Water Research Foundation Project #4405 Rates and Revenues: Water Utility Leadership Forum on...

Water Research Foundation Project #4405Rates and Revenues:

Water Utility Leadership Forum on Challenges of Meeting Revenue Gaps

Denver, Colorado

May 19-20th, 2011

Workshop Facilitators/Research Team

Scott Haskins, CH2MHill Jeff Hughes, Environmental Finance

Center at the University of North Carolina

Mary Tiger, Environmental Finance Center at the University of North Carolina

Workshop Participants/Report Authors

Ed Archuleta El Paso Water Utilities

Gary Breaux East Bay Municipal Utility District

Jerry Brown Contra Costa Water District

Koni Cassini Tampa Bay Water

Jun Chang City of Houston Public Works and Engineering Department

Dennis Doll Middlesex Water Company

Eva Tang Golden State Water Company

Jim Glozzy United Water

Barry Gullet Charlotte-Mecklenburg Utilities

Amber Halloran Louisville Water Company

Tom Jacobus Washington Aqueduct

Steve Lawitts New York City Department of Environmental Protection

Terry Lowery Dallas Water Utilities

John Bigelow American Water

Joe Pajor City of Wichita Water Utilities

Rob Pritchard City of Calgary Water Services

Robert Shaver Alameda County Water District

Doug Yoder Miami-Dade Water and Sewer Department

Phil Speight Las Vegas Valley Water District

Rob Teegarden Orlando Utilities Commission

Deven Upadhyay Metropolitan Water District of Southern California

Richard Westerfield City of Columbus Department of Public Utilities

Workshop Participants

Water Use and Revenue

“Water demand is recalibrating according to new economic realities and public policy

directives. Ignoring declining demand does make it go away – or rather, come back. The intractable manager will remain cash-flow frustrated. The enlightened manager will be better positioned for cost recovery in

accordance with a fluid equilibrium.”

Beecher, Janice A. 2010. The Conservation Conundrum: How declining demand affects water utilities. Journal AWWA, February 2010, 78-80.

Workshop Goal

Address water resources, public health, environmental, and community development requirements in a sustainable manner in North America by increasing capacity of water and wastewater utilities to address revenue gaps.

Overall Workshop Objectives

1. Identify strategies to address “revenue gaps” in your utility

2. Provide an effective forum to share best practices and strategies

3.  Propose resources and resource delivery mechanisms to disseminate strategies to peers

Workshop Format

Small group discussion: Self-selected if possible Plenary discussion Audience polling Short presentations

Workshop Format

Introduction – circle around the problem Survey results – bird’s eye view of impact

and approaches Planning and Financial strategy sessions

– in depth analysis of gap strategies and implementation factors

Communication strategy session – bringing strategies to your stakeholders back in your real, unique and political world

Strategy Sessions

Part 1: Small Groups of Self Selected “Experts”– Create an inventory of strategies in small

groups– Identify factors that influence implementation

Part 2: Peer Feedback Exchange– Review and add to inventory

Part 3: Group Synthesis Consensus Part 4: Post-workshop resource

preparation

Participant Expectations From Survey

“other ideas for revenue diversification” “communication strategies” “bring home some best practices” “learn about successful practices at other utilities”, “learn something I don't know already.” “learn from each other” “To absorb information which will better prepare me to

present our revised financial policies and 3 year rates to our Council in June”.

Ground Rules Default assumption is to not directly attribute remarks to a

utility or in a way that makes a utility readily identifiable Agree to disagree – really Be respectful of the need to allow time for others to speak Accept that “one size does not fit all” and work to distinguish

between “strategies” and “universal truths” Don’t be afraid of the outside of the box Collective responsibility to “park” issues

– Financial research parking lot– Operational issues parking lot

BACKGROUND: THE CONTEXT FOR DISCUSSION

Utility management objectives

Prominent themes in participating utilities’ missions statementsGraphic created in ManyEyes

Framing The Problem

What is a revenue gap? What are the underlining causes of

the revenue gap? – What is the most important factor

contributing towards revenue gaps for your utility (write it on a post-it note)

Why is filling it so difficult?

Relevant Foundation Reports

#497 Socioeconomic Impacts of Water Conservation

#840 Managing the Revenue of Cash Flow Effects of Conservation

#838Impacts of Demand Reduction on Water Utilities

#839 Revenue Instability and Conservation Rate Structures

#902 Long Term Effects of Conservation Rates

#2774 Utility Rate Structures: Investigating International Principles and Customer Views

#2935 Water Efficiency Programs for Integrated Water Management

#4175 A Balanced Approach to Water Conservation: Removing Barriers and Maximizing Benefits

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Bil

led

Wat

er (

MG

D)

Water Sales (1980-2009)(Slide provided by Orange Water and Sewer Authority)

Lower than projected demands have resulted in cumulative net revenue reduction of about $7.3 million over last 3 years.

Is it variable or is it gone??

