Fixed costs (October 27, 2015)
Kevin Kleine says he doesn’t understand why Apple Valley Ranchos Water Company charges him the same amount as before, even though now he is using less water (Paid more to do less,
Daily Press, October 27, 2015).
The answer is fixed costs. Perhaps recasting the situation will help illustrate the concept.
Let’s say you have a Monday-through-Friday job that is a one-hour drive from your home, and this job requires to you dress nicely (suit and tie, for example). You have to have the proper clothes (and keep them clean and pressed), you have to have a reliable car (and keep it well maintained), you have to buy fuel to get there and back, and those two hours per day when you are driving but not working are still worth something to you.
Now let’s say that your employer tells you that due to hard times, he’s cutting you back from eight hours per day to six hours, which means your paycheck will be that much smaller. You still have the same clothing costs, transportation costs, fuel costs, and driving time, but you have much less income. If you are like most persons, this reduction in income is going to hurt financially, because your fixed costs are staying the same, but your income (which in Ranchos’ case is called revenue) has plummeted.
For Ranchos, 90 percent or more of the cost of delivering water to you the consumer is made up of fixed costs. Thus, when consumption goes down, there has to be some mechanism that allows Ranchos to cover fixed costs, lest the whole system suffer.
Should the Town be successful in its jihad against Ranchos, they will have to make allowances for fixed costs in much the same way, except instead of there being a lag time of months or years between when fixed cost recovery is needed and when it is approved, the price adjustment(s) — AKA rate increases — will be almost immediate. That’s because the issuer of the massive bond the Town will need to purchase Ranchos will demand it. With that much money on the line, no lender is going to allow the Town as the borrower to collect less revenues than are needed to cover the bond payments.
It’s not pleasant for consumers, but it’s no different from other scenarios where there are high fixed costs.
— Greg Raven is Co-Chair of Apple Valley Citizens for Government Accountability, and is concerned about quality of life issues.