UNIVERSITY OF WISCONSIN MADISON WATER SYSTEM MANAGEMENT AND DECISION MAKING: IS IT TIME FOR CHANGE?

Transcription

1 UNIVERSITY OF WISCONSIN MADISON WATER SYSTEM MANAGEMENT AND DECISION MAKING: IS IT TIME FOR CHANGE? The Changing U.S. Water Industry

2 AGENDA 1. Industry Challenges 2. The Rising Cost of Water 3. Where will the Money Come From? 4. Industry Solutions 5. The Trend of Regionalization 6. Is Private Investment Coming to Water? 2

3 INDUSTRY CHALLENGES Reports based on industry wide surveys More than 1,200 industry respondents State of the Water Industry Report 56% Utility Professionals 44% Non Utility Professionals Survey Completed Late 2012 Strategic Directions Report Respondents are Utility Organization Professionals Survey Completed Early

4 TOP 10 MAJOR TRENDS Industry Issues Rank State of the Water Industry Report Strategic Directions Report 1 State of water and sewer infrastructure Aging water and sewer infrastructure 2 Lack of public understanding of the value of water Managing capital costs 3 Capital costs and availability Managing operational costs (energy, chemicals, etc.) 4 Water supply and scarcity Funding or availability of capital 5 Aging workforce/talent attraction and retention Increasing/expanding regulation 6 Drought Information technology 7 Customer, constituent and community relationships Treatment technology 8 Cost recovery Aging workforce 9 Regulation and government oversight Water scarcity or availability and/or conservation 10 Emergency preparedness Water loss (non revenue water) 4

5 AGING WATER AND SEWER INFRASTRUCTURE American Society of Civil Engineers 2013 Report Card on America s Infrastructure ASCE estimates 240, water main breaks/year in the U.S. Capital investments for wastewater and stormwater systems estimated to total $298 billion a number that will likely rise with increased regulatory requirements 5

6 THE COST OF WATER AND WASTEWATER INFRASTRUCTURE REPAIR AWWA Report, Buried No Longer $1 Trillion for potable water pipe networks USEPA Drinking Water Infrastructure Needs Survey and Assessment $127 Billion for water treatment, storage and source ASCE Report Card $298 Billion for wastewater and stormwater TOTAL $1,425,000,000,000 6

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9 Rank INFRASTRUCTURE RENEWAL AND REPLACEMENT ARE MORE FINANCIALLY CHALLENGING THAN TECHNICALLY DIFFICULT State of the Water Industry Report Industry Issues Strategic Directions Report 1 State of water and sewer infrastructure Aging water and sewer infrastructure 2 Lack of public understanding of the value of water Managing capital costs 3 Capital costs and availability Managing operational costs (energy, chemicals, etc.) 4 Water supply and scarcity Funding or availability of capital 5 Aging workforce/talent attraction and retention Increasing/expanding regulation 6 Drought Information technology 7 Customer, constituent and community relationships Treatment technology 8 Cost recovery Aging workforce 9 Regulation and government oversight Water scarcity or availability, and/or conservation 10 Emergency preparedness Water loss (non revenue water) 9

10 REVENUES VERSUS COST OF SERVICE Yes, rate revenues cover cost of service and needed capital improvements Yes, rate revenues cover cost of service, but do not cover needed capital improvements No, there is a large gap between rate revenues and cost of service No, there is a small gap between rate revenues and the cost of service I don t know 4.0% 6.8% 29.5% 53.8% 5.8% Source: Black & Veatch Respondents were asked if revenues generated under their utility's current rate structure fully cover the cost of providing water and/or wastewater services, as well as necessary capital improvements. 10

11 REVENUES COVER COST OF SERVICE BY ORGANIZATION TYPE Municipal department Municipal utility commission/authority 6.6% 2.4% 4.6% 5.9% 1.2% 8.6% 31.8% 30.6% 48.3% 60.0% No, there is a large gap between rate revenues and cost of service No, there is a small gap between rate revenues and the cost of service Yes, rate revenues cover cost of service, but do not cover needed dcapital Yes, rate revenues cover cost of service and needed capital improvements I don't know improvements Source: Black & Veatch Respondents were asked if revenues generated under their utility's current rate structure fully cover the cost of providing water and/or wastewater services, as well as necessary capital improvements. 11

12 FULL COST OF RECOVERY 28% 20% 22% 19% 7% 4% Not at all Able Fully Able NA Source: AWWA 2013 State of the Water Industry Report Utility personnel were asked if they thought their utility was able to cover the full cost of providing water service, including infrastructure replacement and expansion needs, given what customers currently pay. 12

