July 2018

By Carl Brown, President, GettingGreatRates.com

Rates: Part II

opefully, the cost-to-serve rates article in the March

2018 issue of The Kansas Lifelineconvinced you that

you DO want cost-to-serve rates. They are adequate and fair.

You arrive at cost-to-serve rates in two phases:

1.  “Classification,” which results in a set of total costs:

fixed, variable and capacity-related. That was covered

in the last issue. And,

2.  “Allocation,” which is the process of divvying costs

out to customers. That is covered in this article. 

Consider this allocation example for the Town of


First, gather data, part of which comes from classification.

Ratewell’s basic data is shown in Table 1. Ratewell is a

small town with relatively low costs. It has a customer base

that is fairly uniform –mostly residential with 3/4-inch

meters and just a few commercial customers with larger

meters. Simple rates are appropriate here.

Appropriately, Ratewell wants simple rates. In “analyst-

speak”, they want to “allocate” costs simply, using the same

minimum charge for all customers, the same unit charge for

all volumes of use and no usage allowance.

Table 2 shows how to calculate Ratewell’s minimum

charge. Every customer would pay this $20.00 base fee

every month. That is a bit short of fair, but to keep the math

simple, something has to give.

Table 3 shows how to calculate Ratewell’s level unit

charge in dollars per 1,000 gallons. The rate of $5.00 per

1,000 gallons is the average variable cost of the water.

Another structure may be more appropriate, but Ratewell is

going for simple math. That also rules out a usage