Revenue Trends, Pricing Signals, and Financially Resilient Utilities: Understanding and Adapting to New Challenges

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Hughes Director Environmental Finance Center at the University of

1 Revenue Trends, Pricing Signals, and Financially Resilient Utilities: Understanding and Adapting to New Challenges Jeff Hughes Director Environmental Finance Center at the University of North Carolina efc.unc.edu (919)

Smart Management for Small Water Systems *under a Cooperative Agreement with the US EPA The EFCN will provide training and technical assistance to small public water systems in all fifty states and

2 Smart Management for Small Water Systems *under a Cooperative Agreement with the US EPA The EFCN will provide training and technical assistance to small public water systems in all fifty states and five territories to help local water systems achieve and maintain compliance with the Safe Drinking Water Act. Workshops and trainings will be provided in these areas: Asset Management Water Loss Reduction Water System Collaboration Fiscal Planning and Rate Setting Energy Management Funding Coordination, and Managerial and Financial Leadership Contact Information: Glenn Barnes glennbarnes@sog.unc.edu

and future fiscal challenges To explore new methods of identifying and reducing the risks associated

3 Defining a Resilient Business Model for Water Utilities Water Research Foundation Project #4366 Objectives: To define new financial approaches and paradigms for water utilities in addressing current and future fiscal challenges To explore new methods of identifying and reducing the risks associated with revenue variability On-going research discussion at Final research will be at

4 WHAT IS YOUR BUSINESS MODEL, WHAT DO YOU SELL?

6 Gallons per Month Average Household Water Use for the State of Texas and Selected Municipal Utilities, (Gallons per Month) (TX annual n from 365 to 661) 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 Houston (-5%) Corpus Christi (-5%) Odem (-14%) (pop. 2,611) Texas Statewide Average (-8%) Year Data Source: Texas Municipal League

7 Percentage of 423 Texas Municipal Water Utilities 25.00% Percentage Changes in Average Household Water Use for 423 Texas Municipal Water Utilities, (Self-Reported) 22.93% 20.00% 16.78% 16.78% 15.00% 10.00% 10.64% 7.80% 8.27% 10.64% 5.00% 3.31% 2.84% 0.00% > +100% > +40% and <= +100% > +20% and <= +40% > 0% and <= +20% 0% >= -20% and < 0% >= -40% and < - 20% >= -60% and < - 40% Percentage Change in Average Household Water Use (Increase or Decrease) < -60% Data Source: Texas Municipal League

8 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

9 Why? Breakdown of Louisville (KY) Water Company residential water decline between 1990 and 2007 Parameter Allotment gpd Household use gpd PMDI People per household Educational index Average home value $120,100 $144, Home size 2,155 sq. ft. 2,281 sq. ft Total = GPD attributed to increased installation of low-flow appliances Rockaway, T.D., P.A. Coomes, J.Rivard & B. Kornstein. (2011) Residential water use trends in North America. Journal AWWA. February 2011,

10 Number of Water Utilities Percentage Changes in Water Bill Prices at 5,000 Gallons per Month for 513 Texas Municipal Water Utilities, <= -20% > -20% and < 0% 0% > 0% and <= 20% > 20% and <= 40% > 40% and <= 60% > 60% and <= 80% > 80% and <= 100% > 100% and <= 200% > 200% Percentage Change in Water Bill (Increase or Decrease) Data Source: Texas Municipal League

11 Monthly Bill Amount Median Prices for Texas Municipal Residential Water Bills at 5,000 GPM and 10,000 GPM, (TX annual n ranges from 501 to 685) $45.00 $40.00 $ kgal $ kgal $25.00 $20.00 $ Year Data Source: Texas Municipal League

12 Average Perice per 1 kgal for a 5 kgal per Month Water Bill Correlation between 2012 Average Monthly Household Water Use and Average Price/1,000 Gallons for a 5,000 GPM Water Bill (661 TX Municipalities) $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $ ,000 10,000 15,000 20,000 Average Household Water Use (Gallons per Month) Data Source: Texas Municipal League, Texas Water Development Board

13 Change in the Total Revenue Driving Revenue Through Rate Increases 100% 80% 60% 40% 20% From 2007 to 2010 across 103 TX utilities CPI inflation between the two years 0% 0% 20% 40% 60% 80% -20% Change in the Total Monthly Bill for 5,000 Gallons -40% Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill. Data sources: Texas Municipal League annual TX water and sewer rate surveys (self-reported), Texas Water Development Board data from audited financial statements of utilities with outstanding loans.

14 Source: Fayetteville Observer 2/6/04

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

17 EBMUD

18 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

20 ALTERNATIVE RATE STRUCTURES

21 16 Challenge: Uncertain Revenue Changes in water use have had: A large negative impact A small negative impact No impact A small positive impact A large positive impact Source: Water Resource Foundation/Environmental Finance Center

22 Fixed versus variable Data analyzed by the Environmental Finance Center at the University of North Carolina. Data source: Each utility s customer billing records, project funded by NC Urban Water Consortium

23 Charlotte-Mecklenburg Utilities Water and Sewer Revenues Fixed versus variable 100% 90% 80% 70% 60% 50% 40% Variable Fixed 30% 20% 10% 0% * Data sources: Mickey Hicks, CFO, Charlotte-Mecklenburg Utilities

24 Peakset Base Model Inspiration = energy sector A customer s base charge would be individually set based on their three-year rolling average peak Builds more of utility cost recovery into the base charge while still promoting customer conservation and efficiency % Fixed Revenue Base Rate Variable Rate Current Residential Rate Structure High Fixed (AR1) Medium Fixed (AR2) Low Fixed (AR3) 18% 57% 47% 37% $6.00/meter water + $6.00/meter - irrigation $3.46/kgal of previous month s use $1.85/kgal of historic peak demand $0.52/kgal of previous month s use $1.49/kgal of historic peak demand $1.25/kgal of previous month s use $1.12/kgal of historic peak demand $2.01/kgal of previous month s use

25 How would it impact individual customers? Comparison of monthly charges for water under current rate and two Peakset Base scenarios Resident 1 Rate structure (annual charge for water) FY10 Peak Demand 24,100 gallons

26 Questions?????? Jeff Hughes Director Environmental Finance Center at the University of North Carolina efc.unc.edu (919)

Capital Finance Overview: Dealing with the New Normal

Capital Finance Overview: Dealing with the New Normal Jeff Hughes Director Environmental Finance Center at the University of North Carolina efc.unc.edu jhughes@sog.unc.edu (919) 843-4956 www.efc.unc.edu