What City Councils and Boards Need to Know to Oversee a Utility

A city council that oversees an electric, gas, water, or wastewater utility, or a cooperative board that governs an electric system, is asked to approve rates, authorize debt, adopt budgets, and accept audits. Most members were elected or appointed for reasons that have little to do with utility finance. Many serve with no formal training in how a utility earns revenue, funds capital, or sets rates.

That is a governance risk, and it is fixable. Board members do not need to become accountants or engineers. They need enough background to read the reports in front of them, ask questions that test the work of management and consultants, and explain a decision to the public afterward.

This article covers the four subject areas I would put in any board training program, followed by how members should handle the public meeting itself.

The board's role is oversight, not management

Before the technical subjects, members should be clear on what the board is responsible for. The board sets policy, approves the budget and rates, authorizes borrowing, and holds management accountable. Management runs the utility day to day.

The difficulty is information. Management and consultants know the system. Board members receive a packet a few days before the meeting. Training narrows that gap so the packet can be questioned rather than simply accepted.

1. Financial analysis

Members should be able to read a set of utility financial statements and understand what a handful of measures say about the system's condition. The statements differ by type of utility:

• Municipal and public utilities report net position and typically operate under bond covenants that set a minimum debt service coverage ratio.
• Cooperatives report margins and patronage capital, and RUS or other lender covenants commonly set minimum TIER (times interest earned ratio) and DSC (debt service coverage) levels.

Whatever the structure, board members should know these measures and where each one comes from:

1. Operating margin or operating ratio, by service (electric, water, wastewater, and gas reported separately).
2. Debt service coverage, and the covenant minimum it is measured against.
3. Days cash on hand, and the policy target the board has adopted.
4. Equity ratio or net position trend over several years.
5. Budget-to-actual variances, with an explanation of the largest ones.

Questions to ask management

• What changed from last year, and what drove it?
• Is each service covering its own cost, or is one subsidizing another?
• How close are we to a covenant minimum, and what would move us toward it?
• Which variances are timing, and which will recur?

A single year of results says little. Members should ask for at least five years of trend, and for a comparison to similar systems when one is available.

2. Capital planning

Capital spending is where most of a utility's long-term financial risk sits. Pipes, poles, plants, and substations are built to last decades, and the decisions made now set rates for a long time.

Members should understand how the capital improvement plan is built, how it is funded, and what happens to rates if the plan changes. The funding sources are cash from rates, debt, contributions from developers and customers, and grants. Each has a different effect on current and future ratepayers.

Questions to ask

• What is the age and condition of the major asset classes, and what is the replacement rate compared with the useful life?
• Which projects are required (regulatory, safety, reliability), and which are discretionary?
• How is each project funded, and what is the effect on rates in each of the next five years?
• What is the cost of deferring a project, and who bears it?
• What growth or new customer load is assumed, and who pays if it does not arrive? This matters most where a single large load drives dedicated infrastructure.

The board should also ask what is not in the plan. Plans built from a project list often leave out items that have no sponsor inside the utility.

3. Rates

Rates are the board's most visible decision and the one members hear about most from the public. Training should cover the logic of a rate study in plain terms:

1. Revenue requirement: how much revenue the utility needs to cover operations, debt service, capital, and reserves.
2. Cost of service: how that cost is divided among customer classes based on how each class uses the system.
3. Rate design: how each class's share is collected through fixed charges, volumetric charges, demand charges, or tiers.

Members should know the difference between those three steps, because a question about one is often answered with an explanation of another. A member who asks why a residential bill is increasing 6 percent may hear about the revenue requirement when the real driver is a change in rate design.

Questions to ask

• When was the last cost-of-service study, and what has changed since?
• What share of revenue comes from fixed charges, and how does that compare with the share of costs that are fixed?
• What assumptions drive the sales forecast, and what happens to revenue if sales come in lower?
• How do our rates compare with neighbors, and is that the right comparison?
• Are we phasing in an increase, and what does the plan look like if we skip a year?

Cooperative boards have an additional topic: how margins are allocated to members as capital credits, and how that policy interacts with rates and equity.

Boards also carry a responsibility for what delayed rate increases do to the system's credit. I covered that in Delaying Rate Increases: The Board's Role in the Bond Rating and in When the Board Won't Approve a Rate Increase: Plan B Options.

4. Implementation of AI

Management teams and consultants are starting to use AI for forecasting, customer service, document review, and analysis. Boards will be asked to approve spending on it, and members will be asked about it by the public. They need a working understanding without needing to know how the models are built.

The core points:

• AI output is a first draft. A person who knows the subject has to verify it before it is used in a report, a rate filing, or a public statement.
• The board should ask for an AI use policy that says what tools are permitted, what data may be entered into them, and who reviews the output.
• Customer and employee data, and anything covered by public records or confidentiality rules, needs specific handling. Members should ask where the data goes when a tool is used.
• Decisions stay with people. The board should be clear about which steps management may hand to a tool and which it may not.

Questions to ask

• Where is AI being used today, and who approved it?
• How is the output checked, and by whom?
• What happens if the tool is wrong?
• How is the vendor selected, and what does the contract say about our data?

A consultant's report that relied on AI-generated analysis should say so, and the board should ask how the figures were verified. Staff are also using AI to prepare board materials, which I covered in How AI Can Help You Prepare Board Packages and Minutes Faster.

Reading management and consultant reports

The same habits apply whether the report is from staff, an outside consultant, or an auditor:

1. Read the summary, then find the assumptions. Ask which ones the conclusion is most sensitive to.
2. Ask what alternatives were considered and why they were not recommended.
3. Ask what would change the recommendation.
4. For a consultant, ask who engaged them, what they were asked to do, and what they were not asked to do.
5. If a number is important to the decision, ask where it came from.

A member does not need to challenge the work. Asking these questions on the record shows the public that the board reviewed it.

The public meeting

Training should include how members behave when the public is in the room, because rate increases and capital projects draw the most attendance.

• Know the open meetings rules for your state. Deliberation among a quorum outside a noticed meeting is generally prohibited, and rules on what may be discussed in closed session vary. The attorney should brief new members before their first meeting.
• Use plain language. Explain a rate change in dollars per month for a typical customer, and say what it pays for. Avoid acronyms without explanation.
• Do not improvise numbers. If a member is asked a question and does not have the figure, the correct answer is that the board will have staff provide it. Staff should follow up in writing.
• Be consistent. Members should describe the reason for a decision the same way in the meeting, in the press, and with constituents.
• Prepare for the likely questions. Before a rate hearing, staff and the board should list the questions the public is most likely to ask and agree on the answers.
• Separate listening from deciding. Public comment is part of the record. The board's response should show the comment was heard, even where the decision is unchanged.

Structuring the training

A workable program has three parts:

1. Onboarding within the first 90 days of a new member's term, covering the four subject areas above and the open meetings rules.
2. An annual refresher tied to the budget cycle, using the utility's own numbers.
3. Targeted sessions before major decisions such as a rate case, a bond issue, or a large capital project.

Using the utility's own financial statements, rate schedules, and capital plan in training makes it concrete, and it gives members a reference they will use again.

Where to start

For members who need the industry background first, the Electric Utility Fundamentals for Leaders and Decision-Makers career track was written for board members, city and town council members, and department heads, with no accounting background required. Its four courses cover how the electric business works, how to read financial statements, how KPIs drive decisions, and how rates are built, for 5.50 NASBA CPE hours. Boards and councils can enroll as a group.