UMC Financial Management & Rate Structures 2 — Questions and Answers
Question 1: A utility applies an inverted block rate structure. What is the PRIMARY purpose of this design?
- Reward high-volume customers with lower unit prices
- Charge higher unit rates as consumption increases to encourage conservation (Correct answer)
- Simplify billing by applying one flat rate to all usage
- Recover fixed costs through a minimum monthly charge
Correct answer: Charge higher unit rates as consumption increases to encourage conservation
Inverted block rates increase the per-unit price at higher consumption tiers to discourage excessive use and promote conservation.
Question 2: Which financial metric measures a utility's ability to cover annual debt service from operating revenues?
- Current ratio
- Return on equity
- Debt service coverage ratio (Correct answer)
- Operating ratio
Correct answer: Debt service coverage ratio
The debt service coverage ratio (DSCR) divides net operating revenues by annual debt service to show whether the utility can meet its bond obligations.
Question 3: Under the cash basis of accounting, revenues are recorded when:
- Services are rendered to customers
- Bills are mailed to customers
- Cash is actually received (Correct answer)
- The budget appropriation is approved
Correct answer: Cash is actually received
Cash-basis accounting records revenues only when cash is physically received, not when the service occurs.
Question 4: A utility's working capital is BEST defined as:
- Total long-term assets minus total long-term liabilities
- Current assets minus current liabilities (Correct answer)
- Annual revenues minus annual operating expenses
- Net plant value plus cash on hand
Correct answer: Current assets minus current liabilities
Working capital equals current assets minus current liabilities and measures the utility's short-term liquidity position.
Question 5: Which rate design element ensures that customers who use no water still contribute to fixed infrastructure costs?
- Commodity charge
- Minimum monthly charge or base charge (Correct answer)
- Excess use surcharge
- Seasonal adjustment factor
Correct answer: Minimum monthly charge or base charge
A minimum monthly or base charge recovers fixed costs (pipes, meters, billing) regardless of whether the customer uses any water.
Question 6: When a utility issues revenue bonds, pledged security for repayment is typically:
- The full faith and credit of the local government
- Federal grant funds reserved for debt service
- Net revenues generated by the utility system (Correct answer)
- Property taxes levied on service area residents
Correct answer: Net revenues generated by the utility system
Revenue bonds are backed solely by the net revenues of the enterprise fund, not by taxing authority or general fund credit.
Question 7: An 'equity contribution' in a utility capital financing plan most commonly refers to:
- Grants received from state revolving funds
- Internally generated retained earnings or reserves used for capital projects (Correct answer)
- Developer impact fees deposited into operating accounts
- Proceeds from revenue bond issuances
Correct answer: Internally generated retained earnings or reserves used for capital projects
Equity contributions are funds a utility provides from its own retained earnings or reserves rather than from debt or outside grants.
UMC Financial Management & Rate Structures 2
A utility applies an inverted block rate structure.
What is the PRIMARY purpose of this design?