Managing Revenue in Water Systems

Transcription

1 Managing Revenue in Water Systems Monday, June 1, :40 3: CPE Moderator: Speakers: Rodney Greek, San Diego County Water Authority Debby Cherney, Eastern Municipal Water District Jeffrey Hughes, University of North Carolina Chapel Hill

2 Jeff Hughes Environmental Finance Center, UNC School of Government Debby Cherney Eastern Municipal Water District

3 Presentation Outline 1. Overview of revenue challenges and trends 2. Strategies that work, sort of work, and may work in the future. 3. Communicating difficult financial realities 4. Resources

4 Supporting the fair, effective, and financially sustainable delivery of environmental programs through: Applied Research Teaching and Outreach Program Design and Evaluation How you pay for it matters 4

5 Our partner water and wastewater utilities Acknowledgements

6 and REPORT TOOLS SLIDES BLOG POSTS 6

7 Revenue Variability at 3 Water Utilities Assessed and compared revenue risk of 3 utilities with different rate structures, climates, customer water use patterns, customer types. Applied each other s rates on own customer base to identify relationships between revenue risk, rates and use. Listed mitigation strategies.

8 REVENUE CHALLENGES AND TRENDS

9 Sales Trends? What are you seeing in your region?

10 Need a New Business Model? ,000 Water Sales (million gallons per day average) Conservation Pricing Changes in 2002 and ,000 18,000 16,000 14,000 Reclaimed Water Use Begins 12,000 Customer Accounts ,000 Actual Water Sales Accounts Source: Orange Water and Sewer Authority

11 Projections Don t Generate Revenue 11

12 Industry Revenue Growth Roller Coaster Annual Change to the Total Operating Revenues Between Years 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2% 4% 2004 to 2005 High revenue growth 2005 to to to 2008 Low revenue growth 2008 to to to 2011 Revenues increased Revenues decreased Interquartile range (25th to 75th percentiles) Median Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill and Raftelis Financial Consultants, Inc. Data Source: Moody's Water and Sewer Municipal Financial Ratio Analysis. The cohort of 485 utilities is consistent across all years. Annual change in total operating revenues among the same 485 utilities nationwide

13 Revenue vs. rate adjustments (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 13

14 STRATEGIES FOR OVERCOMING REVENUE CHALLENGES

15 ALLOCATION BASED CONSERVATION RATES EASTERN MUNICIPAL WATER DISTRICT RIVERSIDE COUNTY, CALIFORNIA

16 About EMWD Established in 1950 Southwest Riverside County, California High-growth, arid climate, limited water 555 square mile service area Population: ~785,000 Services: Water / Sewer / Recycled 2014 Water Supplies 51% imported water 16% local groundwater and desalters 33% recycled water EMWD has a long history of having a strong Conservation Ethic it matters all the time, not just in times of drought.

17 California Drought o 2014 was 7th driest and the 9th hottest year on record (137 years) o 94% of state in severe, extreme or exceptional drought o Snowpack is now only 6% of average o Major reservoirs throughout California are at or below normal o California Department of Water Resources (DWR) restricting water diversions o Colorado River watershed snowpack average in 2014, 63% of average in 2015

18 California Regulatory Actions o Jan 17, 2014: Governor Brown declares a drought emergency (calls for voluntary conservation) o Apr 25, 2014: Second executive order asking for redoubling conservation efforts (voluntary) o Jul 29, 2014: State Water Resources Control Board (SWRCB) implements Emergency Water Conservation Regulations (mandatory) o Mar 27, 2015: SWRCB expands Emergency Water Conservation Regulations o Apr 1, 2015: Governor s Executive Order mandating 25% statewide reduction in potable water use

19 California Regulatory Actions (con t) o Apr 7, 2015: State Board releases initial regulatory framework to implement the Executive Order. o Apr 28, 2015: State Board releases an update to the framework incorporating the following: o o o Simplistic sorting of agencies using a three-month July - September 2014 self-reported GPCD Agencies assigned into groups ranging from 4% to 36% required reductions Failure to meet targets by February 2016 can result in fines of up to $10,000 per day Regulations provided no acknowledgment of climate, housing density or conservation achievements prior to 2013.

20 Tools and Strategies EMWD is mandated to cut potable water use by 28% ohow? Mandatory use restrictions Customer incentives Active outreach Partnering with building industry and county to introduce new landscape ordinances Allocation Based Rate Structure

21 Allocation Based Rates o Individualized Budgets Encourages efficiency through sharply tiered pricing system Fair Identified Over Use Customers for Targeted Outreach Appropriate cost nexus by reinvesting in water use efficiency programs and higher cost supplies Over Allocation Within Allocation Indoor Usage Budget Persons x 60 GPD Outdoor Usage Budget Irrigated Area x ET Factor Excessive Use Up to 50% over budget Wasteful Use More than 50% over budget Price/CCF Tier 1: $1.793 Tier 2: $3.280 Tier 3: $5.879 Tier 4: $10.755

22 Fixed v. Variable o Variable rates capture 100% of variable costs o Fixed service charges capture most of fixed costs, plus include separate line items on the bill for water supply reliability capital charges and sewer system capital charge (R&R) o When we sell less water, we actually drive down our melded cost of water because we buy less of our most expensive supply $300 $250 $200 $150 $100 $50 $ $151 $133 Revenue Volumetric Revenue Fixed Revenue FY 2014 Revenue and Expense Water & Sewer ($ million) $91 $149 Expense Volumetric Expense Fixed Expense

