Water 2009 - Ehlers: Financial Planning, Financial Advisory Services

Conservation Rates for Water Utilities

New Minnesota Law Requires Water Conservation Rate Structures

A new state law requires public water utilities to implement residential and commercial rate structures that encourage conservation. The law will require most Minnesota utilities to review their existing water rates and, if necessary, adopt conservation-compliant rates.

Who is affected?

There are three implementation dates that affect Minnesota public water utilities serving more than 1,000 people. (Suppliers serving fewer than 1,000 people or those lacking user meters are exempt from the conservation rate mandate.)

Now: Utilities must comply before requesting state (DNR) approval to construct a new well or increase existing well volumes.
2009: Utilities in the metropolitan area must comply by January 1, 2010.
2012: All other utilities must comply by January 1, 2013.

What is a conservation rate structure?

A conservation rate structure is a rate structure that provides households with a financial incentive to use less water. The most common “conservation rate structure” in Minnesota employs increasing block rates. For example:

Usage	Rate per 1,000 Gallons
0-15,000 gallons/quarter	$2.00
15,000-45,000 gallons/quarter	$2.50
45,000-60,000 gallons/quarter	$3.15
Over 60,000 gallons/quarter	$4.75

The DNR recommends that the increase in cost between block sizes be at least 25% for the lowest blocks, and 50% for the higher block(s). More examples of conservation rate structures are on the DNR website at:

http://files.dnr.state.mn.us/waters/watermgmt_section/appropriations/conservation_rate_structures.pdf

The actual water rate for each block will depend on the revenue needed to pump, treat, store, and deliver the water in your community.

Can we have different rate structures for commercial and residential users?

Yes. While the “conservation rate structure” must apply to all customers, rates and structures may differ between customer categories. For example, cities will still be able to offer larger block sizes to water-intensive commercial customers.

Will a new rate structure affect water revenues?

Yes. When a utility changes either its rates or rate structure, revenues will change. It is our experience that conservation rate structures often increase revenues. However, the relationship between rate structures and revenues is complicated. Revenues are also affected by demographics, housing types in the community, and seasonal weather.

Ehlers recommends undertaking a rate study to forecast how potential new conservation rate structures will impact:

Different types of users (e.g. seniors, families, apartments, small businesses)
Future revenues
Utility’s ability to undertake planned capital improvements.

Who is enforcing the new rate requirements?

The Minnesota Department of Natural Resources (DNR). The DNR will review the rates reported on the annual water reports and in the water supply plans. At this time there are no penalties in the law for non-compliance. However, after the effective dates, compliance will be required before the DNR will issue a well permit or approve a water supply plan. For water supply plans submitted prior to the effective dates, the DNR will be looking for a description of how the City intends to comply.

What should be my utility’s next steps?

Ehlers recommends taking the following steps to ensure compliance with the new law:

Review your existing rate structure to determine if it meets the DNR’s guidelines for a conservation rate structure.
If you determine a change is needed, advise your governing body that they will need to consider new rates over the next 12-24 months.
Select one or two optional rate structures and assess how they will impact different types of customers. Who will pay more and who will pay less than they do now? Will water conservation result in lower water bills?
Prepare a financial projection of the new rate option(s) to ensure adequate revenue will be available to the utility.
Provide the results to your governing body and request them to approve a new rate structure.
Communicate with your customers. Bill inserts, newsletters, and open houses all provide opportunities to let your customers know about the new rate structure and ways to conserve water.

What is a Rate Study?

A rate study is a five to ten year financial plan for each utility – water, sanitary sewer, and storm water. Given increasing mandates for clean drinking and ground water, many citizens will soon be paying more in combined storm, sanitary sewer, and water fees than they do in property taxes. Yet think about how much time is spent on general fund budgets versus the budgets for utilities. A utility rate study will provide a multi-year budget that ensures adequate funding for operating and maintaining your utility systems, as well as paying for mandated improvements.