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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%