Create Sustainable Rates and Charges

Contributor
Sustainable Infrastructure Society
Introduction

“Sustainable” rates and charges are the rates and charges you should set for the water you supply so that you can recover all the costs of supplying water now and in the future. Those costs include the costs of renewing your assets when required and the costs of new projects. If you do not recover the full costs of supplying water you may not be able to operate safely and effectively in the present, and your infrastructure such as pipes and pumps will deteriorate in the future.

By following the steps below you can work out the full costs of providing a safe and adequate supply of drinking water to your customers and then set water rates that reflect those costs.

Here are the main steps in preparing in achieving sustainable rates and charges.  Each of these steps is outlined in the sections below.

  Step 1: Review annual costs and revenues

  Step 2: Work out reserve account requirements

  Step 3: Calculate water rates and charges

  Step 4: Find out more about water rates.

Step 1: Review Annual Costs and Revenues

The first step in setting rates and charges that reflect the true cost of delivering safe drinking water is to work out how much it costs to operate your system every year. You should divide your costs into two broad categories: Administration and Operations, and Contributions to Reserves. The first category, Administration and Operations, includes things such as treatment costs, utilities, wages and maintenance. The second category covers the contributions you make each year to the one or more reserve accounts, shown in the figure below.  

Knowing what your costs are and understanding how they have changed in the past and can change in the future is the key to knowing how much money to collect from customers every year. Refer to other sub-topics including: Create an Annual Budget and Create a Five-Year Plan.

Step 2: Work Out Reserve Account Requirements

The use of reserve accounts is outlined in: Create a Five-Year Plan. The four reserve accounts you might create are shown in the table below. In the case of the Operating Reserve and the Emergency Reserve, you should make annual contributions to these reserves until you have the target amounts shown in the table below. Thereafter, maintain the balance of these accounts at that level. Amounts in the Replacement Reserve and the Construction Reserve are worked out when you implement other BMPs. The amounts that you need to contribute to the reserve accounts must be included in the calculation of water rates; they are part of the overall cost of providing service to your customers.

Account

Purpose

Target Amount $

Operating Reserve

For unexpected operational expenditures, such as a large increase in pumping costs.

X% of annual operating budget

Replacement Reserve

For systematic renewal of assets such as reservoirs and pipes.

Refer to your asset management plan

Emergency Reserve

For emergency events such as damage of intake works by flood.

Y% of annual operating budget

Construction Reserve

For major upgrading of the system such as installation of filtration.

Refer to your long-range plan

Step 3: Calculate Water Rates and Charges

A straightforward approach to working out charges to your customers is to calculate total annual costs and divide this equally among your customers to get the charge per connection. If you do not have water meters, this may be your only practical option.

If you have water meters, then consider charging each customer for the water actually used. In this case, the simplest approach to working out the rate to charge ($ / cubic metre supplied) is to take the total annual cost and divide by the annual amount of water supplied.

Annual Costs Calculation

Total costs are a combination of administration and operating costs (e.g. staff costs, treatment costs, maintenance, administration) and contributions to reserve funds. The schematic opposite gives an illustration of the rate calculation. It’s important to note that in setting rates, many water systems have in the past not allowed for sufficient contributions to the reserve accounts.

You can use the worksheet “Forecast for Sustainable Rates & Charges” to find out how much money to contribute from your operating account to the reserve accounts in the future to maintain a positive balance in each of these accounts. With this information, this you can set your rates and charges accordingly.

Allocation of Revenues

Your water system may include industrial, commercial or institutional customers. If so, you may want to use the concept of Single Family Residential Equivalents (SFRE) when working out how much you will charge for water.

Setting rates and charges for sustainable operation involves not only your annual administration and operations costs but also the contributions to reserves.  You may find that as you calculate the reserve contributions needed, particularly those for asset renewal and capital reserves, large increases in water rates are required in order to operate sustainably. 

To avoid “rate shock”, which is the name given to the reaction of customers when they are faced with sudden large hikes in water charges, you may have to introduce rate increases over time. This approach is used by many water systems when they need a large increase in revenue, which in turn implies a large increase in rates. The important thing is to work through your forecasts and have a systematic plan in place for moving towards sustainable operations.

Step 4: Find Out More about Water Rates

For larger water systems, setting water rates can be complex. There are various rate structures that can be used. For example, if you want to discourage high water use for summer irrigation you might use an “inclined block rate”.  You water system may supply users in several categories; examples are: domestic, institutional, commercial, industrial and agricultural, all of which may require different water rates. To learn more about water rate structures follow this link: Water Rate Structures.

You may set out to recover the full costs of operating your water system, but also need to keep in mind those customers who may suffer hardship from increased charges. (For example: In the United Kingdom, a household spending more than 3% of income on water is considered to be suffering hardship). In British Columbia, the water charges are typically lower than in many other areas of Canada, and Canada has some of the lowest rates among industrialized nations. 

When you have found out more about water rates, you may want to revisit the rates and charges you calculated for your water system. Use the worksheets at the end of this sub-topic to help work out sustainable rates and charges. Expect to revisit your calculations of sustainable rates and charges at least annually to update information. This review and update will take less time than the initial planning process and is important for good financial decision-making. 

Resources

To help you create an Annual Operating Budget, you can complete Excel worksheets available at the Canadian Water Directory's Financial Best Practices web page.

  1. Click on this link to the web page to access the Excel worksheets: Financial Best Practices
  2. Once on the web page, click on the worksheets listed under BMP E.

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