Determining Utility Support Services Costs: Thoughtful Cost Allocation Plan Provides a Robust Tool for a Utility

In this paper, we present a structured approach to allocate support services costs across all the direct cost programs of a municipality. After nearly a 16 year hiatus, the City of Wilmington, Delaware recently completed a City-wide indirect cost allocation study. The study revealed the inaccuracies of the current cost allocation and caused the utility’s annual indirect costs to increase by $1.7 million from its current levels. We will use this study to discuss the following five aspects: (i) the drivers for the study; (ii) the allocation principles and methodology; (iii) the impact of the plan results on the utility’s water, sewer, and storm water rates; (iv) the stakeholder education that was deployed to achieve the buy-in from the City administration and council; and (v) the benefits of the allocation tool and the lessons learned from this City wide cost allocation study.This paper not only highlights the importance of developing a defensible cost allocation plan, but also demonstrates the effective use of stakeholder education to achieve buy-in for the results. The positive results from the study are striking in that despite the fact that the results of the cost allocation project caused the utility rates to increase by 3%, key decision makers including management and elected officials, understood the importance of establishing fair cost allocations, and adopted the results of the cost allocation plan in the FY 2014 budgeting process.