13 AGENDA 1. Industry Challenges 2. The Rising Cost of Water 3. Where will the Money Come From? 4. Industry Solutions 5. The Trend of Regionalization 6. Is Private Investment Coming to Water? 13

14 RATEINCREASES NEEDED TO RECOVER COSTS 5% to less than 10% 10% to less than 15% 20% or more I don t know Less than 5% 15% to less than 20% 6.3% 29.4% 24.4% 5.0% 17.5% 17.5% Source: Black & Veatch Respondents who indicated that current rates do not cover cost of service and necessary capital improvements were asked to select the range in which rates needed to rise to cover the cost of providing services and implement necessary capital improvements. 14

15 50 LARGEST CITIES WATER/WASTEWATER RATE SURVEY Prepared by Black & Veatch s Management Consulting Division Focuses on top 50 U.S. cities determined by population Survey has been completed 6 times since 2001 The 2013 Survey results reflect rates in effect as of April 2013 Survey focuses on residential, commercial and industrial typical bills 15

16 $45 WATER AND WASTEWATER RATE TREND RESIDENTIAL 7,500 GALLONS TREND $40 $35 $30 WATER SEWER $25 $20 $ * * * * 2011* 2012* 2013 WATER $17.0 $17.3 $17.7 $18.6 $19.5 $20.4 $21.2 $23.4 $25.6 $27.4 $29.1 $30.9 $32.7 SEWER $21.9 $22.3 $22.9 $24.5 $26.1 $27.4 $28.7 $31.2 $33.8 $36.4 $39.1 $41.8 $44.5 Source: Black & Veatch 2013 Rate Survey * Survey results for these years are extrapolated based on the average of the preceding and following year. 16

17 WATER AND WASTEWATER RATE TREND COMPOUND ANNUAL INCREASE IN SURVEYED TYPICAL BILLS Water Sewer CIP Source: Black & Veatch 2013 Rate Survey 17

18 50 LARGEST CITIES WATER/WASTEWATER RATE SURVEY Residential Customers 7,500 Gallons Billable Water Usage Community Water$ Rank Sewer $ Rank Combined $ Rank Atlanta Seattle Milwaukee El Paso Memphis Source: Black & Veatch 2013 Rate Survey 18

19 AGENDA 1. Industry Challenges 2. The Rising Cost of Water 3. Where will the Money Come From? 4. Industry Solutions 5. The Trend of Regionalization 6. Is Private Investment Coming to Water? 19

20 FINANCING PROGRAMS Adopted already Considering for the coming years Not adopted or considered at all I don t know General obligation or revenue bonds 70.6% 9.2% 11.5% 8.7% State revolving funds 54.2% 13.2% 21.1% 11.5% Alternative rate structure 29.3% 25.2% 28.8% 16.7% Energy performance or service contracts 18.7% 18.4% 37.6% 25.4% Public private partnerships 15.9% 19.0% 42.8% 22.3% Alternative tax structures 5.4% 4.9% 58.3% 31.3% Regional tax sharing 4.9%3.4% 61.2% 30.5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Black & Veatch Respondents were asked what finding sources they are suing or plan to use to finance capital programs. 20

21 PAST DECADE OF MUNICIPAL BOND FINANCING $50,000 $40,000 $30,000 $20,000 $10,000 Millions $ Considering the $1.425 trillion dollar need, current municipal bond funding will require a 40 year replacement period. Source: Bond Buyer 21

22 ASCE REPORT CARD FUNDING GAP (IN BILLIONS OF 2010 DOLLARS) Total Estimated Funding Infrastructure t Systems Needs Funding Gap Surface Transportation $1,723 $877 $846 Water/Wastewater Infrastructure Electricity Airports Inland Waterways & Marine Ports Dams Hazardous & Solid Waste Levees Public Parks & Recreation Rail Schools TOTAL 2020 $3,635 $2,024 $1,611 ANNUAL INVESTEMENT $454 $253 $201 Source: ASCE 2013 Report Card Notes: Total needs estimated through

23 WATER INFRASTRUCTURE FINANCE AND INNOVATION AUTHORITY (WIFIA) Proposed in 2012 by U.S. Representative Bob Gibbs, chair of the House Subcommittee on Water Resources and Environment Funds from U.S. Treasury at Treasury Rates Intended to fund large (> $20 million) water, wastewater and stormwater projects Proposal considers a May 2011 comparison: Treasury rate 4.04% Municipal i market 54% 5.4% plus underwriting i fees Anticipated 16% debt service savings on 30 year loan 23

24 AGENDA 1. Industry Challenges 2. The Rising Cost of Water 3. Where will the Money Come From? 4. Industry Solutions 5. The Trend of Regionalization 6. Is Private Investment Coming to Water? 24

