UMC Financial Management & Rate Structures 3

Question 1

The 'test year' in a utility rate study refers to:

Accepted Answer

A historical or projected 12-month period used to determine revenue requirements

Answer

The test year establishes the revenue requirement baseline by capturing representative operating costs and capital needs for a defined 12-month window.

Question 2

Which depreciation method allocates an equal expense amount each year over the asset's useful life?

Accepted Answer

Straight-line depreciation

Answer

Straight-line depreciation divides the asset's depreciable cost evenly across its estimated useful life, producing a constant annual expense.

Question 3

A utility's 'rate stabilization fund' is PRIMARILY used to:

Accepted Answer

Smooth rate increases by accumulating reserves in low-cost years

Answer

Rate stabilization funds allow utilities to set aside surplus revenues during favorable periods and draw them down to avoid sharp rate spikes in difficult years.

Question 4

In utility cost-of-service analysis, 'peaking costs' are typically allocated to customers based on:

Accepted Answer

Their contribution to maximum demand (peak usage)

Answer

Peaking costs are driven by the need to build capacity for maximum demand periods, so they are allocated proportionally to each customer class's peak demand contribution.

Question 5

Which of the following is an example of a non-operating revenue for a water utility?

Accepted Answer

Interest earned on invested reserve funds

Answer

Interest income from invested reserves is classified as non-operating revenue because it does not arise from the primary service delivery function.

(UMC) Utility Management Certification Practice Test

(UMC) Utility Management Certification Practice Test

UMC Financial Management & Rate Structures 3