Rural Water Rate Study Puts Town on Path of Stability

NORWOOD, N.C. – The Town of Norwood, N. C. was faced with the costs of servicing the new debts required to upgrade their water and wastewater system, but a rate study by the North Carolina Rural Water Association put the community on track to sustainability.

“The town had recently taken on additional debt because of some big projects,” explained NCRWA Management Circuit Rider Marty Wilson. “They didn’t have to reserves to pay for those projects, so they had to finance them with loans.”

Norwood’s past practice was to set rates to cover the basic operations and maintenance expenses but did not budget for the cost of depreciation. This can leave systems without reserve funds when it’s time to replace equipment or make system improvements. Wilson’s rate study found that Norwood generated $1.3 million in revenues annually through water and sewer bill payments, but that total expenditures for water and sewer total $2.1 million. As a result, the remaining $800,000 shortfall had to be covered from other areas of the town budget.

“Over a period of years, they hadn’t increased their rates,” Wilson said. “They were gradually getting further and further behind.”

It’s a common problem for water utilities, because of the costs of treating water and the political pressure of town councils to keep rates low.

“It’s the rule, not the exception,” Wilson said. “I’ve done hundreds of rates studies and the vast majority of towns I’ve studied are in the same situation. They have artificially low rates and have not funded the future capital projects necessary to maintain the system.”

Norwood’s Town Administrator John Mullis first learned of North Carolina Rural Water’s rate studies from Terry Greene, a NCRWA Circuit Rider that had been assisting them with water operations.  Wilson was conducting a rate study in Denton, N. C. and offered for Mullis to observe the process and attend a presentation to the Denton Town Council.

“After he came along and saw the process, he was very in tested in a rate study for Norwood,” Wilson said.

Wilson began reviewing Norwood’s financial and operational records.

“My goal is to simplify the process,” Wilson said. “Council members are not usually water professionals or accountants.”

Wilson begins by computing the cost of water service, operation and maintenance costs, debt service and capital costs.

“The service they are providing to their citizens has coast,” Wilson said. “So, have to find the true cost of that service. Then we can calculate the rates needed to provide that service.”

Wilson and Greene presented the results of the rate study to the Norwood town council. In his estimate, a 63 percent rate increase was needed to immediately to correct the shortfall. The town’s “declining block” rate structure was also cited as a reason several utilities grant applications the town has submitted have been rejected. Under the declining block structure, the per-unit price of water decreases as water consumption increases, and as such does not reward water conservation, a key component in scoring of such grants.

“How do most other towns and cities handle adjusting rates?” asked Commissioner Robbie Cohen.

“This can’t be done overnight,” Wilson said. “Every town is different, and there is no ‘one size fits all’ approach.”

After discussion, the town council voted to end the declining block rate structure, to make a 15 percent rate increase and to schedule yearly increase until the rates can meet Norwood’s financial needs.

“I was extremely impressed with the Norwood council,” Wilson said. “It was a shock – they realized they were behind, but they didn’t know how far. But they didn’t hesitate to address the problem. Once they had the information they needed, they were very proactive.”