Rate Structuring & Steering the Conversation from Skepticism to Acceptance


By Prabha Kumar

The ethos and expectations of the utility management, the administration, the rate-approving body and the ratepayers intersect during every utility’s rate setting and approval process. Municipal utilities, municipal authorities and investor-owned utilities that head down the rate setting path all need to effectively address a myriad of interests and manage conversations among these four distinct stakeholder groups.

In a rate setting journey, technical expertise, due diligence and defensible principles are all critical for reaching the desired outcomes. Equally important is the quality of the interactions among the four stakeholder groups, which determines the fate of outcomes. This is true for a simpler rate setting process that most municipal utilities commonly engage in, where elected officials decide on the outcomes. It’s also true for a more robust rate-hearing process used by investor-owned utilities where state regulatory commissions decide the outcomes.

Engaging Stakeholders and Building Trust

As illustrated in figure 1, utilities operate in a milieu of opposing pressures: increasing service needs, regulatory demands and costs that exert pressure on revenue requirements; declining usage; volatile revenues and rate pressures that impact revenue generation. In such a milieu, gaining the understanding and support of the ratepayers and the approving entities requires deliberate focus on consistent stakeholder engagement at both local and national levels.

Figure 1

Figure 1 – Milieu of Opposing Cost and Revenue Pressures

In a rate setting process, a narrative gap often surfaces between what utility leaders intend to communicate and what their stakeholders perceive the message to be. The narrative gap impacts the ratepayers’ perceptions of the value of water, wastewater and stormwater services and ultimately affects appropriate pricing of those services.

At the national level, professional organizations and alliances are doing more to inform the public about the value of water. At the local level, crucial dialogue about the value of water and the need for greater financial, infrastructure and operational resilience is on the rise but more muted. Some utilities – especially the larger ones that can dedicate staff to the effort – are taking a more proactive approach to public relations and stakeholder engagement. However, many utilities engage in communications on a limited, as-needed basis – especially when it comes to communications about financial health and rate setting.

In a rate setting process, what utility leaders and rate specialists perceive as simple, factual and understandable may neither seem credible to the other three stakeholder groups nor resonate with their existing perceptions. To bridge this dissonance, it is first important to understand the evolutionary path of stakeholder engagement. As figure 2 illustrates, internal and external stakeholders typically mature through five increasing levels of engagement.

  • Level 1 – Become aware of the information that is available.
  • Level 2 – Listen to the information that is presented.
  • Level 3 – Understand the salient features of the information.
  • Level 4 – Trust the intent and the proposed solution.
  • Level 5 – Support the proposition.
Figure 2

Figure 2 – Phases of Stakeholder Engagement

In his discusson about the economics of trust, Stephen M.R. Covey states in The Speed of Trust – The One Thing That Changes Everything that “Trust always affects two outcomes, speed and cost.” He further asserts that an excellent strategy and execution can be derailed by a low-trust factor or “multiplied by a high-trust dividend.” This rings quite true in the context of rate setting, where lack of trust in the utility’s financial forecast and rate increase proposition can lead to delays in rate approval (speed) and even prevent utilities from achieving the necessary rate increases (cost).

Bridging the Narrative Gap

How can utilties bridge the narrative gap among the four groups of stakeholders in a rate-setting context?

Balanced financial and customer policies, a reliable financial forecast, commitment to transparency and collaboration, and consistent and concerted outreach all help shape a successful conversation. A best-practice approach that purposefully integrates these four principles into a holistic engagement framework can help utilities close the narrative gap and achieve the best possible outcome.

Balanced Financial and Customer Policies

Utilities and rate specialists strive to integrate in to the financial planning process, best financial management practices that relate to the level of fund reserves, level of cash financing of capital, the debt-coverage ratio, and capitalization of operations and maintenance (O&M). However, these policies are often not formally codified in a utility’s charter unless mandated by bond covenants. Similarly, customer-related dispute resolution, enforcement, and billing adjustment policies evolve over time and sometimes are used in day-to-day customer service and billing practice without being formally documented. Less-formal financial and customer service policies can hamper a utility’s ability to build credibility and trust with stakeholders. It is considered a best practice for utility management to more formally and clearly establish such policies without making them a bureaucratic burden.

