Financial Report: Serving the Community through Data-Driven Decisions

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By Glenn Barnes

Water systems exist to serve their communities. But do the water system’s rate structure, prices, and policies align with community values? The annual rate process is an opportunity to measure this.

Every year, water systems should calculate the annual cost of providing water service today and into the future and then craft rate structures, prices, and policies to collect that target dollar figure. Most often, water systems make incremental changes to the rate structure and price that is already in place. Some water systems have clearly stated reasons why they use the rate structures and prices they have, but in my experience most water systems continue to use the same rate structure simply because it is the rate structure that has always been used.

The better approach to the annual rate process includes determining what the community values and to measure how well the water system is doing in achieving those values. I recently spoke with a water system that followed this methodology. The system put together a stakeholder advisory group that included representatives from key demographic groups, business and industry, and residential customers from across their service territory. Led by a facilitator over several meetings, the advisory group developed this list of values for setting rates: legal, recovers the full cost of water, credit strength, fair and equitable, stable and predictable, encourages conservation, understandable and affordable. The water system then used that framework to help develop both its rate structure and pricing.

Once a water system has developed its list of community values, it is possible to measure how well it is doing meeting those values objectively by calculating key metrics. Those metrics serve as a report card of sorts for the water system so it can understand whether the current rate structure, pricing, and policies are appropriate for the community. If the metrics show that the water system is not achieving the values, they can inform what types of changes need to be made to rate structures, pricing and policies.

Let’s take an example from that water system’s list of values: recovering the full cost of water service today and into the future. Operating ratio — calculated by dividing annual operating revenue by annual operating costs — is a simple way to for water systems to determine if the current rate structure and pricing is adequate. Ideally, systems include depreciation as an expense so that some measure of capital replacement is captured in the calculation. Systems should look at operating ratio not just for the last year but rather as a trend over several years to identify changes. If the operating ratio doesn’t measure up, systems know that they will have to raise revenues, cut costs, or both.

Systems that value encouraging conservation are generally working to limit discretionary water use (outdoor irrigation, swimming pools, hot tubs) and leaks. Systems could look for potential discretionary water use by flagging any high user, but it is possible that the high user has a large number of people living in the home rather than discretionary use. A better metric is the percent of customers that have disproportionally high usage in the summer months compared to winter months, showing a change in behavior throughout the year. Systems can also conduct water audits to identify potential leaks in their pipe networks. And with the rise of smart meters, systems now have access to information on the hour-by-hour (or even minute-by-minute) usage of their customers, allowing them to flag customers who may have leaks or discretionary use. If a system identifies a lot of discretionary use, it can price its water higher and/or institute conservation programs and policies.

Affordability is also a value I hear often from systems. The traditional way of measuring affordability — the percent of median household income spent on water bills — is flawed. Prof. Manny Teodoro has developed two better metrics. One looks at the percent of disposable income that low-income households spend on water bills, and the other looks at the number of minimum wage hours someone would need to work to pay a typical water bill. These metrics better represent the ability of households that are most struggling to pay their bills. Or systems can look at customer arrearages and the percentage of customers that are habitually late paying their bills. Again, if the metrics are off, systems can price or structure rates to be easier for low-income households or can implement a customer assistance program.

Every value has a set of associated metrics, and those metrics can be tailored to the unique circumstances of each water system. Data are often a key part water systems’ decision-making around operations. But data are just as helpful in driving policy and rate decisions around finance and management as well.

Glenn Barnes is director of Water Finance Assistance. For the past 13 years, he has provided training and technical assistance across the country on the finance and management of drinking water and wastewater systems, including data-driven decision making, rate setting, long-term planning and workforce development.

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