The basic rationale of this subject is that the cost of providing water service to various classes of customers can be determined and that water rates should follow cost of service. Rates are computed using two basic methods, viz., Revenue-Unit Method (RUM) and Quantity-Block Method (QBM). While both methods adopt the socialized pricing concept by the application of the principle of cross-customer subsidy, each method has its own advantages and disadvantages over the other.

1. WATER-RATE STRATEGY

Water rates could be arbitrary, i.e., determined without serious study and planning. Arbitrary rates may prove to be very low and will not make the district self supporting or they may be too high as to defeat the purpose of serving the majority of water users, hence, the need for a good rate strategy. The general scheme on how the district should go about determining a rate structure that is fair and acceptable to the majority of water users and/or when to apply it is termed water-rate strategy.

In its operation, the district must consider two basic premises.

• All water drawn from the water system must be accounted and paid for.
• Rates must be high enough to meet the financial requirements of the district (for self-sufficiency), but low enough to be within the ability to pay of the majority of users (for public service).

A good rate strategy should consider the following factors:

• Ability to pay of the users - socio economic condition in the district.
• Cash requirements of the district - operational expenses and capital investment.
• Enforceability of the rates - can be justified and made acceptable to the public.
• Availability of reliable data - basis of realistic computations.

A good rate structure should combine the following chief characteristics:

• Revenue oriented, which gives primary consideration to financial requirements.
• Service oriented, which is primarily designed to favor the low income group.
  

2. REVENUE-UNIT METHOD (RUM)

This makes use of an arbitrary term called Revenue Units (RU) into which water consumption, paid at different rates, is converted to obtain a common reference to simplify computation. This method is revenue oriented, with a higher Minimum Charge (MC) and a uniform Commodity Charge (CC) regardless of consumption.

Most applicable to newly-formed water districts.
More applicable to districts with lesser concessionaires and with abundant water supply.
Applies the cross-customer subsidy in the first 10 cu.m. of consumption in the form of minimum charge, based on the size of connection.
Applies a low uniform commodity charge regardless of consumption rate.
The effective cost of water tends to decrease as consumption increases.
RUM Illustrative Exercise is shown in Appendix A.

3. QUANTITY-BLOCK METHOD (QBM)

This is based on the basic principle that high levels of consumption would have higher costs. It is less revenue oriented and more public-service oriented than RUM. This method makes use of quantity blocks (QB), 10 cu.m. per block, in which consumers pay uniform unit price per block and where the rates per block increase on the basis of assigned conversion factors.

Most applicable to more established and already going concern water districts.
More applicable to districts with relatively limited sources and where average consumption is relatively higher.
The minimum charge varies similarly as in the RUM.
The commodity charges increase as consumption increases in proportion to consumption rate.
The effective cost of water tends to increase as consumption rate.
QBM Illustrative Exercise is shown in Appendix B.

4. STANDARD METHOD

This utilizes a combination of the two methodologies, the Revenue Unit Method (RUM) and the Quantity Block Method (QBM). Water rates are computed in a manner whereby the Minimum Charge (MC) is controlled and the remaining revenue requirements are spread through the Commodity Charges (CC). This method has been devised to avoid a very high MC and at the same time to minimize the increments in the CC. The advantages of both RUM and the QBM are enhanced and their disadvantages discarded to come up with a rational schedule of rates that optimizes revenue generation and is socialized in structure as well.

Reduces the relatively high MC determined under the RUM by a certain percentage to make it affordable to the low-income consumers.
Discards the uniform CC obtained under the RUM since such pricing results in a reduced unit cost as consumption is increased.
Recovers the "loss revenues" as a result of the reduction of the MC obtained under the RUM by increasing the CC obtained under the QBM..
The over-all objective of meeting the cash requirements remains.
Illustrative Exercise for Combination Method is shown in Appendix C.

