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SOURCE - Winter 2016

www.ca-nv-awwa.org 21 Once unit costs for each cost component are determined, fixed charges and commodity rates can be calculated based on the derived unit prices. For fixed charges, a capacity unit cost is charged based on the size of the meter and the billing unit cost is charged per account. The sum of these two components makes up the monthly fixed charge for each meter. For tiered rates, the commodity related unit prices must further be analyzed to determine how costs are incurred by each tier. As an example, if a water agency has more than one water supply, “supply” costs are further analyzed to determine the unit price for each water source by dividing the total cost of the respective supply by the total amount of water available. Through this approach, a unit rate for each supply is derived and water supply costs can be allocated to each tier. To maintain affordability and ensure equity, the most cost effective water supply is typically used first to cover water demand. An analysis is then conducted to determine how much demand each supply source can accommodate. This will determine if the most cost effective water supply can cover all of the first tier’s demand. If not, then the second source of water is necessary, and the rate calculated for Tier 1 would be a blended rate of both water supplies. This is just one example of how tiered rates can differ based on costs. Another example is how peak costs and conservation costs are apportioned between tiers. Peaking costs are associated with the extra capacity required to serve the higher demand over the agency’s average daily usage. Also included are additional expenses incurred such as capital improvements. For conservation, the primary purpose of conservation programs is to mitigate higher unnecessary usage through conservation measures that promote water efficiency. Therefore, these costs may be apportioned to the usage within the higher tiers that it is targeted to reduce. Similar to how a cost of service analysis is conducted to derive unit prices for each cost component, this type of analysis should be expanded upon and continued through the tiered commodity rates. The goal is to clearly identify which costs are incurred in which tiers in order to support the nexus requirements of Proposition 218. Developing this type of rate structure provides a better understanding among ratepayers of what they are paying for and increases transparency by connecting an agency’s budget to its rates. Customers generally understand that additional costs are incurred to accommodate a utility system’s total demand and that certain users place a greater demand on the system than others. An agency’s rate structure should support this basic understanding by building up the rates of each tier based on actual costs. A Case in Point East Valley Water District transitioned from a uniform rate structure to inclining budget-based rates. Using the build-up cost approach to supporting tiered rates, EVWD’s expenses were first functionalized and then allocated to cost components that reflect the unique characteristics of the utility. A thorough review of EVWD’s costs was discussed, and policy decisions were made regarding the amount to recover from fixed charges versus commodity rates. Based on this policy discussion, and the amount of EVWD’s costs that are actually fixed, the utility decided to increase the amount of revenue recovery from fixed charges from 25 percent of its revenue requirements to 40 percent. Although this was a significant increase to the fixed revenue component, EVWD’s total fixed costs account for well over 70 percent of total revenue requirements. As such, the adjustment brought their rates more in line with how costs are incurred. However, the remaining 30 percent of fixed costs would still be recovered through commodity rates. When designing the commodity rates, one must be mindful of this remaining 30 percent of fixed costs to ensure these are not recovered in a tier that is susceptible to conservation and, thus, unfunded fixed costs. This means that when establishing tiered rates, the higher tiers should have less of any remaining fixed costs and include costs that are avoidable. In other words, if usage in a higher tier is curtailed, the costs associated with that tier should ideally be eliminated and the water agency does not experience a negative fiscal impact. Figure 2. Customers generally understand that additional costs are incurred to accommodate a utility system’s total demand and that certain users place a greater demand on the system than others. If usage in a higher tier is curtailed, the costs associated with that tier should ideally be eliminated and the water agency does not experience a negative fiscal impact. Functionalized Expenses


SOURCE - Winter 2016
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