23 Water Use Efficiency Results Gallons per Capita per Dat (GPCD) EMWD GPCD Statewide Average: 198 GPCD Baseline Average = % 2020 Compliance Target = 175 GPCD 152 GPCD Actual GPCD Baseline GPCD Target GPCD

24 EMWD Net Revenue Monthly Water Revenues, Expenses and Percent of Customers in Highest Tiers (12-month Rolling Average) $12,000, % $10,000, % 18.0% $8,000, % $6,000, % $4,000, % 14.0% $2,000, % $- 12.0% Water Revenue Water Expense % Customers in Tier 3 & 4

25 Water Shortage Contingency Plan Stage Date Approved Description Actions Stage 1 April 2011 Supply Watch Voluntary reduction up to 10% Stage 2 April 2014 Supply Alert Voluntary reduction up to 25% Stage 3 August 2014 (3a) Stage 4 Stage 5 Mandatory Waste Reduction Mandatory Outdoor Reduction Mandatory Indoor Reductions 3a: No variance adjustments; observation based penalties 3b: Tier 3 budgets decreased by 50% 3c: Tier 3 budgets decreased by 100% Watering schedules limited (1-2 days/week) 4a: Tier 2 budgets decreased by 10% 4b: Tier 2 budgets decreased by 50% 4c: Tier 2 budgets decreased by 100% Catastrophic stage (50% reduction in demand) 5a: Tier 1 budgets decreased by 10% 5b: Tier 1 budgets decreased by 30% 5c: Tier 1 budgets decreased by 50%

26 Hypothetical Impact of a Stage 4b o o At Stage 3a, District projects 68,000 AF of tiered water sales per year. At Stage 4b, District could see acre-foot sales decrease by 20% or more Stage 4b projected to increase revenue over the near-term (5-8 months). District projects FY 2016 revenue increase of approximately $5 million. $140 Commodity Sales($) / Tier Customer Base case (WSCP Stage 3a) relative to WSCP Stage 4b 100% Commodity Sales/Customer $120 $100 $80 $60 $40 $20 90% 80% 70% 60% 50% 40% 30% 20% 10% Reduction in Tier 4 AF Sales $- Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Base case 4b Tier 4 Sales Reduction 0% o Notes: Base case sales using FY15 actual monthly sales per tier. Stage 4b effective July 1 assuming no Tier 3 sales; 50% of tier 2 sales become Tier 4; monthly reduction in Tier 4 sales until 90% reduction achieved. FY 2016 revenue projection assumes some form of revenue adjustment during July through September.

27 Evolving Pricing: Water Utility 2.0?

28 Source: Fayetteville Observer 2/6/04

29 Fixed vs. Variable Revenues and Expenses

30 Rethinking Rate Models, Projections, and omore conservative Cash Flow Plans orate models with less (or no) dependence on revenues from high volume or high block sales o Excess revenues transferred to reserve funds or used for increased pay as you go cash capital funding

31 Conservative Pricing Paired with Rebates or Dividends o Dividends linked to sales, cost of service, and/or policy goals ACE 2012: Skepticism Among the Judges

32 PeakSet Base Base charges generate much higher portion of revenues Base charges are customized to match customer s impact Historic consumption patterns replace meter size as dominant determent of base charge. Comparison of BJWSA existing residential rates to a revenue neutral PeakSet Base model (2012 EFC analysis) Existing BJWSA residential rate structure PeakSet base residential rate structure % fixed revenue 18% 57% Monthly base rate $6.00/meter for water $1.85 x rolling 3 yr. avg. of peak month sales (kgal) Variable rate $3.46/kgal $0.52/kgal

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

34 Feedback from Expert Panel 8: This model is intriguing. 8: This model provides a steady stream of revenue for the utility, which makes it very attractive to me. 7: I like that the base rate is set based on use.

35 CustomerSelect Rate Model

36 COMMUNICATING DIFFICULT REVENUE TRUTHS

37 The Future? orevenue needs are outpacing inflation oprice increases often have to outpace revenue requirements increase needs oprice levels should not be the only financial metric a board focuses on

38 Comprehensive Revenue Metric? $1,200 $1,000 $800 $ $669 $643 $753 $1,032 $600 $563 $414 $582 $497 $524 $400 $298 $282 $200 $0 38

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40 Water Research Foundation Rate Approval Process Communication Strategy and Toolkit (#4455) Principal Investigators Other Team Members

41 Which statement below best describes the water rate increase that was proposed to the local government governing body for approval? (n=1,349) *Summary Statistics Analysis Conducted by UNC Environmental Finance Center 2015 Water Research Foundation. ALL RIGHTS RESERVED.

42 Utilities where rate adjustment requests were more likely to cover essential costs tended to: obe overseen by more experienced staff member ohave a more trusting staff board relationship oinclude capital information with request oinclude alignment with a master plan ohave less of an existing affordability challenge obe in a larger city Analysis Conducted by UNC Environmental Finance Center 2015 Water Research Foundation. ALL RIGHTS RESERVED.

43 2015 Water Research Foundation. ALL RIGHTS RESERVED.

44 Where Can You Find More? Or subscribe to the Environmental Finance blog!

45 Water Utility Revenue Risk Assessment Tool Free to download and use at o Excel tool (simplified) o Focus on residential revenues o Utility inputs own: Rate structure details (can compare 2) Residential customer water use profile Weather patterns Assumptions on price elasticity o Tool estimates the proportion of revenues that may be lost due to changes in water use patterns due to: Rate increase, alone or plus: Normal weather pattern changes, or One time, significant and sudden conservation effort

46 Whiteboard Video Intro Draft version available temporarily at