5. ILLUSTRATIVE EXERCISES

For the purpose of illustrating the various principles and techniques of computing water rates, a well established and a going concern hypothetical utility, the Maunlad Water District, has been developed. The district had years back undergone comprehensive improvements and is now faced with the problem of coping with the increasing cost of operation and maintenance and the debt servicing. Following the district's rate strategy as embodied in its 10-year cashflow projection, it is now imperative that this year's rates be increased to meet cash requirements. As in previous year's rate increases, the district has to take into serious consideration the various requisites of water rates.

Records of the Maunlad Water District show the following information:
-------------------------------------------------------
Average Monthly
Customer Meter Number of Consumption per
Class Size (in.) Connections* Connection (cu.m.)
-------------------------------------------------------
Residential/1/2 9,800 32
Government 3/4 60 62
1 3 120
1-1/2 1 250
2 1 600

Commercial/ -1/2 850 63
Industrial 3/4 65 200
1 15 552
1-1/2 2 1,000
2 11 2,050
3 2 3,000

Wholesale/Bulk 2 1 2,500
------------------------------------------------------
*All metered.

Estimated cash requirement - P2,500,000/month
Collection efficiency - 90 percent
Average income, LIG - P2,000/month

The following examples will illustrate computation of the water rates for Maunlad WD using the Revenue Unit Method (RUM), and Quantity Block Method (QBM), Combination RUM and QBM (CRQ).

a. RUM Method (RUM).

Using the above information, Table 5-1 was prepared. The date were obtained using the computations as shown in the footnotes. Note that the total RUs is 545,346 and the expected total receipts is P2,775,811.00.

Cash Requirement
Amount/Rus = --------------------------------
Total RU x Collection Efficiency

P2,500,000.00
= ------------------ = P5.09/RU
545,346 x 0.90

Using the P5.09/RU, the MCs were computed as shown in columns 8 and 9, per connection and total for group, respectively. The proposed rates are as follows:

--------------------------------------------------------------
Customer Meter Rate Per Month
Class Size (in.) Minimum Charge + Commodity Charge
(Col. 8) (Amount/RU)
--------------------------------------------------------------

Residential /1/2 50.90 + P5.09/cum in excess of 10 cum
Government 3/4 81.44 + P5.09/cum in excess of 10 cum
1 162.88 + P5.09/cum in excess of 10 cum
1-1/2 407.20 + P5.09/cum in excess of 10 cum
2 1,018.00 + P5.09/cum in excess of 10 cum

Commercial/ 1/2 101.80 + P10.18/cum in excess of 10 cum
Industrial 3/4 162.88 + P10.18/cum in excess of 10 cum
1 225.76 + P10.18/cum in excess of 10 cum
1-1/2 814.40 + P10.18/cum in excess of 10 cum
2 2,036.00 + P10.18/cum in excess of 10 cum
3 3,664.00 + P10.18/cum in excess of 10 cum

Wholesale/Bulk 2 3,054.00 + P15.27/cum in excess of 10 cum
---------------------------------------------------------------

b. QB Method (QBM).

Using the same above information, Table 5-2 was prepared. The data were obtained using the computations as shown in the footnotes. Note that the total equivalent volume is 797,102 cu.m.

P2,500,000
Amount/cu.m. = -------------- = P3.48/cu.m.
797,102 x 0.90 (1st QB)

The amount per cubic meter (proposed rates) of water for the different quantity blocks by customer class that will yield the required total revenues are as follows:

-------------------------------------------------------
Customer Quantity Blocks
Class 1st 2nd 3rd 4th 5th
-------------------------------------------------------

Residential/ P3.48 P4.18 P5.01 P6.02 P7.24
Government

Commercial/ 6.96 8.35 10.02 12.04 14.48
Industrial

Wholesale/Bulk 10.44 12.53 15.03 18.06ÿÿ21.72
-------------------------------------------------------

Table 5-3 shows the expected receipts that could be derived from the rates which total P2,774,461.00.

To determine the reasonableness of the above rates and whether the minimum charge for residential class is within the ability to pay of the low income group (LIG), compute and proceed as follows:

Based on the above unit price, a residential connector using 10 cu.m. (the mean low consumption) will pay P34.80/month and a residential connector using 32 cu.m. (the average consumption) will pay P138.74/month (P34.80 + 33.44).

