Defining a Resilient Business Model for Water Utilities

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1 Defining a Resilient Business Model for Water Utilities Water Research Foundation Project #4366 Shadi Eskaf, Environmental Finance Center at UNC eskaf@sog.unc.edu National Water & Wastewater Benchmarking Initiative Meeting April 3, 2013 Vancouver, BC, Canada

2 What are utilities saying? Demand is decreasing We re not getting as much revenue as we would like Costs haven t slowed down like revenues have The economy has hit our customers badly It s harder to raise rates these days

3 What are utilities saying? We re in a new normal. Is there something (else) we can do?

Multi-level analysis Research teams: Environmental

4 Water Research Foundation Project #4366: Defining a Resilient Business Model for Water Utilities Multi-level analysis Research teams: Environmental Finance Center, RFC, and the WaterRF (including P.A.C.)

5 Water Research Foundation Project #4366 Utility Partners EPCOR Water Research Foundation Project #4366 NEOMSD Aqua America Denver Loveland Austin

6 Agenda Current Major Problems Facing Utilities: What do the numbers say? Current Strategies and Practices: How are utilities addressing these issues? Emerging Strategies and Practices: What other options might work in addressing some of the financial challenges utilities are facing?

7 Part 1: Current Trends What do the numbers say?

8 One Utility s Experience

9 And Another s Newport News Waterworks Drop in Demand

10 And Nationwide

11 Challenge: Uncertain Revenue Changes in water use have had: Source: Water Research Foundation/Environmental Finance Center. From the May 2011 Water Revenues Forum (#4405). Sample of 21 leaders from some of the largest drinking water utilities in North America.

12 Total Operating Revenues in 2012 Compared to Prior Years (National) 3% 2% 8% 11%

Changing Revenues of 2,838 Utilities in 6 States Data analyzed by the Environmental Finance Center at the

Revenues are: total operating revenues in CA, GA, NC, WI; gross revenues In OH; revenues that can pay for debt

: the same 946 utilities in CA are analyzed every year).

13 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.

14 Revenue Trends Among our Project Partners FY2002 to FY2011

15 Frequency of Rate Changes

16 Rate Increases

21 34

22 Do the Data Back the Utilities Statements? Demand is decreasing We re not getting as much revenue as we would like Costs haven t slowed down like revenues have The economy has hit our customers badly It s harder to raise rates these days ~ ~

23 Part 2: Current Strategies and Practices

24 Strategy 1: Raise Rates

Hill. Data sources: EFC/NC League of Municipalities and EFC/Georgia

26 Strategy 2: Treat Different Quantities Differently Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill. Data sources: EFC/NC League of Municipalities and EFC/Georgia Environmental Finance Authority annual water & wastewater rates surveys,

27 But: the challenge of driving revenue increases through rate increases HH rate versus revenues increases (2004 to 2010) 1-to-1 Line 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

28 Birmingham Water Works Board

30 Base Charge / Total Bill Base Charge / Total Bill Strategy 3: Fiddle with the Balance between Base Charges (Fixed Revenue) and Volumetric Rates (Variable Revenue) Base Charge as Percent of Total Monthly Bill: 1,059 Utilities in 2 States 100% Wisconsin: 616 Utilities in % Georgia: 443 Utilities in % 80% 60% 60% 40% 40% 20% 20% 0% Thousand Gallons of Consumption 0% Thousand Gallons of Consumption 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).

2011 2012 Data analyzed by the Environmental Finance Center at the University of North Carolina.

31 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.

32 Charlotte-Mecklenburg Utilities Water and Sewer Revenues Fixed versus variable Data source: Mickey Hicks, CFO, Charlotte-Mecklenburg Utilities

33 Base Charge / Total Monthly Charge Portion of Monthly Bill that is Fixed (Base Charge) Across 84 CA Utilities in % 90% 80% 70% Middle 80% of utilities Middle 50% of utilities, inc. median line 60% 50% 40% 30% 20% 10% Recommended by Urban Water Conservation Council 0% ,000 Gallons / Month Data analyzed by the Environmental Finance Center at the University of North Carolina. Data source: AWWA and RFC CA Rates Survey, 2011

Externally Monitored Financial Performance Metrics (e.g.: a few Fitch key indicators) Coverage and Financial Performance AAA AA A All Credits All-in ADS Coverage 2.7 1.9 1.5 2.

34 Externally Monitored Financial Performance Metrics (e.g.: a few Fitch key indicators) Coverage and Financial Performance AAA AA A All Credits All-in ADS Coverage Operating Revenue Growth 3 Year Average Operating Expenditure Growth 3 Year Average 3.9% 4.8% 3.9% 4.7% 3.1% 2.6% 2.6% 2.7% Days Cash on Hand Total Outstanding Debt Per Customer $1,213 $1,828 $1,951 $1,650 Projected Debt Per Customer Year Five $1,583 $2,117 $2,354 $2,024 Image and data excerpted from FitchRatings 2013 Water and Sewer Medians 51

35 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 Debt service coverage ratio 20% of annual water volume revenues 1.6x coverage Debt-funded capital 65% of total CIP spending over 5 year planning period

36 Monitoring Performance

37 Strategy 5: Pass-Through Rate Increases 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. Henry County Water & Sewer Authority, GA

38 Strategy 6: 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

39 Part 3: Emerging Strategies and Practices What other options might work in addressing some of the financial challenges utilities are facing?

40 Revenue Stability Surcharges and Fees (E.g. Austin Additional Base Charge) Fixed base charge + Single-Family Residential 0-2,000 Gallons $2.00 2,001-6,000 Gallons $4.50 6,001-11,000 Gallons $ ,001-20,000 Gallons $ ,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

41 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

42 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

43 Line Protection Programs

44 Rethinking Rate Models, Projections, More conservative and Cash flow Plans 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???

45 Can Annual Revenue be More Predictable Without Losing Price Signal? One Possible Option: Peak-set Base Rates Inspiration: electricity peak charge A customer s base charge for fiscal year set based on their three-year rolling average peak 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 Variable rate $3.46/kgal of previous month s use $1.85/kgal applied to 3- year rolling average of peak month of demand $0.52/kgal of previous month s use

46 Matt Williams, Water Advisory Committee Member to the City of Davis (CA) Water Division

47 Water Charge Peak-set Base: Example of Customer Impact (Beaufort- Jasper Water and Sewer Authority Simulation) Comparison of monthly charges for water for one actual customer under current rates and under a $ Peak-set Base model $ $80.00 $60.00 Current Rate ($ ) AR1 ($ ) $40.00 $20.00 $- Customer s FY10 Peak Demand: 24,100 gallons July (25) Aug (21.1) Sept (14.4) Oct (9.9) Nov (7.2) Dec (7.3) Jan (8.4) Feb (6.5) Fiscal Year 2011 (kgal consumed) Mar (6.6) Apr (11.4) May (18.7) June (29.9)

48 CustomerSelect Rate Model 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) 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 $64.75-$ $81.30 $6.83/kgal unlimited >$ $ NA

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Defining a Resilient Business Model for Water Utilities Water Research Foundation #4366 Presentation to Louisville Water Company 10/14/2013

Defining a Resilient Business Model for Water Utilities Water Research Foundation #4366 Presentation to Louisville Water Company 10/14/2013 Jeff Hughes, jhughes@sog.unc.edu Shadi Eskaf, eskaf@sog.unc.edu