encourage judicious use of water. As a part of the Commission’s current investigation into greater conservation of water, the Commission is considering the encouragement of greater use of water rate designs which can be effective in reducing water waste and encouraging more customer awareness of the cost to provide safe clean drinking water to their home or business. In some limited cases with very small systems, the Commission may provide a waiver of its administrative rules and allow a water utility to charge a flat, unmetered rate. However, this method is largely discouraged as it provides no incentive for customers to conserve water and avoid waste.

Sewer rates can be either flat rate, or based on a water reading. The use of water readings for sewer bills is an additional method of conserving water since the customer will be further incented to avoid water waste.