Measuring Usage and Setting Rates

EDUs or Meters: How to Measure Usage

To understand rates, it is important to understand that there are two ways to set rates: Equivalent Domestic Units (EDUs) and metered amounts. One EDU is approximately 5,000 gallons and is considered to be the average used by a household of four people. One domestic household pays for one EDU and each business is set at a certain number of household EDUs. There are meters which measure the amount of water going into a house. For wastewater, the amount assumed is the same as the amount of water going into a house. In some communities there are no water meters (flat rate) or there may not be a municipal water supply. These areas may only have individual wells. In these areas, a flat rate can be set by using the EDU system.

How to Set Rates

Rates for water or wastewater treatment should be low enough that they are affordable to the user yet provide enough income to cover district expenses. The rates must cover collecting, treating and discharging wastewater or producing, treating, storing, and distributing water. This can be broken down into debt service and operating expenses, including fixed and variable costs. The operating ratio is:

Total Revenues ÷ Total Operating Expenses = Operating Ratio

• The minimum operating ratio for a utility is one (1). Anything less than one requires the utility to review their rate structure as expenses are exceeding revenues.
• 1.15 is a generally accepted operating ratio for systems with > 2,000 connections.
• 1.35+ is a recommended operating ratio for systems with < 1,000 connections.

The coverage ratio is:

Income Available for Debt Service ÷ Annual Debt Service Expenses = Coverage Ratio

• Indicator of system's ability to repay debt
• < 1 banks, bonds buyers, and lending agencies are unlikely to lend money to system
• 1.25 is a normal target for larger systems

1.9 can often be preferred for small systems.

Resources in Rate Setting

CAP Finance is a system for asset management financing to be used in conjunction with a rate study to develop rates.

A good resource is North Dakota Small Community Water System's Handbook on Developing and Setting Water Rates [PDF], written by the Midwest Assistance Program. Please note that the rate guide is for water systems and has a broad application. The guide may be used to understand basic terminology on setting rates.

Developing and Setting Water Rates

How to pass rates

Once rates have been determined, a rate ordinance must be passed. A sample rate ordinance [PDF] is included in the sample documents section of this guide. A hearing should be held on the ordinance. A sample public hearing notice [PDF] and an accompanying sample press release [PDF] which can be sent to local media to notify them that the ordinance will be discussed and voted upon are also included in the sample documents section. The steps to revising a rate ordinance are provided for you at the end of this section. A guide from Midwest Assistance Program (MAP) called Small Community Water System's Handbook on Developing and Setting Water Rates [PDF] is also included which gives more specific advice. Consultation with nearby municipalities can be useful for obtaining additional information on nearby rates and whether they are based on meters or EDUs.

Indiana Code 13-26-11-12 states that notice of hearings for a rate ordinance must be published two times, one week apart with the second time seven days prior to the meeting. This is different than that for a town and should be examined more closely within the Indiana Code.

Please see the prior section for other resources and example documents relating to rates.

Rate Studies

Provided below is an outline of items that your district may wish to consider when determining rates and usage.

1. Types of Utility Ownership
   1. Municipality
   2. Conservancy District
   3. Regional District
   4. Not for Profit
   5. Private (Investor Owned)
2. Types of Revenue Determination
   1. Revenue Requirement Basis
   2. Rate of Return Basis
3. Test Year
   1. Historical
   2. Adjusted
   3. Future
4. Adjustment to Historical Financial Information
   1. Fixed Known and Measurable
   2. Inflation
   3. Operation and Maintenance
   4. Extensions and Replacements
5. Alternatives Shown in a Rate Study
   1. Construction Project Alternatives
   2. Financing Source Alternative
   3. Grant Funding
   4. Return Levels
6. Types of Rate Increases
   1. Across the Board Increases
   2. Non-Across the Board Increases
      1. Cost of Service Studies
7. Schedule of Rates and Charges (Rate Tariff)
   1. Recurring Charges
   2. Non-recurring Charges
8. Effect on Average Monthly Residential Bill
   1. IURC Average
   2. IDEM Average
   3. Economic Status of Community
9. Types of Rates
   1. Flat Rates
   2. Metered Rates
      1. Minimum charge
      2. Service charge
   3. Rates Based on Meter Size
   4. Rates Based on Members in Household
10. Other Rates and Charges (Non-recurring)
    1. Capacity Charges
    2. Connection Fees (initial)
    3. Hook On Fees
    4. Connect and Disconnect Fee
    5. Summer Credits
       1. Lawn watering
       2. Swimming Pool
11. IURC Jurisdiction

Steps to Adopting a Rate Ordinance Revision

1. Drafting the ordinance: The town council / water utility board may appoint a committee to develop the revision, direct staff to develop the revision, or seek assistance in the development of the revision.
2. Accepting it for Consideration: The town council / water utility board should revise the draft as needed, then accept the draft of the ordinance, (this is not adopting the ordinance, merely accepting it for consideration.) This should be done at a regular meeting of the town council / water utility board. The town council / water utility board will schedule a public hearing for the proposed ordinance.
3. Publishing Notice: Notice of the public hearing should be published. Indiana Code 13-26-11-12 states that notice of hearings for a rate ordinance for a district must be published two times, one week apart, with the second notice seven days prior to the meeting. The process of notice must be started at a minimum of fourteen days prior to the hearing. This is different than that for a town and should be examined more closely within the Indiana Code.
4. Making it Available for Viewing: During the time period between the meeting where the ordinance was accepted for consideration and the public hearing, a copy (or copies) of the ordinance should be placed in one or more accessible public places where interested members of the public can easily review the ordinance. Examples include town halls, utility offices, and the nearest public library.
5. Public Hearing: A public hearing for the ordinance should be held. It is advisable to post notice of the meeting, read the ordinance at the meeting, and receive public comment on the ordinance. The ordinance can be adopted at the meeting or revised at the meeting, or the meeting can be a "comment only" format. Whichever method is chosen, ensure the advertised announcement reflects the action to be taken.
6. Adopting the Ordinance: The ordinance is adopted, either at the public hearing itself or at the next regular meeting of the Town Council after the hearing.
7. Publishing the Adopted Ordinance: Once adopted, the full text of the ordinance should be published in the legal ads of two local newspapers and placed in the official meeting minutes and ordinance records.
8. Implementation: Implement the new rates.