How is a Water Rate Study Like a Dead Cow?

Bull skull in the sand desert at sunset. Death concept.

For decades, water utilities have relied on external consultants for rate studies. To a large extent, this reliance continues to this day, despite the availability of online tools and services that allow utilities to perform water rate reviews themselves at a fraction of the cost.

For small and medium-sized communities, in particular, the process of hiring a consultant is both time consuming and expensive, which means rate reviews are usually performed far less frequently than they probably should be. But the fact is, hiring a consultant is very often overkill. It’s like using a sledgehammer to crack a nut or a grenade to dig a hole when a shovel would do just as well — or better.

 
Back to that dead cow…

In 1913, the Ford Motor Company changed manufacturing forever by introducing the assembly line. That change seems so obvious to us now but at the time, it was a revolutionary innovation. It was an innovation borne when Ford employee Bill Klann visited a slaughterhouse and saw the similarities between the process of breaking down a dead cow’s carcass and the process of building an automobile engine. Instead of each butcher performing a specific task as the carcass moved along the line, Klann envisioned an automobile moving along a similar line, as employees performed their individual tasks in turn. His unique, reverse analogy was the spark that ignited a world-altering innovation.

Your water rate study is also like that dead cow, and your process is like hiring a surgeon to break it down with a scalpel, rather than doing it yourself with a proper set of butcher’s knives and some expert guidance. Instead of looking at a rate study as a massive project that only a highly-paid professional can complete, making it feasible only infrequently, think of it in manageable, incremental steps that you can easily do yourself. With the right tools, you can convert your process from a time consuming, expensive rate study completed by a consultant every 5-10 years, into an ongoing practice of rates management that you can accomplish yourself in a matter of hours per year. Waterworth is just such a tool, and our support team can provide all the guidance you’ll need.

 
Rate study by consultant

When performed by a consultant, a rate study becomes an expensive project, completed by someone outside the organization. It is, by necessity, thorough and comprehensive — the time and expense involved mean a utility will expect to get their money’s worth, and rightfully so. But more often than not, that thoroughness is overkill — it’s like the sledgehammer or the grenade.

The process of hiring a consultant can also be an administrative nightmare. You have to issue a Request for Proposals (RFP), collect and review those that come in, and finally award the contract. Utility managers are often unsure of what they need a rate study to accomplish, so they’ll allow the consultant to dictate what should be included, who will sometimes compound the level of overkill so they can justify their high prices.

Then when the consultants finally submit their final report, it’s almost immediately out of date. If you are given a multi-year schedule of rate increases, it becomes less relevant and more inaccurate as time passes and circumstances change. It’s much better to have a model that is always up to date, rather than be surprised when you find, at the end of the consultant’s schedule, that your increases have failed to meet your objectives. But the consultants have left, taking their models with them, leaving you to rely on an aging rate study to guide you in addressing today’s new situation.

Instead of commissioning a rate study as a one-off project, adopt a practice of continuous, ongoing rates management.

An innovative alternative

Fortunately, there is an alternative. Instead of commissioning a rate study as a one-off project, adopt a practice of continuous, ongoing rates management.

Just as you set your budget annually, you should also review your rates annually. And it doesn’t have to be an onerous task, especially if you’re looking at a universal, across-the-board increase that doesn’t require a deep-dive into billing data. With Waterworth, this kind of review can usually be accomplished in just a few hours, once per year.

It’s never too late or too early to get started. Your board will become accustomed to this new process and will welcome the improved quality of information and clarity of presentation. With Waterworth and our process of rates management, you’ll also have ongoing support, whenever you need it. And we won’t charge you extra to revisit your model when circumstances or assumptions change.

Let’s take a closer look at some specific examples of why, how, and when you can incorporate Waterworth into your process.

 
Scenario 1:
You need to perform a rate study but haven’t yet done one.

You know you need one either because your rates haven’t been updated in ages and you suspect they’re too low, or because you’re reaching the end of a previously established schedule of rate increases.

Whatever the reason for the need, you’re leaning towards engaging a consultant. Perhaps you have always used consultants, so that’s what you believe you need to do again. It may also be what your board is comfortable with. But just because it’s what you’ve always done in the past, that doesn’t mean it’s the only way, or even the best way.

This is the ideal time to adopt a new process. Waterworth can help you compile the information you’ll need, upload it into the software, and get started on creating a model to meet your objectives, both immediate and long term.

 
Scenario 2: 
You’re currently in the middle of a rate study.

Once you complete the project, you’ll be in an excellent position to put that information into a Waterworth model, which will set you up for efficient, annual reviews going forward. With Waterworth’s affordability, you can likely even get started without needing approval from your board.

 
Scenario 3:
You have just completed a rate study.

Awesome. Now you can put that static information into a Waterworth model, adjusting your business processes so you stay on top of things by updating the information annually and making small tweaks to your rates, as-needed.

For example, you’ll be able to compare your actuals to the prediction made in the last rate study. How accurate was it? Much like a weather forecast, the best prediction is made with the information at hand, but reality often plays out differently.

A good example of this scenario is Waterworth customer City of Longmont, Colorado. Longmont completed a rate study with a consultant, then switched to using Waterworth to help stay on track with their plan. Waterworth is also helping reassure staff that the scheduled rate increases will continue to meet their objectives.

With Waterworth, Longmont has:

  • Input a new years’ worth of actuals;
  • Recalibrated their Long Term Financial Model (LTFM);
  • Adjusted for changes in Capital Expenditures (CapEx).

In a matter of hours, Longmont was able to update the static information from the consultant’s rate review with current data, ensuring their schedule of rate increases remains on track to meet their needs. And they can repeat the process annually, quickly and easily, using up-to-date data that will allow them to adjust their planned rate increases if they need to, as circumstances change.

 

Granted, there are some situations where a consultant’s expertise may be necessary, such as merging separate water systems; a complicated matrix of customer categories and associated rates; or a challenging equity problem among those customers that requires an in-depth cost-of-service analysis. But for anything else, including revenue shortfalls of any size and changing the rate structure itself, there are tools and technology that will empower you to do it yourself. So next time, think about reaching for a good set of knives instead of calling in a surgeon. Your dead cow will thank you for it.

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