What is a Revenue Requirement?

The first step in making great rates for your water or wastewater utility is to find out exactly how much money you have to have meet all of the normal cash expenditures you have in a year.  A simple definition of a revenue requirement is that it is equal to your total out-of-pocket costs.

Timeframe

With municipal utilities, the best approach is to design rates to meet budgeted expenditures ahead of time.  There are two approaches for you to consider: a single-year requirement, and a multi-year financial plan.  If an immediate one-time adjustment to your rates is needed and you are short on time, a single-year revenue requirement is for you.  If you want to proactively manage your rates and consistently have great rates that you can explain to your community, then a multi-year financial plan is best.

Advanced Needs

For most municipal utilities, a "cash-needs" approach is all that you need.  However, for advanced situations where your utility is serving wholesale customers, or serving retail customers located outside your municipal boundaries, a more advanced method called a "utility approach" will better serve your needs.