0

20

40

60

80

100

120

140

160

180

200

220

2401

93

0

19

35

19

40

19

45

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

An

nu

al

MG

D

Actual Annual

5-Year Moving Average

1967 SWD Forecast

1973 RIBCO Forecast

1980 Complan Forecast Medium

1980 Complan Forecast Medium-Low

1985 Complan Forecast-Medium

1993 WSP Forecast

19

Source: Fayetteville Observer 2/6/04

Why does this happen?

Depen

ds o

n

usag

e

Revenue and Expenses for Charlotte-Mecklenburg Utilities in a Given Year

Source: CMU Director Doug Bean’s presentation to the Charlotte City Council on December 1, 2008.

How do you think your overall utility revenues will change in the next fiscal

year?

Decre

ase

mor

e th

an 1

5%

Decre

ase

5-15

%

With

in 5%

Incr

ease

5-1

5%

Incr

ease

>15

%

Unable

to p

redit

0%

20%

45%

30%

5%0%

How confident are you your estimate from above will be correct?

Extremely Very Somewhat Not so much

15%

40%

35%

10%

Threats to Revenue Stability

Rising costs Uncertain revenues Public unaware of the challenge

Issues of concern, in order of group priority (n=22)

Other Issues of Concern

Others Ranking

Customer Service/Satisfaction 1

Current Economy 1

Drought 2

Encouraging local resource development 10

Revenue structure that handles low water sales

11

What is the first challenge that comes to mind when you think of the revenue gap?

Regulator perception

Affordability

Energy costs

Limited revenue portfolio

Unfunded mandates

Board perception

High fixed costs

Economy

Conservation

Public perception

0 1 2 3 4 5 6 7 8 9

Anecdotal answers in forum were categorized and counted.

Challenge: Rising Costs

Stronger regulations Crumbling infrastructure Reliance on scarce (i.e. expensive)

resources

Challenge: Uncertain Revenue Changes in water use have had:

A larg

e ne

gativ

e im

pact

A sm

all n

egat

ive im

pact

No im

pact

A sm

all p

ositiv

e im

pact

A larg

e po

sitive

impa

ct0

2

4

6

8

10

12

14

16

Challenge: Uncertain Revenue Requirements for conservation planning, programming and

rate setting have had:

A larg

e ne

gativ

e im

pact

A sm

all n

egat

ive im

pact

No im

pact

A sm

all p

ositiv

e im

pact

A larg

e po

sitive

impa

ct0

1

2

3

4

5

6

7

8

Challenge: Uncertain Revenue Changes in customer demographics have had:

A larg

e ne

gativ

e im

pact

A sm

all n

egat

ive im

pact

No im

pact

A sm

all p

ositiv

e im

pact

A larg

e po

sitive

impa

ct0

2

4

6

8

10

12

Challenge: Uncertain RevenueGoals of rate setting

Full cost recovery/ revenue stability

Encouraging conservation

Fostering business-friendly

practices

Maintaining affordability

(keeping rates low – to whom?)

© UNC Environmental Finance Center

Challenge: Uncertain RevenuesWhy utilities can’t just increase rates?

Recognized need to keep rates affordable

Political pressure– Non-utility uses of revenues– Coordination with other utility rate

increases

Challenge: Public Unawareness

People undervalue water, which compounds the challenge of getting

rate increases accepted.

Finding in a study sponsored by the American Water Works Association Water Utility Council, April 2004.

Reported in: Avoiding Rate Shock: Making the Case for Water Rates.

The conservation conundrum

Water utilities face a dilemma in encouraging water conservation– By selling less water, utilities have to increase

rates to cover their costs– Customers are essentially being asked to pay

more for less water

Beecher, Janice. February 2010. The conservation conundrum: How declining demand affects water utilities. Journal AWWA 102:2.

Strategies for Ensuring Financial Resiliency

Financial policies and guidelines– Internal financial policies– Cost index use for rate adjustments

Pricing and sales innovation– Innovative rates and pricing– Revenue enhancement

Planning and cost control– Integrated resource planning– Water-energy nexus strategies

Communication– Board communication– Customer communication

Financial Policies and Guidelines:Internal financial policies

Pre-forum Survey on the Effectiveness of Finance Policies

Very effective

Somewhat effective

Not effective at all

Not applicable/ Not tested

Board-approved finance policy

6 5 4 4

Rate stabilization fund or Reserves

6 7 4 3

Financial Policies and Guidelines:Internal financial policies

Example components of metrics-based financial policy– Credit ratings– Debt-service coverage ratio– Cash financing policy– Reserve targets– Rate comparisons/benchmarks

Financial Policies and Guidelines:Internal financial policies

Excerpt from East Bay Municipal Utility District (EBMUD)’ financial policy

Financial Policies and Guidelines:Internal financial policies

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

Opportunities

-Easy-to-understand

-Ensure some level of rate increase

-Better for operations and maintenance components

Challenges

-Confusion over appropriate index (CCI typically better than CPI)

