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Defining a Resilient Business Model for Water Utilities

Water Research Foundation #4366

Peiffer Brandt, Raftelis Financial Consultants

pbrandt@raftelis.com

Jonathan Cuppett, Water Research Foundation,

jcuppett@waterrf.org

303.347.6122

Jeff Hughes, Environmental Finance Center at UNC

jhughes@unc.edu

Efc.unc.edu

Project Title(s)

• Water Research Foundation Project #4366

• Defining a Resilient Business Model for Utilities

• Assessing Financial Trends and Developing Strategies and Practices to Address Challenges

• If it is Broke, Maybe you Should Fix it…

TUE01: Defining a Resilient Business Model for Water Utilities

Rates, Revenues and Resiliency: Current and Major Problems Facing Utilities: What Do the Numbers Say?

Strategies and Practices: What IS (and IS NOT) Working in Addressing the Financial Problems Utilities are Facing?

Emerging Strategies and Practices: What MIGHT Work in Addressing the Financial Problems Utilities are Facing?

Communication

Rate Setting

Governance and ownership

models

Capital improvement funding best

practices

Outside the water industry

Water Utility Finance Focus Area

2012 • Rate Approval Process Communication Strategy and

Toolkit -#4455

2013 • Capital funding imperatives: best practices for identifying,

prioritizing, funding and resourcing CIP’s - #4493

2014 • TBD

Finance focus area projects to date

Team: Environmental Finance Center at UNC

Jeff Hughes Principal Investigator

Stacey Isaac Berahzer Outreach Coordinator

Mary Wyatt Tiger Project Manager

Shadi Eskaf Technical Lead

Sarah Royster Technical Support

Team: Raftelis Financial Consultants

Peiffer Brandt Co-Principal Investigator

Alexis Warmath Utility Liaison

Doug Bean Project Advisor and Liaison

Catherine Noyes Technical Support

Rocky Craley Technical Support

Project Advisory Committee

• Nick Dugan, US Environmental Protection Agency

• Amber Halloran, Louisville Water Company

• Scott Haskins, CH2M Hill

• Myron Olstein, Independent Consultant

Water Research Foundation Project #4366 EPCOR

NEOMSD

Aqua America

Loveland

Denver

Austin

Water Research Foundation Project #4366 – Utility Partners

Multi Level Analysis

Project Highlights • 6/12: Business Models American Idol

Style at ACE

• 7/12: Water Utility Models Mingle with Wastewater agencies at NACWA

• 11/12-6/13: Peer to peer webinars – Financial policies

– New revenue/rate models

– Integrating affordability

• Blog, Blog, Blog….

• 3/13: Highlights and checking in with the experts at Utility Management Conference

• Summer 2013: Comprehensive Report(s) Expected

Part 1: Revenues, rates, and resiliency Current Major Problems Facing Utilities – What do the Numbers Say?

One Utility’s Experience

And Another’s

Newport News Waterworks’ Drop in Demand

Total Operating Revenues in 2010 Compared to Prior Years (National)

Changing Revenues of 2,838 Utilities in 6 States

Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill and Raftelis Financial Consultants, Inc. Revenues are: total operating revenues in CA, GA, NC, WI; gross revenues In OH; revenues that can pay for debt service in TX. The sample of utilities in each state is consistent across all Years (e.g.: the same 946 utilities in CA are analyzed every year). Data sources: California State Controller’s Office, Georgia Department of Community Affairs, North Carolina Local Government Commission, Ohio Water Development Agency, Texas Water Development Board, Wisconsin Public Service Commission.

Revenue Trends Among our Project Partners FY2002 to FY2011

Fixed vs. Variable Revenues and Expenses

Variable Revenue in the Research Triangle Area

Data analyzed by the Environmental Finance Center at the University of North Carolina. Data source: Each utility’s customer billing records, project funded by NC Urban Water Consortium

Source: Fayetteville Observer 2/6/04

Challenge: Uncertain Revenue Changes in water use have had:

Source: Water Research Foundation/Environmental Finance Center, Water Revenues Forum (#4405)

QUESTIONS?? COMMENTS!!