25 INDUSTRY SOLUTIONS TO THE CAPITAL/FUNDING GAP VALUE OF WATER CUSTOMER UNDERSTANDING OF COSTS VERSUS RATES Little understanding No understanding at all Neutral Understanding Full understanding No gap exists between rates paid and cost of service 8.9% 49.6% 14.0% 11.2% 1.3% 15.0% Source: Black & Veatch Respondents were asked how well their consumers understood the gap between current rates and the cost of providing safe reliable water and/or wastewater services. 25

26 $200 TRENDS IN UTILITY BILLS TRENDS IN AVERAGE MONTHLY UTILITY BILLS $150 $100 $50 $ Water Residential 7,500 gallons Bundled Cable Energy Sewer Residential 7,500 gallons Cell Phone Sources: Bundled cable (internet, cable and phone) The Wall Street Journal, December 29, 2011 Cellular phone data from CTIA industry survey and uses 2.7 mobile phones/household Average energy bill data from EIA 26

27 CUSTOMERS WILLINGNESS TO PAY INCREASED RATES Probably will Probably will not Neutral Definitely will not Definitely will I don t know 2.0% 23.7% 19.4% 41.8% 7.8% 5.3% Source: Black & Veatch Respondents were asked whether or not they believed customers are willing to pay increased rates to support capital spending requirements. 27

28 INDUSTRY SOLUTIONS TO THECAPITAL / FUNDING GAP ASSET MANAGEMENT Current stage Three years from now 50% 44.1% 47.4% 40% 30% 20% 28.8% 18.2% 18.9% 24.9% 10% 0% 3.8% Limited understanding of asset management and not sure where to start 1.4% 3.8% 3.1% 4.3% 1.3% Basic understanding of asset management Good understanding of asset management; Implementation is in progress Very good understanding; Good practice asset management is integrated and applied throughout the organization Excellent understanding; Leading the way in development of asset management concepts and ideas I don't know Source: Black & Veatch Respondents were asked to select the response that best describes the level of asset management maturity within their organization today and what they expect it to be in three years. 28

29 INDUSTRY SOLUTIONS TO THE CAPITAL/FUNDING GAP ASSET MANAGEMENT 43% 21% 22% 10% 2% Not at all Satisfied Fully Satisfied 2% NA Source: AWWA 2013 State of the Water Industry Report Respondents from utility personnel regarding how confident they are that their utility s asset management strategy adequately identifies all repair and replacement needs plus future expansion requirements. 29

30 INDUSTRY SOLUTIONS TO THE CAPITAL/FUNDING GAP ASSET MANAGEMENT BENEFITS OF ASSET MANAGEMENT IMPROVEMENT PROGRAMS No benefit Some benefit High benefit I don t know Prioritizing infrastructure replacement Effective CIP development and implementation Better asset condition and remaining life Justification for project financing and rate increases 1% 0.3% 1.3% 1.0% 12.8% 21.1% 26.3% 27.4% 84.7% 46.6% 70.9% 70.3% 1.5% 2.0% 1.5% 1.3% Improved asset inventory data 1.8% 27.2% 70.0% 1.0% Capital and operating cost efficiencies 1.8% 31.9% 64.8% 1.5% Ability to understand and manage risk 1.3% 32.4% 64.8% 1.5% Operational optimization36% 3.6% 46.7% 48.2% 15% 1.5% Knowledge transfer & interdepartment communication 3.6% 49.0% 44.4% 3.1% Determining level of service goals 4.1% 51.5% 40.8% 3.6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Black & Veatch Respondents were asked to rate the level of benefit an asset management improvement program will have on each of the listed activities. 30

31 INDUSTRY SOLUTIONS TO THECAPITAL / FUNDING GAP ASSET MANAGEMENT TOOLS & SYSTEMS USED TO SUPPORT ASSET MANAGEMENT Currently in use and supports all asset Currently in use and requires Planning to implement within the management needs improvement tto fully support the needs next 2 years Not currently in use and no plans to implement I don t know GIS system 37.4% 51.7% 5.1% 3.1% 2.8% CIP prioritization 36.9% 46.1% 9.7% 4.1% 3.3% Hydraulic models 33.9% 48.0% 5.4% 6.1% 6.6% Computer maintenance management systems 20.9% 49.0% 17.3% 5.6% 7.1% Condition assessments and inspections 20.2% 2% 50.3% 19.9% 9% 56% 5.6% 41% 4.1% Paperless work order management system 15.1% 38.0% 27.3% 11.5% 8.2% Mobile applications 11.0% 28.3% 32.7% 14.3% 13.8% Enterprise management software 10.5% 26.3% 22.0% 18.9% 22.3% Dashboards 7.4% 23.9% 30.3% 18.8% 19.6% Deterioration models 7.9% 17.6% 45.0% 27.4% 20% 2.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Black & Veatch Respondents were asked to select the current usage and/or plans for any of the following tools and systems used to support asset management within their utility. 31

