Jeff Hughes, Environmental Finance Center at UNC

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1 Moving Beyond Dollars Per Gallons Sold (#38983) Defining a Resilient Business Model for Water Utilities Water Research Foundation #4366 ACE 2013 DENVER Wednesday; 3:30 5:00PM Jeff Hughes, Environmental Finance Center at UNC jhughes@unc.edu

2 Project Title(s) Water Research Foundation Project #4366 Defining a Resilient Business Model for Utilities Assessing Financial Trends and Developing Strategies and Practices to Address Challenges If it is Broke, Maybe you Should Fix it

3 Team: Environmental Finance Center at UNC Jeff Hughes Principal Investigator Mary Wyatt Tiger Project Manager Shadi Eskaf Technical Lead Stacey Isaac Berahzer Outreach Coordinator Sarah Royster Technical Support

4 Team: Raftelis Financial Consultants Peiffer Brandt Co-Principal Investigator Doug Bean Project Advisor and Liaison Alexis Warmath Utility Liaison Catherine Noyes Technical Support Rocky Craley Technical Support

5 Project Advisory Committee Nick Dugan, US Environmental Protection Agency Amber Halloran, Louisville Water Company Scott Haskins, CH2M Hill Myron Olstein, Independent Consultant

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

7 Interested in Project Report coming fall 2013 Water Research Foundation Website Project Blog efc.web.unc.edu

8 One Utility s Experience

9 And Another s Newport News Waterworks Drop in Demand

10 Fixed vs. Variable Revenues and Expenses

12 Revenue Impact of Reduced Volumetric Sales (10,000 gallons to 5,000 gallons per month)

14 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: Analysis by UNC Environmental Finance Center using Data from Texas Municipal League

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

15 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

16 Water Utility 2.0?

17 Change what you sell Capacity Readiness to Serve Pricing and selling fire protection

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

19 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

20 Change How You Sell It

21 WaterWise Dividend Model

23 Skepticism Among the Judges

24 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 Comparison of BJWSA current residential rate to a revenue neutral PeakSet Base model 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

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

26 Water Charge $ Peak-set Base: Example of Customer Impact (Beaufort Jasper Water and Sewer Authority Simulation) Comparison of monthly charges for water under current rate and a Peak-set Base model $ $80.00 $60.00 Current Rate ($ ) AR1 ($ ) $40.00 $20.00 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) Mar (6.6) Apr (11.4) May (18.7) June (29.9) Fiscal Year 2011 (kgal consumed)

27 Beaufort-Jasper Water and Sewer Authority By Account Residential High Fixed

28 Feedback from Expert Panel 8: This model is intriguing. I like that it relates to customer classification. I think it should target the largest customers first. I do worry about customers understanding the mixed signals. (Beecher) 8: This model provides a steady stream of revenue for the utility, which makes it very attractive to me. I like that it helps customers manage their peak demand. (Scott) 7: I like that the base rate is set based on use, rather than need but what happens if people really conserve? (Walker)

29 On a scale of 1-5, how well would the Peakset Base Model work for your utility or the utilities you work with? 1. Very well 39% 2. Pretty well 3. Maybe so, maybe not 4. Not well 5. Dreadfully 27% 12% 18% 3% Poll taken by EFC of approximately 30 utility staff officials at 2012 AWWA s ACE in Dallas

30 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

31 QUESTIONS??? COMMENTS!!!

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