Guiding the PUB’s regulatory work is the principle of user-pay utility rates. It is only when rates for water and wastewater services are set on a user-pay basis that they send the correct price signal to ratepayers. This allows customers to make decisions about their use of the services. Appropriate rates allow for the full appreciation of the true value of services being provided and will enable an owner to better meet the objectives of sustainable development established by the province.
Fair and equitable rates are highly dependent on the accuracy of the underlying utility records. Many operating and administrative resources are shared between municipal operations and the utility. The appropriate allocation of costs is essential to avoid inappropriate cross-subsidization.
The customer service charge generally consists of costs which apply to all customers regardless of how much water they use or effluent they discharge. The total of these costs is divided by total number of customers connected to the system (whether they use water service, wastewater service, or both), to derive the Customer Service Charge for the billing period (monthly, quarterly or annually).
The charge includes utility administration costs, such as meter reading, customer billing and collection, and a proportion of other general administration costs, including office salaries, office expenses, auditing and similar costs.
Water and wastewater utilities will frequently issue debentures in order to finance large capital expenditures. All municipal borrowings, including debentures, must be approved by The Municipal Board.
Annual debenture costs (loan principal repayment plus interest), incurred to repay the debenture debt of the utility are an essential consideration for rate determination. Debenture revenue must be included in the calculation of rates.
Whether or not debenture servicing costs are better borne through utility rates or taxes will vary with the circumstances. This determination is made by the municipality and residents.
Where a municipality determines that debenture payments are best recovered through utility rates, they must first apply to the PUB for approval in principle. Once approval has been received, the municipality must meet the requirements of The Municipal Board, using the same process as they would for a borrowing that would be recovered through taxation. Once the project has been completed and the final true costs are known, the municipality must return to the PUB for final approval of the debenture surcharge. Once final approval has been given the municipality may begin charging ratepayers.
Reserves are often created to deal with unforeseen expenses or anticipated but undefined future capital projects. As well, the building of reserves is encouraged in situations where capital improvement or significant capital requirements are anticipated.
However, building excess reserve balances may create intergenerational inequities, with the ratepayer of today paying for services from which they will not benefit. In examining utility reserves, the Board seeks to balance sufficient savings for unforeseen circumstances with the affordability of rates for current water and wastewater ratepayers.
Working capital surplus
The PUB has set a recommended minimum working capital balance of 20% of operating expenses. Working capital represents the net liquid assets of the utility and is calculated by subtracting tangible capital assets and current liabilities from current assets. The Board takes the position that each utility should be solvent and have a buffer to mitigate against unforeseen operational deficiencies. Where a utility’s working capital balance has dropped below the 20% threshold, the Board requires that a provision equal to at least one percent of operating expenses be added to rates until the working capital balance has reached the 20 % target level.