32 AGENDA 1. Industry Challenges 2. The Rising Cost of Water 3. Where will the Money Come From? 4. Industry Solutions 5. The Trend of Regionalization 6. Is Private Investment Coming to Water? 32

33 WHAT IS DRIVING REGIONALIZATION? Increased efficiency through economies of scale Access to water resources and integrated water resources management Centralized operation and governance Enhanced professional capacity in larger scale of operation Access to finance or/and to private sector participation Cost sharing between higher and lower cost service areas 33

34 REGIONALIZATION SPECTRUM Least Risk Sharing and Potential Benefits Most Risk Sharing and Potential Benefits Inter Governmental Cooperation Special Service "Authority/Agreement" Self Contained Authority Merged Utility Entity Utilizes operating agreements, One entity operates treatment All systems combined under Essentially the stronger wholesale contracts, basic facilities; all members buy one legal operating entity that entities buy the weaker service contracts or joint from treatment authority reduce or eliminate the entities service agreements between autonomy of local systems entities Pros: No loss of control May not have to expand plant More efficient use of resources Eliminate duplication of facilities No voter approval required Cons: Very little economic benefit Very little risk sharing Not lowering the combined system costs Temporary solution (possibly) Pros: Each entity maintains control of distribution system/growth May have economies of scale from combined capacity Risk sharing only on treatment Cons: Typically only benefit from wholesale rate path Potential loss of control over capacity/treatment plants No economies of scale on collection/distribution Pros: Total sharing of risk Cost savings optimized through economies of scale Provide for more permanent solution to supply problems Larger entity can seek wider range of financing sources Can spread large capital expenditures over a larger customer base. Cons: No control except through voting rights negotiated by entities Can be most difficult because of system valuation Voter approval required Pros: Acquired entity not burdened with system maintenance Potential economies of scale for a larger system whereby acquired entity may benefit Cons: Loss of control for acquired entity only Potential loss of revenues for acquired entity No risk sharing; acquiring entities bare all the risk 34

35 CASE STUDY GASTON COUNTY, NORTH CAROLINA SEWER REGIONALIZATION STUDY BACKGROUND Charlotte suburb Textile impact 15 entities considered Small system discharges Large system capacity Some ongoing intergovernmental cooperation BENEFITS / INSIGHTS Savings of more than 20% of total costs Lower rates for customers Reduced source point discharge Governance selection challenges Identification of regional cooperation opportunities Two Rivers Water Utilities 35

36 GASTON COUNTY SEWER CONSOLIDATION 36

37 AGENDA 1. Industry Challenges 2. The Rising Cost of Water 3. Where will the Money Come From? 4. Industry Solutions 5. The Trend of Regionalization 6. Is Private Investment Coming to Water? 37

38 OPPORTUNITIES FOR PRIVATE INVOLVEMENT Least Risk Sharing and Potential Cost Benefit Most Risk Sharing and Potential Cost Benefit Private Provision for Services Outsourcing support operations, such as laboratory, meter reading, billing, etc. Private Contracting for Operations and Maintenance Outsourcing direct operations Design Build Operate (DBO) DBO can include long term operating contracts or private ownership IOU Conversion to Investor Owned Utility 40% of water systems claim to utilize some degree of private involvement 38

39 WATER OWNERSHIP CONVERSION IN ENGLAND AND WALES Water and wastewater service moved to the private sector in 1989 Governmental strategy, also encompassing telecom and energy Prior to privatization, water and wastewater were public water authorities Contributing factors: Limits on public sector borrowing Funding challenges for asset maintenance and improvement Cost of meeting water quality directives set by European Union Formation of the Drinking Water Inspectorate (DWI) OFWAT created to control water bills and set service levels First six years following privatization, 17 billion investment Compared to 9.3 billion in the prior 6 years 39

40 WHAT S DRIVING PRIVATE INVESTMENT? What industry factors could lead water systems to consider private investment? City/county funding needs Utility capital funding needs Willingness/unwillingness of stakeholders to increase rates Ability/inability to prosecute needed capital projects Regulatory drivers Reduce operating expenses Operational technology challenges 40

41 CHANGING OWNERSHIP The question of changing ownership has many valid answers; however, is largely dependent on a communities specific situation. Pros and Cons of Private Investment Pros: Cash Influx Funding for other community services Avoid Regulatory Issues Avoid idrate Increase Debate Db Cons: Control Private Owner vs. Customer Interest Service Expansion Environmental Factors 41

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