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 manager is evaluating a capital project using net present value (NPV). A positive NPV means:
Answer: The project generates benefits that exceed its costs when discounted to present value
A positive NPV indicates the discounted future benefits of the project exceed its costs, making it financially worthwhile at the chosen discount rate.
The 'affordability index' for utility rates is most commonly expressed as:
Answer: Annual water bill as a percentage of median household income
EPA and industry guidance measures affordability by comparing annual residential water/sewer bills to the area's median household income, with 2-4% often cited as a threshold.
When a utility uses the 'commodity-demand' method for cost allocation, demand costs are assigned based on:
Answer: Each customer class's contribution to peak demand on the system
Under the commodity-demand method, demand costs—driven by infrastructure sizing for peak conditions—are allocated proportionally to each class's peak demand contribution.
A utility issues $10 million in bonds at a 4% coupon rate with a 20-year term. Annual interest expense is:
Answer: $400,000
Annual interest = $10,000,000 × 4% = $400,000; this is the coupon payment made each year until the bonds mature.
A utility's 'fund balance policy' establishes minimum reserve levels PRIMARILY to:
Answer: Ensure adequate liquidity for emergencies and protect credit ratings
Reserve policies protect utilities from revenue shortfalls or unexpected costs while signaling financial stability to bondholders and rating agencies.
Which of the following BEST describes a 'rate covenant' in a utility bond agreement?
Answer: A legal obligation to set rates sufficient to cover operating costs and required debt service coverage
A rate covenant legally obligates the utility to maintain rates at levels that generate sufficient revenues to meet operating expenses and achieve the required debt service coverage ratio.
In preparing a multi-year financial forecast, which assumption has the GREATEST impact on projected revenue requirements?
Answer: Projected capital improvement program costs and associated financing
Capital improvement program (CIP) costs and their financing (debt service or pay-as-you-go) typically dominate revenue requirement growth in utility financial plans.