Erie Water Works (EWW) contracted with Raftelis to complete a water rate study. The project involved developing a five-year financial plan to determine the need for future rate revenue adjustments, completing a cost-of-service evaluation, and evaluating several rate structure alternatives.
Raftelis developed a customized financial planning model for EWW to evaluate revenue sufficiency over the forecast period and to projected future rate increase needs. The financial plan incorporated EWW’s latest operating budget and five-year capital plan, future debt service, and planned debt issues. We also incorporated fiscal policies related to liquidity and debt service coverage into the financial plan. At the request of EWW, we ran several different scenarios to evaluate the impact of cash funding a desired level of PayGo repair and replacement capital on the forecasted rates. In the end, EWW was able to confidently set rates over the next five-year period to adequately fund the operating and capital costs of the system, while also ensuring a strong financial position for the utility.
The cost-of-service evaluation was used to update EWW’s bulk rate to its municipal customers and to determine if the existing rate structure was equitable recovering costs from EWW’s major customer classes. To evaluate this, system costs were allocated to customer classes using average day, maximum day, maximum hour, meters and services, and customer related cost categories and relevant customer data. Allocated costs were then compared to the estimated revenues to be generated from each class. The bulk rate was calculated by dividing allocated costs by the billed consumption of wholesale customers.
Three rate alternatives were evaluated as part of the rate study. The first involved developing a dedicated capital charge to recover annually recurring repair and replacement costs, while the second involved recovering the additional rate revenue need in each year by generating a greater proportion of revenue from the Customer Service Charges to increase fixed revenues. The third involved analyzing detailed customer data to test the reasonableness of EWW’s existing volumetric tiers.
Ultimately, the Board decided to approve the third option, an across-the-board increase to the base and volume charges, that implements a stable set of programmatic rate increases that mitigate customer rate shock while achieving financial sufficiency across the five-year forecast.