P34.80 is also about 1.74 percent of the estimated average income of P2,000 per month of the low income household. This amount is well within the ability to pay of the LIG considering that the ceiling for the MC is 5 percent of the average income of the LIG. In this case, revision of rates is no longer necessary. Hence, the schedule of rates under this scheme is deemed reasonable.

c. Standard Method (SM)

Reduce by 30% as computed using RUM and the balance of the MC distributed to the four remaining quantity blocks as in the QBM. As earlier computed, the MC of P50.90 for a 1/2" residential connection using the RUM is quite a big disparity from the P34.80 obtained using the QBM. On the other hand, the CC of P5.09 (above 10 cu.m.) from the RUM is higher than the P4.22 (11-20 cu.m.) and P5.07 (21-30 cu.m.), and lower than the P6.08 (31-40 cu.m.) and P7.30 (over 40 cu.m.) CCs as developed from the QBM.

From the results of computation of rates using both RUM and QBM, compute the corresponding total minimum and commodity charges as follows:

-------------------------------------------------------
Total
Minimum Charge Commodity Charge Expected
Method (1st 10 cu.m.) (Remaining 4 blocks) Receipts
-------------------------------------------------------

RU P642,032.00 P2,133,779.00 P2,775,811.00
QB 409,178.00 2,365,283.00 2,774,461.00
Combination 449,422.00* 2,326,389.00** 2,775,811.00
-------------------------------------------------------
* 70 percent of total MCs under RUM.
** Difference between total receipts under RUM and total MC under SM.

Comparing the revenues from the above figures, the MC under the SM would be increased by P40,244 (9.8 percent) over that of QBM. On the other hand, the total revenues from the CCs under the SM would be P35,143.00 (1.5 percent) less than that of the QBM.

Since the total MCs is increased to P449,422 (SM) from P409,178 (QBM), only P2,326,389.00 (SM) is then needed to be earned instead of P2,365,283.00 (QBM) from the CCs. Hence, the adjustment factor below is used.
2,326,389.00
Adjustment Factor = ----------------- = 0.98
2,365,283.00

Proposed Rates, Standard Method (SM)

-------------------------------------------------------
Q u a n t i t y B l o c k
Customer Class 1st 2nd 3rd 4th 5th
-------------------------------------------------------

Res/Gov MC (RUM)x 0.7 P4.10 P4.91 P5.90 P7.10
Com'l/Ind'l MC (RUM)x 0.7 8.20 9.82 11.80 14.20
Wholesale MC (RUM)x 0.7 12.30 14.73 17.70 21.30
-------------------------------------------------------

Note: Rates for the last four blocks 0.98 times the

obtained by the QBM.

Going through the computation of proposed rates using the three methods, comparison was made on resulting rates, Table 5-4, and on earnings by MCs and by CCs in different quantity blocks, Table 5-5, to show the differences as described earlier in the chapter.

Under the RUM, MCs vary with the meter sizes (the bigger the size, the higher is the charge) and the CCs after the first ten (10) cubic meters is uniform, this time irrespective of meter sizes except that for commercial/industrial, which is twice that of residential/government and wholesale/bulk which is three times as much. These are the typical characteristics of the RUM. Under the QBM, the MC disregards the sizes of connection but considers customer classification instead, and the CC increases with consumption through the different quantity blocks (consisting of 10 cu.m./block). Under the SM, the MC (RUM) is reduced and the balance of lost revenues recovered from the CCs which are likewise divided into blocks of 10 cu.m. each as in QBM with ascending rates.

On the basis of comparative earnings from the MC and CC, the MC obtained through the RUM comprises about 23 percent of the total revenues as compared to about 15 percent and 16 percent under the QBM and SM, respectively. The remaining balances are earned by the CC (RUM) and by the CC (QBM & CRO). It should be noted that slight differences in total earnings exist and which may be attributed to rounding off of figures.

It can, therefore, be noted in the above comparison that the Standard Method is a "compromise" method. RUM and QBM may be considered as extremes, while the Standard Method may be considered at the middle.