Rate Hikes

Loudon Utilities Board is considering the rate structure needed to fund future investments in water and sewer infrastructure to meet growth projections and regulatory requirements.

General Manager Ty Ross said LUB is mandated by Tennessee Department of Environment and Conservation to make investments in sewer infrastructure. The utility is also expanding the water treatment plant and increasing capacity to handle growth, he said.

LUB is only looking at alternatives and has not made decisions about raising rates.

At a recent workshop, LUB directors heard from Jim Marshall, a representative of Jackson-Thorton, a consulting company that analyzed revenue requirements and created a presentation to explain how rates might be adjusted to pay for planned improvements.

The objective was to determine the amount of revenue needed to operate the utility and make future investments, Marshall said.

Operating a utility has different requirements than most businesses, Marshall said. No employee will get a bonus if more water is sold during a specific period, while no employee will get a pay cut if less is sold.

“As a public utility, there is no profit motive,” he said.

Fairness and equity in the rate structure is also a goal. Return on investment has to be calculated to pay for infrastructure needs based on the ability of different customer bases to pay, Marshall said. Simplicity in the structure also helps customer service representatives explain rates to customers.

All recommendations would be made in accordance with American Water Works Association standard practices, he said.

The study determined the water department needs $13.6 million in revenue, including $5.3 million for operations and maintenance, $6.8 million in debt service and $1.2 million in rate-funded capital. About 50% of revenue is required for debt service and 39% for operations and maintenance.

Most revenue must come from residential, industrial, large industrial and the Tellico Village Property Owners Association. At current rates, LUB is recovering 62% of the revenue needed to meet long-term revenue obligations — a shortfall of $5.1 million out of the $13.6 million required.

Based on revenue requirements, significant rate adjustments are warranted, Marshall said. He recommended the utility commit to fully fund the revenue requirements over a four-year period. He also said rate adjustments should recover about two thirds of the $5.1 million within two years.

The recommended adjustments for residential inside class, the largest group of LUB customers, would be an increase of $7.63 per month for a total increase of $15.27 per month after two years. The increases would generate about $3.2 million in additional revenue.

The study also examined the need for increases in sewer charges.

Total revenue required for operations and maintenance is $3.9 million. Debt service is $1.7 million, including the estimated annual debt service associated with future borrowing of $9.8 million. Rate-funded capital revenue required is $1.3 million. Total required revenue is $7.2 million.

Based on current rates and the required revenue, the sewer system is under recovering by $1.06 million and rate adjustments are warranted, Marshall said. He recommended LUB fully fund the revenue requirement over a four-year period with two years of rate adjustments designed to recover 50% of the $1.06 million shortfall.

Recommended increases to monthly residential customer charges each year would be $3.43 per month for a total increase of $6.86 per month after two years. Increases would also be applied to other classes of customers, including large industrial customers. After two years, the adjustments would have generated an annual revenue of about $550,000.

LUB Chairman Don Campbell said the need for increased investment in infrastructure — adding a 24-inch main line across the river and expansion of water treatment plants — coupled with an increase in residential and industrial use requires the utility to examine rate increases. He said the goal is to spread the increases across a broad spectrum of customers.