Utility Standby Charges

Dear Management Doctor:

Do you have any information on Utility Standby Charges? I think these charges are described like this: Utility Standby Charge:

a charge levied by a municipality on vacant properties adjacent to municipal services that are not being used, typically for a water and/or sewer line. The justification for the charge is that the municipality is reserving capacity for the future development of the property and can charge a fee for "holding" the service in reserve while waiting for the property owner to develop property adjacent to existing services.

Confused reader

Dear Confused,

This is a new one to me. Hopefully our readers can help us out on this one.

The Management Doctor

Reader Response

I am familiar with flat fee charges that go by names such as:

  • Demand Charge
  • Ready to Serve Charge
  • Meter Charge

These are flat rate charges per month for existing customers. I am not familiar with charging this type of fee to someone who is not yet a customer. However, I would imagine this could be a component of a negotiated development agreement. I would be interested in hearing where and how this was done.

The ready to serve charges for existing customers pay for the distribution system. The theory is that it costs to build and maintain a system that is ready for the customer's use. If everyone started using 50% less water, you would still have the same costs associated with distribution system debt service and maintenance costs.

There are similar issues in electric utilities. With distributed generation, a customer can have their own generator, but they are still connected to the grid. The utility justifiably charges them for their share of the costs of the distribution system.

One more example. Some volume-based refuse collection systems have a flat fee that functions as a ready to serve charge. This flat fee is covering the cost of running the garbage trucks around the city. The city still has to drive the truck by your house even if you don't put garbage out that week. The flat fee may also have a volume component such as including the first bag or can of garbage in the flat fee.

In the typical retail business, the business invests the capital for the infrastructure up-front and (hopefully) recovers their costs as part of their price. But even in retail, there are some examples that have a ready to serve component, health clubs and Costco or Sam's Club come to mind.

Benjamin J. Jordan
University of Wisconsin

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