Financial Management & Rate Structures Flashcards
7 cards from real UMC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Management & Rate Structures flashcards as text
A utility transitions from a flat rate to a tiered rate structure. Which customer group is MOST likely to experience a bill decrease?
Answer: Low-consumption residential customers
Under tiered rates, low-consumption customers pay the lower first-tier price for all or most of their usage, typically reducing their bills compared to a flat average rate.
The 'net revenue pledge' in a utility bond covenant requires that:
Answer: Revenues after paying operating expenses must cover debt service by a specified ratio
A net revenue pledge means debt service can only be paid after operating and maintenance expenses are covered, and the ratio must meet or exceed the covenant threshold.
Which financial statement shows a utility's assets, liabilities, and net position at a single point in time?
Answer: Statement of net position (balance sheet)
The statement of net position (balance sheet) provides a snapshot of what the utility owns and owes as of a specific date.
A utility's 'operating ratio' is calculated as operating expenses divided by operating revenues. A ratio above 1.0 indicates:
Answer: Operating expenses exceed operating revenues, signaling a potential deficit
An operating ratio above 1.0 means the utility spends more than it earns from operations, which is unsustainable without rate increases or other revenue sources.
Under GASB standards, utility enterprise funds are required to use which basis of accounting?
Answer: Full accrual basis
GASB requires enterprise funds, including public utilities, to use full accrual accounting, recognizing revenues when earned and expenses when incurred.
A 'buy-in' or 'system capacity' fee differs from an annual service charge primarily because it:
Answer: Is a one-time charge meant to recover the new customer's share of existing infrastructure investment
Buy-in fees make new customers pay their proportionate share of the existing system's asset value, ensuring existing ratepayers are not subsidizing new growth.
Which scenario BEST illustrates a 'cross-subsidy' in utility rate design?
Answer: Setting residential rates below cost while recovering the deficit from commercial customers
A cross-subsidy occurs when one customer class pays rates below its cost of service while another class pays above its cost to offset the difference.