2: DRIVERS AND CURRENT PRACTICES: WHAT IS WORKING (AND IS NOT WORKING) IN ADDRESSING THE FINANCIAL PROBLEMS UTILITIES ARE FACING?

Why?

Parameter 1990 2007 Allotment – gpd

Household use – gpd

208 187 -21

PMDI 0.29 0.75 -2.6

People per household

2.52 2.38 -5

Educational index 2.45 2.81 +1.3

Average home value

$120,100 $144,600 +3.5

Home size 2,155 sq. ft. 2,281 sq. ft. +0.6

Total =18.8

18.8 GPD attributed to increased installation of low-flow appliances

Breakdown of Louisville (KY) Water Company residential water decline between 1990 and 2007

Rockaway, T.D., P.A. Coomes, J.Rivard & B. Kornstein. (2011) Residential water use trends in North America. Journal AWWA. February 2011, 76-89.

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Average Household Water Use (Gallons per Month)

Correlation between 2012 Average Monthly Household Water Use and Average Price/1,000 Gallons for a 5,000 GPM Water Bill (661 TX Municipalities)

Data Source: Analysis by UNC Environmental Finance Center using Data from Texas Municipal League

Rising Rates…...

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3 Texas: 194 Utilities

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Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill. Rates data for all utilities in this analysis were known for all consecutive years. Data sources: Rates surveys conducted by GEFA/EFC (GA), OH EPA (OH), WI PSC (WI), TML (TX).

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Median Water Monthly-Equivalent Bill (Same 650 NC and GA Utilities)

14,000 gallons/month

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5,000 gallons/month

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Data analyzed by the Environmental Finance Center at the University of North Carolina. Data source: EFC and NC League of Municipalities Annual NC State Rate Survey, 2007-2011

The challenge of driving revenue increases through rate increases:

HH rate versus revenues increases (2004 to 2010)

Data analysis by the Environmental Finance Center at the University of North Carolina. Data sources: 2010 and 2004 RFC/AWWA Water and Wastewater Rates Survey Data for 82 Utilities

1 to 1 Line

Birmingham Water Works Board

Base Charge as Percent of Total Monthly Bill: 1095 Utilities in 2 States

Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill and Raftelis Financial Consultants, Inc. Data sources: Rates surveys by GEFA/EFC (GA), and WI PSC (WI).

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Georgia: 443 Utilities in 2012

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Wisconsin: 616 Utilities in 2012

2011

Data analyzed by the Environmental Finance Center at the University of North Carolina. Data sources: EFC and NC League of Municipalities Annual NC State Rates Survey, 2011, & EFC and GA Environmental Finance Authority Annual Rates Survey, 2011.

Charlotte-Mecklenburg Utilities Water and Sewer Revenues Fixed versus variable

Data sources: Mickey Hicks, CFO, Charlotte-Mecklenburg Utilities

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Portion of Monthly Bill that is Fixed (Base Charge) Across 84 CA Utilities in 2011

Middle 80% of utilities

Middle 50% of utilities, inc. median line

Data analyzed by the Environmental Finance Center at the University of North Carolina. Data source: AWWA and RFC CA Rates Survey, 2011

Recommended by Urban Water Conservation Council

External Financial Performance Targets

Word Cloud developed by Environmental Finance Center based on text from Ratings of 18 Water Utilities

Externally Monitored Financial Performance Metrics (E.g. Fitch Key Indicators)

• Total outstanding long-term debt per customer

• Total outstanding long-term debt per capita

• Projected debt per customer

• Projected debt per capita • Three-year historical

average senior lien ADS coverage

• Senior lien ADS coverage

• Minimum projected senior lien ADS coverage

• Three-year historical average all-in ADS coverage

• All-in ADS coverage • Minimum projected all-in

ADS coverage • Days cash on hand • Days of working capital • Free cash as a % of

depreciation

Source: Fitch Ratings Annual Medians Report

Internal Financial Performance Targets (E.g. Charlotte Mecklenburg Utilities)

