The University of Tennessee, Knoxville

Tennessee County Municipal Advisory Service

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Charging Water and Wastewater Customers Fairly

Reference Number: MTAS-797
Tennessee Code Annotated
Reviewed Date: August 18, 2016
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Fairness is an important consideration for setting water and sewer rates. No group of customers should be subsidizing another group. The 12-month billing summary for the water department is shown in Table 1 below.

The finance director calculated percentages for each rate classification and made the comparisons shown in Table 2 below.

Since the percent consumption and percent revenue columns in Table 2 closely match within a few percentage points, staff decided that the current rate structure treats customer groups fairly. No structural changes would be needed to the current rates. If expense data per customer group is available it could be included in the fairness test.

The fairness test was repeated for the sewer rate structure with similar results.

 
Table 1: Any City
Water Billing Summary by Customer Class

 
Number of Bills
Consumption (Gallons/Year)
Revenues/Year
Residential Inside
4,000
30,000,000
$630,000
Residential Outside
1,000
6,000,000
$163,000
Commercial Inside
100
20,000,000
$428,109
Commercial Outside
12
4,000,000
$150,000
Utility Districts
1
12,000,000
$350,000
Industrial
7
7,200,000
$176,870
Total
5,120
79,200,000
$1,897,979

The finance director calculated percentages for each rate classification and made the comparisons shown in Table 2. 

 
Table 2: Any City
Water Usage Versus Revenue by Customer Class

 
Consumption (Gallons/Year)
%
Annual Revenues
%
Residential Inside
30,000,000
38%
$630,000
33%
Residential Outside
6,000,000
8%
$163,000
9%
Commercial Inside
20,000,000
25%
$428,109
23%
Commercial Outside
4,000,000
5%
$150,000
8%
Utility Districts
12,000,000
15%
$350,000
18%
Industrial
7,200,000
9%
$176,870
9%
Total
79,200,000
100%
$1,897,979
100%

Since the percent consumption and percent revenue columns in Table 2 closely match within a few percentage points, staff decided that the current rate structure treats customer groups fairly. No structural changes would be needed to the current rates.
The fairness test was repeated for the sewer rate structure with similar results.

Note: Multiple step declining block rate structures are likely to lead to fairness issues. In such rate structures, large volume users are usually found to be paying less than their fair share. Many cities decide on lower water and sewer rates for large volume users, such as manufacturing facilities, because of the benefits they add to the city, such as jobs. A better approach is a uniform rate structure where the first 1,000 gallons costs the same as the 101,000 gallon.

 

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