A database utility rate model for cost recovery: financial cost allocation.

• Author: Eggeman, Gail L.

Database management technology has enabled the City of St. Petersburg, Florida, to establish an annual, equitable rate structure for the accounts of its major utilities--water, wastewater, reclaimed water and stormwater.

Annual utility rates in St. Petersburg, Florida, historically have been increased by an incremental percentage approach. The public utility fund (PUF) budget is a consolidated cost pool for potable water, wastewater, reclaimed water and stormwater. In the past, rates were increased each year based on the percentage increase in the PUF budget over the previous year. This process was supplemented every 8 to 10 years with a detailed cost-of-service and cost-allocation study performed by an outside consultant. Now, city staff completes an annual rate study in less than one hour using a database utility rate model.

It became apparent that the incremental percentage approach was not the most equitable allocation of the costs to the various types of services provided or for the allocation of the cost increases to the various components of the budget. In 1987, the city established a goal to complete an annual rate study and set utility rates based on the "cost of service." The work was to be performed by city staff, and an annual report on the rate study was to be prepared for publication and distribution.

This article describes how and why St. Petersburg's database utility rate model was developed and the stages and sequence of its development. Further, the article presents the results of the city's effort to provide timely and accurate rate information for budget decisions, as well as the establishment of an annual, equitable rate structure for total cost recovery. The results of this work and the efficiencies achieved in St. Petersburg may be of interest and benefit to other agencies facing similar problems or seeking improvements to current methods of rate setting.

A Cash Needs Approach

The initial step was to define the process that would eventually result in utility rates for the city's 88,000 potable water (PW) accounts, 78,000 wastewater (WW) accounts, 7,000 reclaimed water (RW) accounts and 85,000 stormwater (SW) accounts. The work included allocating to the four PUF utilities approximately 1,500 budget line items consisting of 54 different organizations with six object categories per organization and 10 codes per object category.

Organizations represent major cost centers and include such areas as treatment plants, well fields, the department director's office, pumping stations, laboratory, etc. The object categories are used to identify costs within each organization for personnel, personnel benefits, commodities, contract services, fund transfers and capital outlay. The codes within each object category are used to provide more specific identification of the type costs. For example, codes within the personnel benefits category are used to identify costs for health benefits, social security, pension, etc.

Each of the 1,500 line items is categorized as either a customer, fixed or variable cost or a combination of these type costs. These costs, as defined, are then allocated to the customer base by the type, size and number of services. The 1988 rate study, performed with some computer assistance, required three to four months to complete. A Lotus 1-2-3 program was developed for the 1989 rate study; this reduced the completion time to three to four weeks. In 1990, the city staff implemented a utility rate model using database management and was able to reduce the time to allocate costs and compute rates to less than one hour.

The revenue...