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Democracy on the Front Lines
City Administrator’s Blog
Walter Denton
June 1, 2007
There have been several news articles recently about the City’s proposed water rate changes. The issue has been a little confused, primarily because it does not really involve additional revenues, but rather tries to bring more equity into the rate structure. The ordinance increases rates for the high volume users, but the vast majority of customers (around 85%) will be unaffected. Below are answers to the common questions we have received.
Question #1: Why change the City’s water rate structure?
Answer #1: The City has long used a declining rate structure, basically the more water you use the cheaper the rate. About a third of the nation’s communities and utilities are going to “increasing block rates” where the more you use the higher the rate, in specific increments or tiers of usage. What is proposed in this O’Fallon rate change is that we move toward a more reasonable pricing structure, approaching single tier pricing. In that move, we propose to stay with a discounted rate for a low use tier of 0 to 2,000 gallons per month (some call it the “senior citizen” tier). On average, about 2,000 accounts per month do not exceed 2,000 gallons of usage. For those residents who use more than 2,000 gallons per month, our proposed rates attempt to level the playing field between the residential user
and the commercial customers. This is in part a response to the question of “Why should the residential customer subsidize the large commercial user?” as the provision of a gallon of water costs the same to the end user whether residential or commercial. It is also an incentive to the large user to conserve and not force our utility to make large capital improvements to support large user demand. Some may see that as a move towards conservation.
Question #2: How does the proposed rate change affect customers using less than 8,000 gallons per month?
Answer #2: There is no change in the rates for accounts using less than 8,000 gallons per month.
Question #3: How does the proposed rate change affect revenue received for accounts affected by changing the second tier of O’Fallon rates from 2,000 to 8,000 gallons per month to 2,000 to 10,000 gallons per month?
Answer #3: The proposed rate change is from $4.11 to $4.46 per 1,000 gallons, or $0.35 per 1,000 for this 2,000 gallon increment change in the rate structure. In the analyses computed by our rate setting software for FY06 data, on average 756 customers used 8,500 gallons per month, and 554 customers used 9,500 gallons per month. During that period our account records show about two-thirds of our customers were in O’Fallon. So, applying that ratio to the customer numbers above gives us, 756 x 2/3 = 499 and 554 x 2/3 = 366 customers respectively. With the rate change of $0.35 per 1,000, that affects the cost of 500 gallons x 499 customers, and 1,500 gallons x 366, or 249,500 + 549,000 gallons. Multiply the sum of those two numbers by $0.35 per thousand and you get (798,500 gallons x $0.35 per 1,000 gallons) $279 per month
difference in revenue received from those accounts. Therefore, the increase in revenue to the City from raising the rate in the range of 8,000 to 10,000 gallons on average usage is only approximately $3,600 per year from the O’Fallon users, or about $4.16 per account per year.
Question #4: How does the proposed rate change affect revenue received for accounts that average between 10,000 and 50,000 gallons per month?
Answer #4: The rate change is from $4.11 to $4.20 per 1,000 gallons, or $0.09 per 1,000. Using the analyses of our rate setting software for FY06, about 1,300 O’Fallon customers will be affected. The cost increase to those 1,300 accounts will be approximately $24,000 per year or $20 per year per customer.
Question #5: How does the proposed rate change affect revenue received for accounts that average more than 50,000 gallons per month?
Answer #5: As the rate change does away with the tier “next 240,000 gallons,” the computation is not as straight forward and less precise using average consumptions. The approximate revenue gain from the proposed rates using FY06 data is roughly $0.09 per 1,000 gallons x 132 accounts x 158,242 gallons per month average usage x 12 months/year = $22,800 per year for all users in the above 50,000 gallons per month. To the $22,800, the revenue from the cost increase to the users of water over 248,000 gallons per month (rate change from $3.25 to $4.20 per 1,000 gallons ($0.95 per 1,000)) must be added. That computation yields approximately $48,000 per year. So, the total revenue change to be collected from the large users in O’Fallon from the proposed rate change is in the vicinity of $70,000 per year.
Question #6: How much additional revenue will the proposed rate changes garner from O’Fallon water accounts?
Answer #6: Approximately $97,000 per year based on FY06 water consumption data.
Question #7: How many people are affected?
Answer #7: On average based on FY06 consumption data, 1,513 accounts in the whole system (around 1,000 accounts in O’Fallon) use between 10,000 to 20,000 gallons per month and 616 accounts (say 400 in O’Fallon) use more than 20,000 gallons per month. These totals are for both residential and commercial accounts. There are approximately 15,000 accounts in the O’Fallon/Fairview Heights water system. The vast majority of customers (85%) use less than 10,000 gallons per month.
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