Examining the state of municipal utility rates in today’s inflationary environment

More than any time in modern history, inflation is taking a significant toll on entities and individuals across the United States – and utilities are certainly no exception.

That said, utilities are not helpless when it comes to the increased cost of doing business. You can combat inflation, to some degree, by understanding where you stand today and considering a few basic best practices that can help you prepare for tomorrow – and beyond.

In a recent webinar, Baker Tilly shares steps your utility can take to combat the increased cost of doing business.

Utilities and inflation: setting the stage

It is important to begin by noting that utility rates as a whole have been increasing at a pace greater than the broader market inflation for years. The pandemic certainly has not helped in that regard, but utility affordability problems existed before COVID-19 threw supply chains and labor markets into disarray. As you can see in the Bureau of Labor Statistics (BLS) data below, the water and sewer Consumer Price Index (CPI) has significantly outpaced total CPI and income growth for the past decade.

This pressure has been even more acute in the past 12 months as significantly higher costs for personnel, materials, chemicals and construction bidding have hit simultaneously at rates not seen in decades. Debt financing plays a key role in addressing the backlog of infrastructure improvements that most utilities are facing, and rising interest rates are an extra burden when combined with new record high construction bids.

The combination of all these factors is putting extra pressure on utilities with many of their budgets tighter than ever and their customers suffering affordability issues as every aspect of daily life gets more expensive.

What can utilities do?

Adjustments to utility rates can have relatively long lead times. Taking into account the time to prepare detailed calculations, regulatory approvals and local council discussions and advertisement requirements, it can be months or even a year before changes take effect. This makes it pivotal for utilities to stay ahead of these cost increases. Depending on their specific situation, which might mean refocusing on the importance of budgeting, or doing more frequent rate analyses, or proactively monitoring results to identify problems before it is too late.

Having realistic and well thought out line item operating budgets and performing regular budget to actual comparisons (monthly or quarterly) are a utility’s first line of defense. By comparing their actual costs to the original estimates, a utility can garner real insights on trends long before they become noticeable in the bottom line of financial results. Budgeting that includes multiyear capital planning also allows a utility to better tailor their rate approach to big picture needs, getting out of a reactive cycle.

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