DI-Why? What utilities should ask themselves before setting their own rates

Everyone loves a good DIY project. I do home projects myself because they are fun, which is mostly true, but my secret motivation is not shelling out hard-earned money to pay a contractor to do it.

DIYs always seem like a great idea at first, but rarely do they get the results I want. I tend to skip steps and take a lot more time than my spouse, and I originally agreed to.

On the other hand, there are projects I’ve completed over and over, becoming an expert. They’re the projects I enjoy completing and learning from, that I’m most skilled at, and that I know I shouldn’t expend resources on because my work will achieve the same results.

DIY Rate Setting

The DIY homeowner in me understands the desire of a utility leader looking to update their rates independently. Before deciding to DIY, there’s a handful of questions to consider:

Do you know all the steps in the process, and will you be tempted (or pressured) to skip any?

It’s easy to find great resources to help you plan your own rate study – many of us at Raftelis are contributing authors of the main one – the American Water Works Association’s M1 Manual. But the process of following these recommended industry best practices is complicated. Some steps can, on their face, seem unnecessary, but all are critical.

Take, for example, a Cost of Service (COS) analysis. Performing a COS analysis is critical. It reveals the true cost of providing utility services, encompassing operational expenses, capital investments, debt service, and maintenance costs. It provides valuable insights for decision-making, such as identifying cost drivers, revenue shortfalls, and areas requiring rate adjustments. By understanding the actual service cost, utilities can allocate resources efficiently, prioritize infrastructure investments, and maintain service reliability.

That sounds like a lot of work, and it is. One may be tempted to skip this step, but doing so could have major consequences, such as higher or lower rates than you need. Both of these outcomes will decay public trust in your utility.

What are the consequences of a missed step or step that was not performed well?

When you DIY your rate study, the consequences may not be immediately apparent. It’s possible that the rates you design on your own have unintended consequences, like encouraging your customers to use a lot less water, which can negatively impact revenue and the utility’s ability to function. In many states, rates must be set in a manner that shows a logical nexus between the costs and rates, and a detailed administrative record must support rates. Will a decision you made to perform an inadequate analysis give customers a reason to bring legal action?

As you set out to analyze every variable and properly organize your data, make sure you consult legal counsel to assure you’re following your state’s rate requirements.

How well are you equipped to solicit and incorporate critical feedback from stakeholders?

Utilities and their governing boards that embrace a public engagement process to gather internal and external stakeholder input into the rate-setting process usually have better outcomes than those that don’t. Engagement creates more informed and involved customers, which builds their trust in you, and it gives boards the input or support they may need to make what can be difficult and controversial decisions.

Do you or anyone else on your staff have the experience or bandwidth to design and manage a meaningful engagement process, such as leading a citizen advisory committee, hosting open houses, and fostering community conversations?

Often, an outside perspective can give your board confidence in the information they’re using to make decisions. If you don’t hire an outside consultant, are you prepared to help build that confidence?

If you’re a first-timer designing and managing a rate update study and process, what will the learning curve cost you?

It’s easy to get overconfident when you watch a whole house renovation happen in a 30-minute time slot. In reality, these projects take several weeks or months to complete. Before deciding to DIY your rates, take a step back and consider every step of the process. Ask yourself:

  • What resources do you have?
  • Are you able to complete every step of this process to the extent that’s required of you?
  • Who from your team needs to be part of the process?
  • What risks are you taking by doing it yourself?

You may have a colleague from another utility willing to share their rate study schedule, and that’s a start. But each utility is different, so no process is identical. Things that seem obvious up front need more time to sort out, and it doesn’t take much to blow a schedule. You may find yourself at crunch time, with few or no internal resources to help get back on track.

A DIY rate study will require input from personnel from multiple divisions and departments – how will this coordination impact your schedule?

Long ago in my home renovation endeavors, I learned that I do not have the authority to pick the colors of paint, or shape of the tile, or the shade of grout. This turned out to be a good thing, as my wife’s choices usually resulted in something better than mine would’ve.

Can the same be said for your choices and the choices of others in the organization? How final is the CIP from engineering? Do those upgrade and replacement projects align with reality? Will contributors respect your deadlines to get data from them, or will you have to hound staff repeatedly for weeks? Will you even know it’s on their radar, or has it been co-opted by a higher priority?

Consider whether you have the time and resources to properly manage the entire project. Updating rates is a big task that requires juggling priorities, resources, and other organizational input.

Given your already full workload, how will the time spent managing this project impact your ability to perform your existing set of duties?

You have a full schedule. Your team has a full schedule. Everyone is busy doing all the tasks they were hired to perform daily to keep your customers in service. Rate studies need to be done every three to five years and are usually a heavy lift. What other tasks, deliverables, and organizational priorities will suffer with your attention diverted to this project? How will you shift priorities and responsibilities to ensure your rates update is a success?

In Closing

If you’ve read this and are still confident that performing a DIY rate study is the best route for your utility, you might consider using tools that make your project easier, save some time, and give you confidence in a better outcome. Recently, Raftelis unveiled a new software called Ellio. Think of it as an experienced, super handy neighbor who pops over occasionally to provide tips and advice for your home DIY reno.

With Ellio, users upload their data, and Ellio builds a custom financial model and enables side-by-side analysis of rate-setting scenarios and alternatives. It can also help with benchmarking against your peer utilities and measuring your organization’s performance. The best part is that subscriptions to Ellio come with on-call support from Raftelis’ professional utility rate-setting experts. More information about Ellio is available on our website.

While I understand the motivation for performing DIY rate studies, it is crucial for utility leaders to carefully evaluate the DIY approach and their capabilities. Leveraging the specialized skills and experience of professionals who have done this for thousands of other utilities and understand the intricacies of rate setting can allow utilities to navigate the process with confidence, ensure a fair and sustainable rate structure, and prioritize their core responsibilities of providing reliable and efficient utility services.