-Could discourage management innovation

-Not appropriate for utilities with atypical situations

Financial Policies and Guidelines:Cost index use for rate adjustments

Pricing and Sales Innovation:Innovative rates and pricing

Pre-forum Survey on the Effectiveness of Innovative Rate Structure and Design

Very effective Somewhat effective

Not effective at all

Not applicable/ Not tested

10 6 2 2

Opportunities

-Better align method of revenue collection with costs

Challenges

-Balance conflicting objectives

-Not a comprehensive solution

Pricing and Sales Innovation:Innovative rates and pricing

Pricing and Sales Innovation:Innovative rates and pricing

Adjusting cost-recovery of increasing block rates

Ongoing separate water supply rate Targeted affordability programs Revenue decoupling Discounted rates Drought surcharges Need for communication

Pricing and Sales Innovation:Revenue enhancement strategiesOpportunities

-Leverage existing assets and core competencies

-Leverage utility synergies

Challenges

-Low profit margins

-Board tendency to use it to replace, rather than supplement, revenue

-Identifiable line item subject to debate

Renewable Energy

Pricing and Sales Innovation:Revenue enhancement strategies

The 7.6-megawatt Gross Hydroelectric Project, located about 30 miles northwest of Denver, is owned by Denver Water.Photo credit: Denver Water

Ranching Fleet maintenance

services Advertising Cell towers Lab services Service line insurance

policies

Pricing and Sales Innovation:Revenue enhancement strategies

Photo credit: Associated Press

Planning and Cost Control:Integrated planning strategies

Pre-forum Survey on the Effectiveness of Integrated Long-Term Planning

Very effective Somewhat effective

Not effective at all

Not applicable/ Not tested

11 7 0 1

Planning and Cost Control:Integrated planning strategies

Ensuring success Scenario planning Integrate plans with employee

performance evaluations Engage stakeholders Frequently update strategic and long-

range plans

Planning and Cost Control:Water-energy nexus strategies

Image credit: U.S. Department of Energy

Planning and Cost Control:Water-energy nexus strategies

Water sources, uses and geography Plant and infrastructure improvements Water use/conservation Renewable energy On-peak demand reduction Management approaches Operations optimization

Planning and Cost Control:Cost control

Pre-forum Survey on the Effectiveness of Cost Control

Very effective Somewhat effective

Not effective at all

Not applicable/ Not tested

9 12 0 0

Planning and Cost Control:Cost control

Contracting-in vs. Contracting-out Bulk purchasing Managing long-term commitments Know the trigger point Monitoring and management Need for communication

Communication Strategies

Pre-forum Survey on the Effectiveness of Communication Techniques and Customer Engagement

Very effective Somewhat effective

Not effective at all

Not applicable/ Not tested

9 7 4 1

Who is the Audience for Your Finance Story?

yourself your board your newspaper your boss

– Engineer– Finance

your neighbor

Impact of Operating Environment:Governance structure

Municipal County Authority/special district Elected board Appointed board Number of local governments Number of board members For profit board

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

making?22%

28% 28%22%

0%

Communication Strategies:The board

Credit rating agencies are asking tough financial, policy and governance questions and placing value on political stability, predictability and financial certainty.

Communication Strategies:The board

Board orientation On-going small group meetings Individual meetings Send a messenger

The Message

http://www.wuc.on.ca/information/distribution.our_watermains.cfm

Graphic Credit: Dawn of the Replacement Era, Reprinted by permission. Copyright © 2008, American Water Works Association.

Which information do you think would be most helpful in presenting a rate

increase to your board?

10%0%

81%

10%0%

Communication Strategies:The board

Boiling it down into a sound bite or tweet

“Water: cheap as dirt, valuable as gold.”

“Sewer – smells great.”

Impact of Operating Environment: Demographics

Income Growth rate Residential vs. non-residential Unemployment

Communication Strategies:The customers

Important to maintain direct lines of communication by:

-joining and participating in service organizations

-hosting annual events

-setting up watering stationsPhoto of NYC’s “Water-

on-the-Go” FountainPhoto credit: Triple Pundit

Communication Strategies:The customers

Utility by-lines related to finance

Dallas Water: a not-for-profit department of the City of Dallas

Denver Water: a public agency funded by water rates and tap fees, not taxes

Communication Strategies:The customers

Charlotte-Mecklenburg Utilities’ graphic for communicating “the Cost of Improvements and Investments.” Found at:http://charmeck.org/city/charlotte/Utilities/CustomerService/guidetorates/Pages/CostofImprovements.aspx

Future Research Needs

What lessons can the water industry learn from private corporation success?

How should the industry measure utility financial sustainability?

How should the analytical framework be crafted to address the significant differences in political and economic ownership models?

How can improved reporting tools and dashboards assist all parties in making performance visible and transparent?

I think our utility’s business model in 15 years will….

...look a lot like what we have today.

…be very different, and I have a good idea of what

it will look like.

…be very different, but I don't have any idea what

it will look like.

37%

42%

21%