In the initial part of this series, we delved into how subpar work order processes can negatively impact the financial stability and asset renewal of electric co-ops or utilities. The second article examined the insufficient use of regulatory accounting. Now, we turn our attention to the necessity of maintaining rates that cover the cost of service delivery to customers and the adverse effects of postponing rate increases.

Why Are Rate Increases Delayed?

Several factors contribute to the postponement of rate increases, including:

• Poor management planning

• Inadequate financial reporting and business planning that fail to highlight necessary expenditures

• A cautious board wary of raising rates

Procrastinating on rate increases merely defers the inevitable. Conversely, routine rate adjustments can acclimate customers to how your co-op or utility meets their needs.

What Criteria Do Bond Rating Agencies Use?

Bond rating agencies emphasize the importance of regular rate increases in their evaluation process. According to Moody’s criteria:

• AAA rating - “Excellent rate setting record”

• Ba rating - “Consistent record of insufficient rate setting”

Effective business processes should integrate planning and forecasting tools to provide concrete evidence to the Board that a rate increase is necessary, along with the consequences of not implementing such increases.

Regularly conducted cost of service studies, whether internal or outsourced to a consulting firm, can significantly enhance business planning.

Utility Accounting and Rates Specialists provides on-line/on-demand courses on operations and construction project accounting, rates, and management for new and experienced co-op and utility professionals and Board Members. Click on the button to see courses that will enhance your career skills and provide value to your organization!

What Are Customer Expectations?

Customers expect reliable service. While they may grumble about rate increases, they will express greater dissatisfaction if service reliability declines.

The rate increase process should involve public Board meetings, workshops, and listening sessions to help the public understand the need for rate adjustments.

While these sessions might not always lead to greater acceptance, they demonstrate the co-op or utility’s commitment to due diligence and public engagement in justifying rate changes.

Consequences of Delaying Rate Increases

Postponing necessary rate increases can lead to several negative outcomes:

• Reduced system reliability

• Increased employee turnover if salary hikes do not match those of peer utilities

• Deterioration of essential equipment needed for reliable service

• Inadequate planning for power supply or transitions

• Slower adoption of new technologies that could enhance long-term reliability and cost-efficiency

• Lower bond ratings

Review your systems and educate your Board and ratepayers to potentially achieve a more favorable outcome in the rate approval process.

Next: While technology is not a panacea, it can significantly enhance your processes.

How I Can Assist

If you are looking to enhance your processes in these areas, I can help. Feel free to contact me with any questions, or we can schedule an appointment to discuss your improvement needs in more detail.

Thank you for reading this article. Please send me any suggestions for other topics. I am always looking for ways to address current issues and serve as a resource for utilities and electric cooperatives.

About Russ Hissom - Article Author

Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.  

Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.

The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.