• Debt service coverage ratio minimum 1.80

• Fund balance to be maintained at level equal to 100% of the operating expenses for the current budget for the operating year

• The City’s goal is a 40-60% mix of PAYGO to financing within next 2 years

38

Internal Financial Performance Targets (E.g. EBMUD)

EBMUD Financial Indicator Target

Working capital reserve ≥ 3x monthly net O&M expenses

Self-insurance reserve 1.25x expected annual costs

Contingency/rate stabilization reserve 20% of annual water volume revenues

Debt service coverage ratio ≥1.6x coverage

Debt-funded capital ≤65% of total CIP spending over 5 year planning period

Henry County WSA, GA

• “Beginning October 1, 2008 and on the first day of October of each year thereafter, the water and sewer rates in effect as of September 30th, 2008 and each year thereafter shall be increased by 5 percent. The 5 percent rate increase shall be computed each year by increasing the previous year's rates by 5 percent. Said rates shall remain in effect until modified, amended or terminated by the Authority.”

Internal Financial Policies –Rate of Return/Dividends to Owner

• Net revenues

• Net income

Types of affordability programs

Options facing payment-troubled customers

Percent N

Payment plan to allow customer to pay amount over time 76% 231

Customer referral to private, nonutility agency 54% 163

Customer referral to a local gov. agency for assistance 49% 149

Education 35% 105

In-home conservation assistance 25% 76

Special billing arrangements 21% 64

Change in the rate customer is charged 8% 24

Other 8% 24

One-time bill credit from utility funds 3% 8

2010, Best Practices in Customer Payment Assistance Programs, Water Research Foundation #4404

Creating a Safety Net (E.g. City of Baltimore Bureau of Water and Wastewater)

Affordability programs put into place in 2002, which corresponded directly with consent decree

• Low Income Water Assistance Program

– $125/year credit on water bill

• Senior Citizen Water Discount

– 30% discount on water and sewer rates charged on each quarterly bill

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On a scale of 1 -5, how well would affordability programs work with your utility or the utilities you work with?

1. Very well

2. Pretty well

3. Maybe so, maybe not

4. Not well

5. Dreadfully

Source: Informal Survey Administered by EFC/RFC at ACE 2012 Session

Rethinking Rate Models, Projections, and Cash flow Plans

• More conservative

• Rate models with less (or no) dependence on revenues from high volume or high block sales

• “Excess” revenues transferred to reserve funds or used for increased pay as you go cash capital funding

Governance!! Structure, Size, Culture……

What best describes your governing board’s role in financial decision making?

1. We present and they say yes

2.We present and they say no and tell us to cut

3.They provide thoughtful ideas that are incorporated into proposals and decisions

4.They voice their opinions loudly, but generally follow management’s lead.

22%

28% 28%

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Source: Informal Survey Administered by EFC among 25 CFOs and General Managers

QUESTIONS??? COMMENTS!!!

PART 3: EMERGING STRATEGIES AND PRACTICES

Water Utility 2.0?

Revenue Stability Surcharges and Fees (E.g. Austin Additional Base Charge)

Single-Family Residential

0-2,000 Gallons $2.00

2,001-6,000 Gallons $4.50

6,001-11,000 Gallons $7.45

11,001-20,000 Gallons $12.55

20,001 – over Gallons $12.55

Rates adjusted annually to meet fixed revenue goal of 20% of the total water revenue requirements

+ Revenue Stability Reserve Fund Surcharge $0.12/gallon

Source: Austin Excerpts from Committee Final Recommendations

Commercializing new, expanded, or existing services

• Pricing and selling fire protection

• Customer line repair programs

– Self administered

– Third party

• Selling services to other enterprises

– Meter reading and billing

– Project management

Fire Protection Pricing (e.g. EPCOR – Edmonton)

