Roadmap to Financial Health

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1 Roadmap to Financial Health Jeff Hughes Shadi Eskaf March 5-6, 2012 Chapel Hill, NC

2 Session Objectives 1. Improve ability to assess financial health 2. Improve understanding of strategies and initiatives that support financial health Financial Policies Supplemental Services Pricing and Business Models Capital Planning

3 Annual MGD Is it variable or is it gone?? 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 Source: Seattle Public Utilities

4 Population What happened in Seattle Prices went up Homes became more efficient Water users became more efficient Decentralized initiatives increased 1,400, ,300, ,200,000 Population 240 1,100, ,000, , , ,000 Total Water Consumption , , , , , , Source: Seattle Public Utilities

5 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 The Conservation Conundrum: How declining demand affects water utilities. Journal AWWA, February 2010,

6 Rating Agencies Agency Rating Criteria Assessments and Special Reports Ratings System Fitch US Water and Sewer Revenue Bond Criteria (8/11) 2012 Water and Sewer Medians (12/8/11) 2012 Outlook: Water and Sewer Sector (12/8/11) AAA AA A BBB +,- Standard and Poors Standard and Poors Public Finance Criteria (2007) Sector Review: Funding Long-Term Needs Remains The Biggest Risk For U.S. Municipal Water And Sewer Utilities (1/31/12) How U.S. Municipal Water And Sewer Bond Ratings Correlate With Some Key Measures Of Issuers Credit Quality (9/26/2011) AAA AA A BBB +,- Moody s Research and Ratings RATING METHODOLOGY Analytical Framework For Water And Sewer System Ratings (8/1999) WATER AND SEWER SECTOR OUTLOOK: Water/Sewer Revenue Bonds Have Positive Rating Trends, With Billions In Issuance Expected Over Next 20 Years (2/2000) UK Water Sector Outlook 2011 Industry Outlook (10/2011) Aaa Aa A Bb 1,2,3

7 North Carolina Benchmarking LGC Memo: Statistical Information on Water and Sewer Operations (forthcoming) EFC Water and Wastewater Financial Benchmarking (any day now) SOG Benchmarking Project

8 Indicators Operating Ratio = Operating Revenues/ Operating Expenditures Operating Margin = (Operating Revenues Operating Expenses**)/Operating Revenues **Operating Expenses include Depreciation which is not a cash expenditure 8

9 Indicators Debt Service Coverage = Revenue available to pay debt service/debt Service Revenues available to pay debt service = Operating Revenues (Operating Expenditures + Other Essential Expenditures)

10 Example Operating Revenue $3.2 million Operating Expenditures $2 million Contractual Payment to City $200,000 Combined Debt Service (P&I) $500,000 Overall Debt Service Coverage Ratio = ( )/0.5 = 2.0

11 Millions Reported NC Utilities Aggregate Operating Revenues and Expenses (inc. dep.) ( ) $2,500 Number of Utilities 1800 Operating Revenues $2,000 Operating Expenses $1, $1, $ $ Fiscal Year Ending 200 0

12 $6,000,000 $5,000,000 North Carolina Utilities Average Operating Revenues and Expenditures ( ) Average Operating Revenues Average Operating Expenditures Op. Revenues by Inflation (CPI) $4,000,000 $3,000,000 $2,000,000 $1,000,000 $ Fiscal Year Ending

13 Do Water and Wastewater Rates Cover System Costs?

14 Small Water Systems vs. Large

Billed Water (MGD) Water Sales (1980-2009) (Slide provided by Orange Water and Sewer Authority) 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.

