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INTRODUCTION

Establishing cost-based rates, fees, and charges is an important component in a wellmanaged and operated water utility. Cost-based rates provide sufficient funding to allow communities to build, operate, maintain, and reinvest in their water system that provides the community with safe and reliable drinking water and fire protection. Properly and adequately funded water systems also allow for the economic development and sustainability of the local community. The purpose of this manual is to discuss standard practices in financial planning and rate making that a utility can use to establish cost-based rates, fees, and charges to recover the full costs associated with their water system.

The methods and analyses used to establish cost-based rates, fees, and charges have a long history within the water utility industry. Operators of some of the earliest water systems recognized the need for sufficient funding and rates to properly operate, maintain, and expand their water systems. The American Water Works Association (AWWA) appointed the Committee on Water Rates in 1949. As time passed, the utility industry recognized the need for a manual of standard practice. Through the work of this committee, the first AWWA M1 manual, Water Rates Manual, was published in 1954. Many of the same concepts, methodologies, and analyses used in 1954 remain relevant today. As time has passed, the AWWA M1 manual has been updated and expanded to reflect the changing industry and its current financial and rate issues. The development of AWWA's Sixth Edition of the M1 manual continues the efforts of many dedicated rate professionals to provide a manual of standard practice for the development and establishment of cost-based water rates, fees, and charges.

As a manual of standard practice, AWWA advocates the use of the generally accepted cost-based principles and methodologies for establishing rates, charges, and fees contained and discussed within this manual. Establishing cost-based and equitable rates is technically challenging and requires, at some level, knowledge and understanding of finance, accounting, budgeting, engineering, system design and operations, customer service, public outreach and communication, and the legal environment as it may relate to setting rates, fees, and charges.