PRIVATE FIRE PROTECTION SERVICE
Conclusion of Excerpts from the Report of the Committee on This Subject of the American Water Works Association—Final Suggestions -Some Rules to Be Considered in Establishing Rates
(Continued from page 1123)
The principles which apply to establishing fair rates may be stated as follows:
- Fair and equitable rates must cover all of the operations of the water utility.
- The division of the rates among the consumers must be such as to give no undue preference to one class of consumer over another.
- In determining how the rates should be divided, the cost of the service required by each class of consumer must be determined, and the entire cost, so far as possible, divided among the different consumers who take different classes of service.
Bearing these facts in mind, your Committee will attempt to outline but one method of allocating charges, for by so doing much confusion will be avoided. The method chosen complies substantially with the system of rates which has been adopted by the Public Utility Commissions of New Jersey, Pennsylvania, Maryland, Wisconsin, and possibly other commissions.
The problem of establishing fair rates may be broadly stated as follows: Every water works plant, municipal or private, has a certain sum of money invested upon which it must pay interest or dividends, or both. In addition, it must set aside an annual reserve for depreciation, or pay annually into a sinking fund an amount sufficient to retire its outstanding bonds at maturity. It must also pay operating and maintenance expenses and taxes. If the property is exempt from taxation, they need not be included in the gross revenue required, but the principle is the same. If the plant is self-supporting, these expenses must be paid for from the revenues of the water works, whether municipal or private. The revenues must be derived from the rates if justice is to be done to all.
The problem of devising a schedule of rates which distributes the cost equitably among all classes of consumers involves two main operations, therefore:
A. Determining the gross revenue required to provide interest or dividends, or both, plus a proper allowance_ for operating expenses, taxes, and a reasonable annual reserve for depreciation or sinking fund charges as the case may be.
B. Establishing the incidence of the rates by:
1. A fair separation of the area served by the water purveyor into districts if, under the conditions of service existing in the plant, certain consumers possess the advantage of location, whereby the cost of delivering water to some is less than the cost of delivering water to others. Such a separation of area is not necessary if an average rate for the entire area may be used.
2. Subdividing the gross revenue between:
a. Miscellaneous revenue.
b. Public fire service revenue.
c. Revenue derived from the sale of water to domestic, commercial,
manufacturing and public consumers.
3. Subdividing the revenue derived from the sale of water between proportional service costs and fixed service costs.
4. Subdividing proportional service charges for water supplied between the classes of consumers as a means of establishing a sfiding scale of rates, if desired, which varies with the cost of supplying water in different quantities.
Proportional costs are kinetic costs, which vary closely with the amount of the production or output or the amount of water consumed, and, therefore, include the production or output costs. The cost of pumping and filtering is in large measure a production cost, and all operating and maintenance expenses on the used capacity of the distribution system should be charged to proportional cost.
Fixed service costs arc the static costs which do not vary with the quantity of water produced. Fixed service costs are composed of two elements:
1. The demand, capacity or readiness to serve cost.
2. The service or customer cost.
The capacity or demand costs do not vary with the output, but with the capacity which a plant must have to meet the demand without regard to the amount of water consumed. In every plant sufficient capacity to meet the maximum demand which the water utility has contracted to supply when called upon to do so must he provided in addition to the capacity necessary to meet the ordinary and usual daily demand. The plant necessary to meet the spasmodic or unusual demand lies idle for a large portion of the time. The capacity chargeable to the capacity or demand cost is the surplus capacity of the system not apportioned to fire service, which represents the capacity required to meet unusual or spasmodic demands or to provide reasonable future development. The capacity or demand cost is, therefore, chargeable to plant made necessary to meet the contractual obligations of the water utility to furnish this demand, and is in substance a readiness to serve charge. The courts and public utility commissions have recognized the propriety of a readiness to serve charge.