18 Billed Water (MGD) Water Sales ( ) (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

19 Meeting Revenue Challenges Costs Finance Policies New pricing and business models Supplemental services (behind the meter) Affordability programs Communication, communication

20 What are you Doing?

21 Do you have an approved set of water/wastewater finance policies? 1. Yes 2. No 3. Workin on it 23% 31% 46% Yes No Workin on it

22 Does your utility have a "finance policy" that sets financial targets and goals, such as reserve balance, debt service ratios, etc.? n = 260 If yes: is your "financial policy" Governing Board-approved? Don't know if have a finance policy 12% Finance policy is Board-approved 34% Do not have a finance policy 47% Have a finance policy 41% Source: NCLM/EFC 2010 NC Water and Wastewater Financial Practices and Policies Survey Finance policy is not Boardapproved 3% Don't know if finance policy is Board-approvd 4%

23 Orange Water and Sewer Authority ments.aspx

24 Financial Policies and Guidelines: Internal financial policies EBMUD Financial Indicator Target Working capital reserve Self-insurance reserve 3x monthly net O&M expenses 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

25 Other Measures Supplemental Services Affordability Programs

26 PRICING AND BUSINESS MODELS

27 How satisfied are you with your rates and the revenue they generate? 1. Not at all need an overhaul 2. Not very they need a lot of work 3. Somewhat tweaks needed 4. Very no changes needed Not at all need an... Not very they need a... 0% 0% 0% 0% Somewhat tweaks... Very no changes n...

28 How satisfied are you with your rates and the revenue they generate? (2011) 1. Not at all need an overhaul 2. Not very they need a lot of work 3. Somewhat tweaks needed 4. Very no changes needed

29 Rates background: GS 160A-314 /153A-277 A) A city may establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by any public enterprise.

30 Rates per SL /HB 2499 water rate structures that are adequate to pay the cost of maintaining, repairing, and operating the system, including payment of principal and interest on indebtedness incurred for maintenance or improvement of the water system also consider the effect of water rates on water conservation and recommend rate structures that support water conservation.

31 Rate Setting Resource Free guide written for utility managers in June 2009 (funded by DENR). cations/2009/guidelinesdes igningratestructures.pdf

32 CURRENT RATES (PRELIMINARY RESULTS)

33 Annual NC Water and Wastewater Rates Survey NC League of Municipalities Environmental Finance Center at the School of Government Collaboration since 2005 (8 years) Funded by the Public Water Supply Section at NC DENR In 2012: 494 utilities. 92% of local government, non-profit and multisystem private utilities Free, online information: tables, summary report, Rates Dashboards, rate sheets at and

34 Which Rates were Studied? Rates for 494 utilities across NC Rates for water, irrigation and wastewater service Rates for residential and for nonresidential (small commercial) customers Rates for inside and outside customers Including base charges and allowances

35 Preliminary Results Graphs and data shown in this presentation represent January 2012 rates, and are PRELIMINARY results. Please do not quote. Final results will be shared in March 2012 and be made available at

36 Base Charges Low bills for low consumption amount vs. Revenue stability Preliminary results do not quote

37 Residential Rate Structures Water Wastewater Rate structures applicable to residential customers for consumption up to 15,000 gallons/month only Preliminary results do not quote

38 Pricing Different Services ~25% use separate rate structures for non-residential customers ~12% use separate rate structure for residential irrigation water

39 Residential Water Bills Among 521 Rate Structures Preliminary results do not quote

40 Affordability of Rates Medians: 0.9% water, 1.1% sewer Preliminary results do not quote The average North Carolinian pays $69.70/month for 5,000 gallons of water and wastewater

within the past two years Only 3% of utilities have

41 Changes in Rate Structures and Rates Since Last Year 50% increased rates last year 83% changed rates within the past two years Only 3% of utilities have not changed rates since Preliminary results do not quote

42 Changes in Rates Since Last Year Half of the rate increases were for more than 4%. Preliminary results do not quote

44 100% Utilities Changing Water Rates (Among the Same 361 NC Utilities) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

45 14% Water Rate Increases for 5,000 Gallons/Month (Among the Same 361 NC Utilities) 12% 10% Median - 75th 25th - Median 8% 6% 4% 2% 0%

