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Utility Rates and Legal Defensibility: A High Hurdle

November 5, 2009

I’m not sure what’s going on in Naples, FL when their water rate consultant is telling the City Council that the City’s water rates are not legally defensible, but we can speculate if only to illustrate a point.  There are lots of reasons why utilities should address their rates on an ongoing basis, but legal defensibility is probably not very high on the list . It’s not that defensibility isn’t important – it is. It’s that the courts tend to give wide latitude to municipal utilities (owned by cities, counties, districts, etc.) to the point where in order to prove that utility rates are “illegal” is to prove that they are inherently unsound.  In many jurisdictions we hear the words “arbitrary” and/or “capricious” as characteristics of such “inherently unsound” rates.  That standard may not sound like such a tough burden of proof, but it is.  If you’ve done any calculations at all to determine a rate, you are probably in good shape as far as the courts are concerned. Obviously, there are differences by state and if you have any questions as to the legal defensibility of your rates, you should find competent legal counsel – someone who practices in municipal utility law -  to guide you.

And here’s a word of caution for city leaders and elected officials reading this right now: just because the burden of proof favors you doesn’t mean that you don’t have hundreds of other, better, reasons to take a hard look at rates on a frequent basis.  Making rates cost-based on one hand, and fair and equitable on another is something that requires time and expertise.  In addition, poorly designed rates can lead to disaster.  Consultants can be very helpful in sorting through the maze and coming up with good solutions; the best consultants can provide you with options for you to consider, each of which is safe from a revenue and legal perspective.

StepWise is working on a new service package called Rate Lock that will allow utilities to have a professional rate study completed every year at a fixed price based on the number of customers served.  With Rate Lock, you’ll be able to keep your rates up to date as your costs change and your system grows.  You’ll be able to do this in a way that is easy on your budget too.  We plan to release Rate Lock nationally in 2010.  Stay tuned.

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