In addition to the capacity or demand costs, service or customer costs must be provided for. These costs result directly from individual service rendered to the customer. They include interest and depreciation, or sinking fund charges, on the cost of the service connection and meters, if the cost of installation is paid for by the water purveyor. They include the cost of reading meters, of rendering and collecting bills, of repairs to service connections, meters and appurtenances, and in the case of private fire protection service, special inspection expenses. Such costs would not accrue if the plant existed in its entirety without consumers.
The total fixed service charge is the sum of the service or customer cost, and the capacity or demand cost. Both of these costs vary generally with the size of the service connection or meter. While this is not a precisely accurate statement, it is, broadly speaking, true, and it must be remembered that what is wanted in a system of rates is not mathematical precision but simplicity, and it is necessary to make some approximations in order to arrive at a simple rate schedule.
A correct analysis of service costs clearly indicates that the separation of fixed service costs and proportional service costs is not a subtle distinction, but a rational separation based on the fundamental principle of assessing the fair cost of the service to each consumer. One consumer may desire a connection of large capacity through which a small amount of water is ordinarily taken, but which may be utilized to full capacity at infrequent intervals, whereas another may consume water in quantities reasonably proportional to the size of his service continuously throughout the year. Why should the latter pay for the utility’s readiness to serve the former? The readiness to serve bears a direct relation to the size of the plant and, therefore, to the fixed investment in the property necessary to give service on demand.
The gross revenue, which it is necessary to derive in order to secure interest plus a proper allowance for operating expenses and taxes and a reasonable annual reserve for depreciation or sinking fund charges, is derived from two main sources:
1. Revenue derived directly from water service, or the sale of water, which includes the revenue derived from public fire protection, as well as that derived from domestic, industrial, commercial and manufacturing, or public uses other than fire, and
2. Miscellaneous receipts which include revenue from turn-off and turn-on charges, meter change charges, meter repair charges, plumbers’ fees and fines, and non-operating revenues derived from rent, interest on deposits, and other miscellaneous sources.
The principal steps in the establishment of a system of rates may be outlined as follows:
The limits between which the charges for the different classes of service vary when properly allocated are too great to admit of suggesting a definite percentage chargeable to each, but the limits between which such charges vary, expressed as a percentage. have been given as a guide to the general problem of fixing rates.
The subdivision of charges between districts has not been attempted, for if the gross water service revenue which should be derived is properly subdivided between districts, the problem of allocating charges between different classes of service within a district is identical with the outline here given for the plant as a whole.
It is not the purpose of this report to go into the details of the method of making a fair apportionment of the revenues between public fire service protection and general water service. It is only necessary to say that the apportionment of costs to public fire service varies greatly with the size of the plant, the cost of public fire protection service being relatively much greater in small plants than in large plants.
Having ascertained the proper amounts to be collected from public fire protection and from general water service, the next step is to deduct the revenue derived from public fire protection from the total water service revenue, and apportion the remainder, or the general water service revenue, between revenue to be derived from fixed service charges, and from proportional service charges. The ratio of fixed service charges to proportional charges varies somewhat in different plants, but, in general, the fixed service charges fall between 20 and 40 per cent, of the revenue to be derived from general water service, which, of course, means that the proportional service charges vary between 60 and 80 per cent, of the same amount.
The theory on which operating expenses and fixed charges are divided between proportional and fixed service charges is that the direct expense of materials and supplies, as well as interest and depreciation or sinking fund payments on that portion of the plant which is utilized in producing and delivering the commodity supplied, should be included in the proportional charges. The proportional charge covers the cost of producing and delivering water for normal service requirements, and includes collecting and storing, pumping, filtering, transporting and distributing. In this way, coal and wages at a pumping station, chemicals and wages at a filter plant, and that proportion of the maintenance and care of the pumping station and filter plant, the distributing reservoirs, distribution system, and storage reservoirs, which is chargeable to actual output goes to the proportional charge for water.
Since the proportional charge varies with the quantity of water taken, the basis of charge should be so much per hundred cubic feet, per thousand cubic feet, or per thousand gallons.
