The Art of Budget-Based Rate Development and Implementation

Submitted by IEUA

BBRs require as much art as science to develop and implement. It is very important for agencies to keep in mind that public agencies are funded by and are the property of the public. This may help agencies consider why it’s important to develop rate structures that take customer-level characteristics into account. The art of developing and implementing BBRs is perhaps the least understood and/or overlooked part of moving to this rate structure. While much of switching to a BBR structure is technically-oriented (e.g., billing system upgrade, financial study, etc.), there is also an art to developing a new rate structure that makes sense to elected officials, the agency, and the customers; is defensible with respect to costs and Proposition 218; and aids in achieving the three primary objectives of a rate structure: (1) maintains revenue stability, (2) promotes conservation, and (3) is publically and (4) legally accepted.

BBRs require internal agency flexibility, the consideration of public perception, and for the agency to truly seek equity across all customer groups. These and other thoughts on BBRs are discussed below:

  • BBRs should apply to all customer groups, which increases the technological requirements but provides a more defensible rate structure for all customers.
  • Variances should be highly promoted to ensure customers feel they have the opportunity to make changes to their allocation and/or make their allocation more accurate.
  • Technical information, such as weather data and aerial imagery, must be represented as a way for agencies to set correct allocations for customers. Technology is a cost, but agencies often find the effort is worth the time and money in terms of customer acceptance and the accuracy of allocations.
  • Allocations that utilize existing efficiency standards are more defensible to the agency and its customers.
  • Timing, especially of Proposition 218 notices and rate structure implementation, is an important consideration. Timing is contingent upon a number of factors, including revenue needs, the election cycle, and the ability of customers to focus on the proposed rate structure while not being confused with other important agency events and issues.
  • The overall messaging of rate structure changes needs to be simple, for example:
  • Under BBRs, every home gets an allocation that fits its need. The rate structure recognizes individualized water needs from customer-level data such as the number
    of residents, landscape square footage, or local evapotranspiration (ET).
  • Allocations for business customers are designed to meet the individual water requirements of the business, taking into consideration number of employees, outdoor
    water use, and equipment and process water needs.
  • Allocations change as the weather changes, as occupancy in a home changes, and as business needs change (i.e., variances exist).
  • Efficiently-used water is the least expensive, while wasted water is the most expensive.
  • Naming of tiers is important and can be considered one of the pieces of “art” in setting up a BBR structure. For example, agencies with fixed tiered rate structures typically name tiers by with numbers (i.e., 1, 2, 3, etc.). This gives customers little information about their water use (Are they efficient? Are they wasting water?). The advantage of a BBR structure is that the allocation-based tiers give the agency and the end user more information about individual water use. Tier naming sends the customer a more accurate message about their level of water use relative to where they should be to be considered efficient.

Agencies may expand their knowledge by using customer surveys, where the concept of water budgets is described to customers in public meetings long before the rate change occurs, in order to gauge public knowledge and education. One agency found this to be a valuable step that gave the Board confidence it was moving in the right direction based on the customer survey responses. Agencies may also consider rate modeling of a wide range of cost-recovery scenarios from financial consultants. A rate study should be able to model any cost recovery scenario, from high risk to low risk scenarios and evaluate the impact on prices, customer bills, revenue recovery, etc. These approaches are part of the art of developing BBRs in order to find the best combination of revenue recovery, water use efficiency, and customer fairness to take to agency officials and then to customer stakeholder groups. Get the story right, test it internally, and then take the science and customer-based discussion of rate-making to customers.