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Utility Rate Study (A Case Study)

Reference Number: MTAS-554
Reviewed Date: 03/24/2023

The mayor and board of alderman of Any City had just finished listening to a presentation from the water/sewer manager about needed projects. The water and sewer systems had their challenges. The mains, especially sewer lines, in the heart of the city were old and badly needed repair. The manager kept talking about “I & I,” finally explaining that this meant inflow of surface water and infiltration of groundwater into the sewer system. In other words, the sewer lines and manholes were cracked allowing extraneous water to enter the system. Heavy rains resulted in excess water being transported through the sewer lines to the treatment plant. This caused an increase in operational expenses and often caused operational compliance problems.

The manager mentioned that the “man from the state” had been to talk about the problems, and the city needed to take corrective action soon or potentially face fines and enforcement action.

The water manager said that water lines, particularly the old downtown lines, were deteriorated and the “water loss” was excessive. He explained that water meters in the downtown area were old and most likely not registering all the water being used. Because the sewer bills were calculated using water consumption, the resulting loss of revenue was compounded. Any City was likely losing revenues in both water and sewer billings because of the old meters.

Another major challenge came from an area where the interstate highway intersected the city limits. Commercial and residential developers were clamoring for water and sewer service. While water service was available in this area of town, lines were sized inadequately for large demands. Sewer service was not available. If development of this area was going to occur, water infrastructure had to be expanded, and sewer infrastructure had to be installed. Any City’s engineering firm had just finished a cost study for these improvements. It would cost more than $6 million to expand water and sewer service to meet the demands of new development. Repairs, replacement, and rehab of existing lines would cost more than $4 million. The good news was that Any City’s water and sewer treatment plants were capable of handling new growth, particularly if water loss and I/I were reduced.

The bottom line, the manager explained, was that several million dollars were needed to fund these projects. The city administrator said that some monies could eventually be recouped from new development. However, improvement of existing mains in the downtown area would not result in any new customer revenues. She concluded by saying that the city would probably qualify for some grant monies but nothing approaching the total needed. Silence filled the room as the water/sewer manager took his seat and the enormity of the challenge was understood.

Sound familiar? This meeting could have taken place in your city. Water and sewer operations and maintenance problems challenge city leaders everywhere. Add increasing federal and state regulations, and it is easy to see why many municipal decision makers feel overwhelmed. The answer for Any City lies in bringing together a combination of factors, including proper planning and financial resources. The mayor and alderman instructed the city administrator to work with the water/sewer manager and finance director to come up with a funding plan.

Planning new projects, meeting the demands of customers, dealing with rising costs, and complying with new laws and regulations are all part of operating a municipal water/sewer system. And they all have one thing in common – money. As the city staff began to assess the task, they quickly realized that the current water/sewer revenues were simply inadequate. But how much would they need, how would rates be impacted, and how would rate-payers react?

“We need a rate study.”
As the city administrator, water/sewer manager, and finance director discussed their assignment, it became apparent that the focus could not be limited to capital projects, but also would need to include all the operation and maintenance expenses, depreciation expense, and debt obligations. It had been several years since consultants from the University of Tennessee Municipal Technical Advisory Service (MTAS) had assisted with developing financial projections and suggested new rates for the water/sewer fund.

Should we call MTAS? Or, since we have a previous study as guideline, can we do it ourselves? Any City’s staff decided to undertake the task.