Chapter 1

Requisites of Water Rates

1. GENERAL REQUISITES

Water rates are instruments for recovering the cost of providing adequate water service to customers and must reflect not only the fixed costs of the supply system, but also on the operating expenses of the water district. The cost of service should be equated with revenue requirement for the purpose. Nevertheless, rates should satisfy the following general requisites:

a. Adequacy. The revenues generated out of a water-rate schedule must be sufficient to meet the various elements of revenue requirements of the district. The revenues should be enough to promote the district's growth and to ensure its viability. The rates should lead to stable revenues.

b. Public Service. The rates must be set at a reasonable level to reflect public service. Higher rates will have some effects on consumption. If the rate increase is relatively small, this effect will probably be minimal; if substantial, this effect may be severe.

c. Equitability and Socialized Pricing. The rates must be able to cover the cost of providing the service and to equitably distribute the cost of service to all classifications and sizes of connection. Rates should be made where some minimum level of consumption would be billed at a relatively low fixed cost to benefit the low income group while those who use greater quantities of water would be made to pay higher costs. Simply stated, higher levels of consumption would have higher unit costs.

d. Affordability Level. The rates must be kept affordable to low income group (LIG). The LIG is defined as that sector of residential consumers having the lowest capability to pay for water service. It has been ascertained that a water consumption of 10 cu.m. per month will provide for the basic requirements of those in the LIG. For this purpose, the minimum charge for 1/2" residential connection should not exceed 5% of the average income of the LIG in the service area. This is a measure of the reasonableness of rates and has been regarded as the maximum amount that this income group can pay for their monthly water bill.

e. Enforceability. The rates must be fair and reasonable. They should be justifiable and acceptable to the public. This, in essence, is the rationale why rates are subjected to public hearing as a requisite for confirmation.

f. Water Conservation. The rates must encourage broad water usage in order to achieve economies of scale, i.e., full utilization of system capacity and overall benefit to the community in terms of economic development, health and sanitation. The rates should promote an efficient allocation of water resources, thus discouraging unreasonable and wasteful usage of water.

g. Historical Continuity. The rates must reflect a sense of historical continuity, it being necessary that any rate increase should relate to a definite trend in recent years.

2. LEGAL REQUISITES

The established water rates for the water district should comply with the provisions of Sections 37 and 63 of PD 198, as amended.

a. Rates must be adequate to provide for:

(1) Reimbursement from all new customers for the cost of installing new services and meters;

(2) Revenue from all water deliveries and services performed by the district;

(3) Annual operating expense of the district;

(4) The maintenance of and the repair of the works;

(5) A reasonable surplus for replacement, extension and improvements; and

(6) Payment of interest and principal and provide a sinking fund for payment of debts of the district as they become due and establish fund for reasonable reserves.

b. The rates, after hearing had been conducted for the purpose, are subject to review by the Administration to establish compliance with the above-stated provisions. The confirmed rates are executory and enforceable after the lapse of seven calendar days from posting in a public place in the locality of the district, without prejudice to an appeal being taken by a water concessionaire to the National Water Resources Board (NWRB).

Further, LOI 700 requires, among others, as follows:

a. Ensure that the rates are not abruptly increased beyond the water users ability to pay, seeing to it that each increase, if warranted, does not exceed 60% of the current rate; and

b. The district concerned will conduct public hearings prior to any proposed increase in rates.

3. LWUA REQUISITES

a. For purposes of computing the percentage increase in water rates, the 60 percent limitation shall be based on the existing minimum and commodity charges and not on the effective billing rates.

b. In order to ensure the viability of newly formed or depressed water districts, the 60 percent limitation on the increase in water rates shall not be applicable in the following cases:

1. A water district implementing water rates inherited from its predecessor which is not a water district may establish and propose new water rates without reference to the inherited water rates. Such new water rates shall be considered as the initial water rates.

2. A water district completely operational for at least 18 months may establish and propose new water rates without reference to the old water rates implemented prior to the disruption of its operation.