Report Recommends Giving Customers Living Outside Of Cities Ways To Ensure Fair Water And Sewer Rates

Monday, February 24, 2014

A new report by a state commission recommends ways to ensure fair water and sewer rates for non-city customers of city utilities.  The report is the result of complaints by residents of Piney Flats in Sullivan County who receive water and sewer service from Johnson City that they, like all non-resident customers of the city, are charged rates double those charged city residents without justification.  A bill by their state representative, Timothy Hill, that would have capped their rates at 150% of rates charged city residents was sent to the Tennessee Advisory Commission on Intergovernmental Relations for study.

The commission’s report points out the unintended consequence of rate caps, which have a tendency to become standard rates, and recommends instead giving outside customers representation on city utility boards or an appeal process or both.  Echoing a 2008 report by the state’s Water and Wastewater Finance Board (WWFB), the Commission said that rates should be both reasonable and justified and that whether a customer lives inside or outside the city is not enough on its own to justify a rate difference.

The commission’s executive director, Lynnisse Roehrich-Patrick, said that this is not an isolated issue.  “Water and sewer rates are often much higher for non-resident city customers than for city residents, although they may be comparable to rates paid by utility district customers located outside cities in more rural areas.  The crux of the matter seems to be that non-resident city customers don’t have the same ability to complain to someone who either answers to them at election time or is independent of the utility.”

Unlike city residents, non-resident customers have no recourse to elected officials when they believe their rates are unfair.  And while utility district customers can take rate complaints to a state board, city utility customers cannot.  City residents who feel their rates are unjustified can complain to those they elect, who either set rates themselves or appoint those who do.  Likewise, utility district customers can complain to their boards, which are either elected directly by the customers or appointed by the county mayor or executive for whom all county residents vote.

Customers of utility districts can appeal rate decisions to the Utility Management Review Board (UMRB) housed in the Comptroller’s Office, but city water utilities are regulated by the WWFB, also housed in the Comptroller’s Office, which does not have the UMRB’s authority to handle rate complaints.  Investor-owned utilities are regulated by the Tennessee Regulatory Authority and cannot raise rates without their approval.

Of the 199 cities that provide water service outside their city limits, 176 charge rate differentials ranging from 4% to 176% more for water service; 23 charge the same rates inside and outside the city.  Thirteen have outside water rates that are exactly double; 29 have water rates that are exactly one and one-half times their inside rates.  Rates for sewer service follow a similar pattern.  Although utilities commonly use rate studies to determine what to charge their customers, the difficulty of figuring out what it costs to serve customers in different parts of their service area may account for some of these seemingly arbitrary rate differentials.  The commission did not recommend separate cost studies for these areas.

The commission’s concerns about rate caps stem from the experience of other states.  For example, Florida caps water rates for non-resident city customers at one and one-half times the rate charged residents.  Outside rates cannot exceed one and one-quarter times inside rates without a public hearing.  Rate consultants there estimate that about half of Florida’s utilities have set their outside rate at exactly that 125% threshold.  Wyoming gives utilities that receive state grants or loans the option of setting rates for outside customers at a maximum of 125% of the rate charged customers inside the city or the actual cost of providing water service.  Those that don’t receive grants or loans can charge up to double the rates paid by city residents.  Most of Wyoming’s utilities charge at or near the 125% cap.  Colorado has had a similar experience with caps imposed on the interest rates charged by payday lenders.

The full report is available on TACIR’s web site at http://www.tn.gov/tacir/pubs_by_date.html.  For more information, contact Cliff Lippard at cliff.lippard@tn.gov.  

The Tennessee Advisory Commission on Intergovernmental Relations (TACIR) serves as a forum for the discussion and resolution of intergovernmental problems and provides high quality research support to state and local government officials to improve the overall quality of government in Tennessee and to improve the effectiveness of the intergovernmental system to better serve the citizens of Tennessee.


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