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User Rate Structures

User rate structures should be sufficient to generate basic operating and maintenance costs, an asset management reserve, and a debt service reduction fund to pay down outstanding loans on a system.

No one wants to pay more for water or sewer services, but many communities do not have an adequate rate structure.  This results in systems which deteriorate over time because communities lack the funds for routine or preventive maintenance.  Often, when breakdowns do occur – pump failures, for example – communities are faced with repair or even replacement costs for which they haven’t planned.

The CDBG grant is gap financing.  Communities must finance portions of projects with long-term low-interest loans, either from the Commission or from our funding partners at USDA – Rural Development.  Systems are therefore expected to generate some sort of debt service reduction fund with projects funded by CDBG.  To require each community to take on an appropriate loan, we require new user rates sufficient to generate an annual utility bill for an average user that is at least 1% of the Median Household Income (MHI) for the community.  The Commission does not require rates to be raised for existing customers.  However, rates for new customers connected as a result of the CDBG-funded project must meet this requirement. 

Let’s look at a typical example:

A small town wants to expand an existing water system to connect 200 new customers in a portion of the county which they have annexed, and they apply for CDBG funding for the project.  Considering the MHI for the community and the average usage of a customer of the system, the Commission determines that all new customers will pay $25 per month for average system use.  Suppose that existing customers currently pay only $10 for that same average usage.  Would the Commission require an increase in everyone’s water rates? 

No. We would require the higher rates for the 200 new (and all future) customers, but we would not force the system to raise everyone’s rates.  The difference between the two rates structures would be viewed as a project “surcharge,” (of $15 in this case), and that surcharge applied to the 200 new customers would be the basis for the loan required in order to obtain the CDBG grant.

Since the MHI figure varies from community to community, this approach has a leveling effect on loans required in different geographic regions of the State.

The Arkansas Natural Resources Commission does not recommend specific rates, but utility systems can obtain free help with rate structure analysis (as well as other management or operational issues) from the Community Resource Group.

CRG helps low-income rural communities construct, operate and maintain public drinking water and waste water treatment facilities through on-site technical assistance, training, educational workshops, publications, regulatory assistance and rapid financing.  They assist communities in planning, financing and developing water or waste disposal facilities, and help existing systems comply with federal and state health and environmental standards.  Their technical assistance providers can assist with operational problems, financial management assistance, rate structure analyses, training for governing Boards and system staff, financing assistance (leveraging), and applications to their Community Loan Fund.

CRG also distributes informative publications such as The Safe Drinking Water Trust e-Bulletin - a Resource for Small Water System Decision Makers, and the Community Water Bulletin.  The e-bulletin is an online publication which provides small rural water utilities with management tools and regulatory information needed to successfully run their system, while the CWB provides practical information for Directors, managers, and other system staff of small water utilities.  Both publications are free, as are visits and technical assistance by CRG personnel.