46 $70 Median Water Monthly-Equivalent Bill (Same 361 NC Utilities Throughout the 5 Years) $60 $50 $40 $30 $20 14,000 gallons/month 10,000 gallons/month 5,000 gallons/month 2,000 gallons/month $10 $

47 Rates Dashboards Interactive tool to compare rates (bills) among all utilities, or utilities with similar characteristics: System size (number of accounts or revenues) Technology (water source type or river basin) Location (regional council, 50 miles distance) Economic development tiers Available online at

48 Webpages on NC Rates (with report, tables, Dashboards, more) The 2012 report, tables and Rates Dashboard will be available in March 2012

49 PRICING

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

53 Pricing Case Studies 1. City of Raleigh source water protection component 2. City of Charlotte base charge modification 3. Beufort Jasper

54 Source: Lisa Creasman, CTNC/UNCWI

57 n = 261 Does your utility pay for watershed protection or land acquisition from the revenues it collects from customers? No 77% Don't know 11% Yes 12% Source: NCLM/EFC 2010 NC Water and Wastewater Financial Practices and Policies Survey

58 INCREASING REVENUE STABILITY BY INCREASING FIXED CHARGES

59 Are there alternatives? 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.

61 What would you do? Recent extreme drought revealed water supply vulnerability and the need for water efficiency and conservation Extreme monthly/yearly revenue variations have been problematic Annual average across the board rate increases of 7.5% over last 5 years with some unscheduled increases as high over 10%.

63 City of Charlotte Rate Study 2011, Red Oak Consulting

65 City of Charlotte Rate Study 2011, Red Oak Consulting

68 Charlotte-Mecklenburg Utilities Adopted Rate Increase Water Rates Fixed Charges Billing Charge $2.40 Availability Fee $2.25 Usage Rates Tier 1: 0-4 ccf $0.98 Tier 2: 4-8 ccf $1.96 Tier 3: 8-16 ccf $3.41 Tier 4: <16 ccf $5.32 Sewer Rates Fixed Charges Billing Charge $2.40 Availability Fee $4.30 Usage Rate $4.14 Sewer Cap Single-Family Res 16 ccf Multi-Family Res 11 ccf Non-Res None

69 2010

70 2011

71 2012

72 2012

74 Case Study: Beaufort-Jasper Water and Sewer Authority ALTERNATIVES TO THE CLASSIC PRICING MODEL

75 The Customerselect Model This model is based on the plans offered by the majority of cell phone service providers, in which an allotment of use is included in one fixed charge. The customer chooses a plan and pays an overage fee if he/she uses more. See your local Verizon Wireless store Example residential structure Plan name Monthly water allotment Cost for w&s under current rate structure Customerselect cost (w&s) Overage Lifeline 2,000 gallons $12.00-$31.02 $25.99 $12.00/kgal Basic service/small family 6,000 gallons $40.53-$69.06 $59.99 $12.00/kgal Light irrigation/large family 10,000 gallons $78.57-$88.95 $79.99 $12.00/kgal Heavy irrigation 15,000 gallons $92.41-$ $99.99 $12.00/kgal Water waster Unlimited >$ $139.99* NA

76 Potential Benefits Increased revenue stability: Customers lock into plans Gives customer a choice: This means less administrative burden than budget-based rates of utility determining block rate for customers Moves more to a model of water and sewer service, rather than a commodity Promotes conservation, especially around the break points Relatively easy to add ancillary services (like service line protection) a la carte

77 Potential Challenges Complicates budgeting process: -How do you predict what plan customers will choose? -When will they lock in? -Can they change plans? How often? What is the optimal length of the contract? Does not fit with seasonal use of water: Water use is not as consistent month-to-month as cell phone use. Allowing roll-overs could help this, but would dissuade conservation. Customers will request real-time water use information: In order to provide this service, metering upgrades will be required.

The Peak-Set Base Model Under this rate structure, a customer s base charge would be individually set based on their three-year rolling average peak.