• Fire Hydrant Service fee charged to the City of Edmonton; the City of Edmonton’s Fire Rescue Service Budget

Fire Protection Pricing (e.g. EPCOR – Edmonton)

Fee schedule set 5 years out

• 12% related to new hydrant replacements

• 30% related to the operations and maintenance costs associated with hydrants

• 58% related to the portion of the common water infrastructure costs to provide fire protection water services as a standby service

Costs and fees ($ in thousands)

2012 2013 2014 2015 2016 Total

Predicted Fire Protection Costs

$9,898 $10,255 $10,620 $11,030 $11,437 $53,240

Fire Protection Fee

$8,900 $10,400 $10,900 $11,300 $11,740 $53,240

Line Protection Programs

Rethinking Rate Models, Projections, and Cash flow Plans

• More conservative

• Rate models with less (or no) dependence on revenues from high volume or high block sales

• “Excess” revenues transferred to reserve funds or used for increased pay as you go cash capital funding

• Payment of dividends???

WaterWise Dividend Model

Skepticism Among the Judges

• Inspiration: electricity peak charge

• A customer’s base charge for fiscal year set based on their three-year rolling average peak

Comparison of BJWSA current residential rate to a “revenue neutral” PeakSet Base model

Can Annual Revenue be More Predictable Without Losing Price Signal?

One Possible Option: Peak-set Base Rates

Current BJWSA residential rate structure

PeakSet base residential rate structure

% fixed annual revenue 18% 57%

Base rate $6.00/meter – water + $6.00/meter - irrigation

$1.85/kgal applied to 3-year rolling average of

peak month of demand Variable rate $3.46/kgal of previous

month’s use $0.52/kgal of previous

month’s use

Matt Williams, Water Advisory Committee Member to the City

of Davis (CA) Water Division

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July(25)

Aug(21.1)

Sept(14.4)

Oct(9.9)

Nov(7.2)

Dec(7.3)

Jan(8.4)

Feb(6.5)

Mar(6.6)

Apr(11.4)

May(18.7)

June(29.9)

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Fiscal Year 2011 (kgal consumed)

Current Rate ($647.744)

AR1 ($621.548)

Peak-set Base: Example of Customer Impact (Beaufort Jasper Water and Sewer Authority Simulation)

Comparison of monthly charges for water under current rate and a Peak-set Base model

FY10 Peak Demand 24,100 gallons

Beaufort-Jasper Water and Sewer Authority By Account – Residential – High Fixed

Feedback from Expert Panel

• 8: “This model is intriguing. I like that it relates to customer classification. I think it should target the largest customers first. I do worry about customers understanding the mixed signals.” (Beecher)

• 8: “This model provides a steady stream of revenue for the utility, which makes it very attractive to me. I like that it helps customers manage their peak demand.” (Scott)

• 7: “I like that the base rate is set based on use, rather than need – but what happens if people really conserve?” (Walker)

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3%

27%

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39%

On a scale of 1 -5, how well would the Peakset Base Model work for your utility or the utilities you work with?

1. Very well

2. Pretty well

3. Maybe so, maybe not

4. Not well

5. Dreadfully

Poll taken by EFC of approximately 30 utility staff officials at 2012 AWWA’s ACE in Dallas

CustomerSelect Rate Model

Monthly water

allotment

Cost for water under

current rate structure

CustomerSelect

Plan Cost Overage Charge

2,000 gallons $8.93-$13.13 $8.13 $6.83/kgal

6,000 gallons $15.23-$30.38 $18.70 $6.83/kgal

10,000 gallons $35.43-$54.18 $32.52 $6.83/kgal

24,000 gallons $64.75-$146.68 $81.30 $6.83/kgal

unlimited >$154.18 $162.60 NA

• Individual customers choose plans that best works with their consumption and pay an overage fee if the household uses more than the plan

CustomerSelect Rate plans simulated for Clayton County Water Authority (GA)

QUESTIONS/COMMENTS?