UMC Financial Management & Rate Structures 2

Question 1

A utility applies an inverted block rate structure. What is the PRIMARY purpose of this design?

Accepted Answer

Charge higher unit rates as consumption increases to encourage conservation

Answer

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?

Accepted Answer

Debt service coverage ratio

Answer

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:

Accepted Answer

Cash is actually received

Answer

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:

Accepted Answer

Current assets minus current liabilities

Answer

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?

Accepted Answer

Minimum monthly charge or base charge

Answer

A minimum monthly or base charge recovers fixed costs (pipes, meters, billing) regardless of whether the customer uses any water.

(UMC) Utility Management Certification Practice Test

(UMC) Utility Management Certification Practice Test

UMC Financial Management & Rate Structures 2