The capacity costs are the costs chargeable to the excess plant made necessary to meet the contractual obligations of the company to furnish the maximum demand which the water consumer may make. Thus, the fixed charges on the reserve portion of the pumping stations, filter plants, impounding reservoirs, mains, etc., are chargeable to capacity cost. The material, labor and interest appurtenant to the reserve capacity should be charged to the capacity or demand cost.
The total fixed service charge for domestic, commercial, industrial and public uses other than fire, which is the sum of the capacity and consumer cost, should be levied as a fixed annual amount to be paid quarterly whether water is taken or not.
The fixed service charge may be based upon a capacity unit. The capacity unit has in a number of cases been fixed as the capacity of a 1/2-inch service connection or 1/2-inch meter. By ascertaining the capacity ration between a 1/2-inch service connection or meter, and the other sizes of service connections or meters, the number of capacity units in each size of service connection or meter may he ascertained. If all of the service connections or meters in a plant and their sizes are listed, the total number of capacity units in the system may be ascertained, and the net unit fixed service charge will be the quotient of the total revenue which should be derived from the fixed service charge divided bv the total number of capacity units in the water works system. By multiplying this capacity unit charge by the ratios established for the different sizes of service connections or meters, the fixed service charge for each size of connection or meter may be ascertained.
If it is desired to assess more than the cost of public fire service upon the taxpayer, the fixed service charge may be subdivided by assessing that portion of the charge due to excess capacity directly upon the property benefited, on any basis desired, and the remainder may be levied upon the water taker on the capacity unit basis above outlined.
Modifications in this respect may be made in individual cases to suit individual preferences, but the principle is the same. Attention should be called, however, to the advantage of establishing a uniform svstem of water rates, and of following practices which commissions regard as according substantial justice to all.
By deducting the revenue from the fixed service charges from the total revenue to be derived from general water service, the
amount to be derived from proportional charges for water used may be ascertained. When this is done, ascertain the total net pumpage, that is, the total pumpage less water unaccounted for due to pump slippage, leakage in mains, etc., and divide the total revenue to be derived from proportional changes by the total net water delivered to ascertain the rate per unit of water sold.
With such a system of rates established, it is simple to see that one who requires a large service connection and little or no water will pay only the fixed service charge, whereas one who requires a small service connection and a steady supply of water will pay for the bulk of his service through proportional charges. As one of the members of the Maryland Public Service Commission said, you buy water on the European plan. One pays so much for his room, and pays in addition for whatever he takes to drink. It is also simple to see that the charge which will be made for fire protection service under such a system of rates will be the fixed service charge, which will be the same as would be charged for any other connection of the same size without distinction or discrimination on account of the purpose for which the connection is desired.
The following rules should be considered in conjunction with the establishment of a system of rates of this kind.
When the word “consumer” is used, it is used to designate the party contracting: for or using: service on a premise.
When the word “premise” is used, it shall be taken to designate:
a. A building: under one roof owned or leased by one party and occupied as a residence, or for business or commercial purposes, or
b. A grroup or combination of buildings owned or leased by one party, occupied by one family, or one corporation or firm, or as a place of business, or for manufacturing or industrial purposes, or as a hospital or other public institution, or
c. One side of a double house having a solid vertical partition wall, or
d. A building owned or le&sed by one party containing more than one apartment and having one entrance and using one hall in common, or
e. A building owned or leased by one party having a number of apartments, offices or lofts which are rented to tenants, or
f. A public building such as a town hall, school house, fire engine house, etc., or
g. A single lot or park or playground, or
h. Each house iti a row of houses.
When the term “service connection” is used it is intended to mean the pipe line from the water main to a premise.
Where more than one service connection is used for one premise, or for one consumer, the fixed service charge shall be applied to each and every connection supplying one premise or one consumer.
Where two or more service connections supply the same premise or the same consumer, the consumer shall be billed at the schedule of proportional rates for a quantity of water equivalent to the sum of the readings of all meters on the premises.
Private fire hydrants shall be charged for at the same rates as public fire hydrants.
NICHOLAS S. HILL, Jr., Chairman
GEORGE C. EARL
FRANK C. JORDAN
WALTER E. MILLER