Reliable Financial Forecast

In the context of rate setting, both regulated and non-regulated utilities are often challenged to provide financial forecast based on known and measurable factors such as historical usage increase or decrease, O&M costs, and escalation factors. Such an approach may not always adequately address a utility’s need to build financial agility or ramp up capital investments to catch up on system integrity or meet regulatory compliance. Nevertheless, developing a reliable forecast that balances program needs with financial policy metrics and incorporates features that explicitly enhance direct customer experience can be a wise tactical approach to build understanding and trust.

For example, prior to developing its multi-year financial forecast, a utility in the mid-Atlantic United States performed a 25-year asset renewal forecast, staffing projection, and financial impact analysis of absorbing customer fees for online payments. As the utility’s rate consultant, Black & Veatch incorporated the results from these distinct tasks in to the multi-year financial forecast. This approach not only established a fiscal path to meet utility operations but also explicitly enhanced the customer experience by eliminating the online payment fee.

Commitment to Transparency and Collaboration

Transparency and collaboration often play a pivotal role in enhancing the credibility of both the messenger (the utility) and the message (the proposed rate increase or fee). These attributes therefore need to pervade utility financial studies, rate setting decisions, and actions.

Recently, the City of Wilmington, Del., successfully created a utility Rate Stabilization Fund and an Operations & Maintenance Reserve Fund through legislative action by the city council. This prudent fiscal policy action was accomplished primarily through effective collaboration among utility management, city finance department, the mayor’s office, the City Council’s Finance Committee, and the Utilities Citizens Advisory Board. Transparent deliberation about the need for and the benefits of such an action also contributed to the successful outcome.

Consistent and Concerted Outreach

Increasing existing water or sewer rates is challenging. Modifying the rate structure to include an additional fee, such as a stormwater user fee, is even more daunting. Even in such situations, cultivating a consistent outreach culture in conjunction with the other three principles can help utilities successfully navigate public scrutiny to achieve desired outcomes. Consistent outreach is no longer a matter of choice but a necessity to enable stakeholder to advance from awareness to acceptance of a proposition, as illustrated in figure 2.

In a rate setting or rate-case context, effective messaging strategies can help nudge stakeholders from a latitude of rejection and non-commitment to a latitude of acceptance. Use of evidence-based messaging that emphasizes the character and competency of a utility and use of a panel of trusted external stakeholders to objectively evaluate the facts and merits of the proposed solution are two such strategies (Hahn Public Research, 2016).

The City of Newark, Del., used evidence-based messages to gain public and elected officials’ acceptance for a new stormwater user fee. The utility’s leadership clearly demonstrated that for an average residential customer the magnitude of increase in the monthly bill will be lower than the increase that would be needed if annual stormwater costs were recovered through water charges instead of through a distinct stormwater fee based on impervious area.

The city also transparently delineated stormwater funds to replace corrugated metal pipes and communicated the resulting direct benefits such as enhanced stormwater conveyance and alleviation of flooding in flood-prone neighborhoods of the city.

Similarly, prior to launching its new stormwater user fee, the City of Springfield, Ohio, convened a panel of stakeholders to provide input. Communication goals included education, engagement, and solicitation of input regarding all key policy decisions and the merits and impacts of the proposed solution.

Figure 3

Figure 3 – Synergy of Key Principles

Getting to Yes

During a rate setting or a rate-case process, utilities can improve the quality of interactions among the four groups of stakeholders through the power of synergy by incoporating the four key principles of balanced policies, reliable forecasting, transparency, and consistent outreach (figure 3). Incorporating these principles of good stakeholder communication with technical due diligence not only during a rate setting process but as a consistent best-management practice can help build a high trust factor. Changing stakeholder attitudes is never an easy task, but investment in multi-pronged efforts to foster stakeholder understanding goes a long way towards building utility credibility and good long-term relationships.

Prabha Kumar is a director in Black & Veatch Management Consulting, LLC, and leads the stormwater utility consulting practice within the firm’s Advisory and Planning group. She specializes in delivering water, sewer and stormwater financial and management consulting services to utilities nationwide. The Advisory and Planning group provides rates and regulatory services, transactions due diligence, integrated resource planning and business transformation services to the water, electric, oil & gas and telecom sectors.

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