78 The Peak-Set Base Model Under this rate structure, a customer s base charge would be individually set based on their three-year rolling average peak. This would allow BJWSA to build more of their cost recovery into the base charge while still promoting customer conservation and efficiency. It would particularly encourage steady water use. Example residential structure

79 Use by other utilities/industries Energy utilities use a similar pricing model with demand charges. Demand charges are based on the highest rate of electrical flow (or current) during a billing period. The demand charge will be a large part of the bill if the customer uses a lot of power over short period of time, and a smaller part of the bill if the customer uses power at a more or less constant rate throughout the month. Most water meters are not capable of capturing the highest rate of flow over a billing period. However, with relative ease, water utilities could adopt an inspired model by basing a year s base charge on the previous three year s rolling average.

80 Impact of Peak-Set Base on Utility and Residential Customers

81 Potential Benefits Increased revenue stability: There would be a larger percentage of revenue coming from base charge. Promotes steady customer water use: A high peaking ratio would be costly to a customer all year long. Customers can expect more steady bills: This might also mean reduced customer cutoffs. Would not require metering upgrades

82 Potential Challenges Requires methodology for determining base charges for new customers Potentially requires billing software upgrade BJWSA may expect more meter re-reads and high bill disputes because of the longterm impact of a high meter read. A customer that is planning moving will not have a large incentive to conserve.

83 Dividend Model At the end of the fiscal year, BJWSA would return profit to customers in the form of a dividend; the dividend would be based on the water stewardship of that customer. A dividend model could be combined with existing or any other pricing model. BJWSA could define water stewardship in any number of ways: budgetbased, customer-select, or relative to customer use (average water use or peaking factor).

84 Example Structure The following example shows a method for calculating dividends based on a customer s recent water use compared to the rolling average of the past three years. After a third party audit, it is deemed that BJSWA earned $500 profit. In the following sample, there are six customers that reduced their average water use this year compared to the past three years. Their portion of the profits are calculated based on each steward s share of the reduction. The following table shows how BJWSA might provide water stewardship dividends to their customers.

85 Example Structure 3-year rolling average ( ) 2011 average water use Reduction ( average water use/3-year rolling average) Portion of Reduction (Customer reduction x total reduction) Portion of Profit (% of total reduction x utility profit) Household A Household B 3,000 2,500 17% reduction 14% of total reduction 8,000 4,000 50% reduction 41% of total reduction $70 $205 Household 5,500 5,350 3% reduction 2% $10 C Household 4,000 4,200 No reduction 0% $0 D Business A 2,500 2,450 2% reduction 2% $10 Business B 10,000 8,000 20% reduction 16% $80 Business C 500, ,000 30% reduction 25% $ % 100% $500

86 Potential Benefits This model drives the message that BJWSA is not a for-profit entity: Profits are returned to customers. Provides a positive way for BJWSA to interact with customers: Palmetto Electric issues checks on December 1. Ensures that utility first-and-foremost meets financial goals Depending on how this model was set up, it most likely would not require metering or billing upgrades.

87 Potential Challenges Added administrative costs of calculating and cutting checks Disincentive to conserve during first years as a customer establishes a baseline The more people that act as water stewards, the less money there is to go around more customers. This could be discouraging.

88 NC Rate Setting Resources Guide to Billing, Kara Millonzi Rates Book EFC Web Resources (data, guidelines, dashboard) LGC Data Painful Art of Rate Setting Rates Course 2/23/2010 Rate Setting Guide AWWA M1 Guide Rural Water Association Consultants NCLM/EFC Practices Survey (Coming soon!!)

89 Jeff Hughes Environmental Finance Center University of North Carolina CB #3330, Knapp-Sanders Building Chapel Hill, NC USA

Rates, Rates and More Rates

Rates, Rates and More Rates Jeff Hughes David Tucker February 5-6, 2013 Chapel Hill, NC www.efc.unc.edu Session Objectives 1. Provide update on state of rates 2. Provide strategies for dealing with rate