Defining a Resilient Business Model for Water Utilities Water Research Foundation #4366 Presentation to Louisville Water Company 10/14/2013

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Vernon Hampton
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jhughes@sog.unc.edu Shadi Eskaf, eskaf@sog.

1 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 UNC Environmental Finance Center

2 Resilient Business Models for Water Utilities Rates, Revenues and Resiliency: Current and Major Problems Facing Utilities: What Do the Numbers Say? Current Strategies and Practices: What are utilities doing now to address revenue oriented financial challenges. Emerging Strategies and Practices: What MIGHT Work in Addressing the Financial Problems Utilities are Facing?

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

7 TRENDS

8 Industry Revenue Roller Coaster

Changing Revenues of 2,838 Utilities in 6 States Data analyzed by the Environmental Finance Center at the

Revenues are: total operating revenues in CA, GA, NC, WI; gross revenues In OH; revenues that can pay for debt

: the same 946 utilities in CA are analyzed every year).

9 Changing Revenues of 2,838 Utilities in 6 States Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill and Raftelis Financial Consultants, Inc. Revenues are: total operating revenues in CA, GA, NC, WI; gross revenues In OH; revenues that can pay for debt service in TX. The sample of utilities in each state is consistent across all Years (e.g.: the same 946 utilities in CA are analyzed every year). Data sources: California State Controller s Office, Georgia Department of Community Affairs, North Carolina Local Government Commission, Ohio Water Development Agency, Texas Water Development Board, Wisconsin Public Service Commission.

10 One Utility s Experience

11 EPA Energy Policy 2003 Refinery Reuse 2008 AB Reductions 2012 Refinery Closed And Another s 70.0 Newport News Waterworks Drop in Demand MGD

12 Relative Fraction to FY2005 Baseline Total Operating Revenues Relative to FY Aqua America Inc. Clayton County Water Authority, GA Charlotte-Mecklenburg Utilities, NC EPCOR Utilities Inc. (Edmonton) WaterOne (Johnson County), KS Mesa Consolidated Water District, CA Metropolitan Water District of Southern California NEORSD, OH Yorba Linda, CA Louisville, KY Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill. Data Source: Income Statements and Comprehensive Annual Financial Reports.

13 Percent of Utilities How are revenues tracking against expenditures? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% O&M expenses rose faster than operating revenues Operating revenues and O&M expenses rose at about the same rate Operating revenues rose faster than O&M expenses 0% 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 an d Sewer Municipal Financial Ratio Analysis. The cohort of 583 utilities is consistant across all years. Increases of operating revenues and O&M expenses within +-1% are put in the "same rate" category..

14 PRACTICES AND STRATEGIES

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

16 Internal Financial Performance Targets (E.g. Charlotte Mecklenburg Utilities) Debt service coverage ratio minimum 1.80 Fund balance to be maintained at level equal to 100% of the operating expenses for the current budget for the operating year The City s goal is a 40-60% mix of PAYGO to financing within next 2 years 17

17 Internal Financial Performance Targets (E.g. EBMUD) EBMUD Financial Indicator Target Working capital reserve 3x monthly net O&M expenses Self-insurance reserve 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

18 Debt Service Coverage Ratio 4 Metrics Compared to Fitch's 2013 Medians for AAA, AA and A Rating Categories Days Cash on Hand Alameda County Water District (FY2012) Beaufort-Jasper Water & Sewer Authority (FY2012) Cape Fear Public Utility Authority (FY2012) Charlotte-Mecklenburg Utilities (FY2012) City of Durham Department of Water Management (FY2012) City of Raleigh Public Utilities Department (FY2012) Mesa Consolidated Water District (FY2012) Nashville Metro Water Service (FY2012) Town of Cary Public Works and Utilities Department (FY2012) Yorba Linda Water District (FY2012) Clayton County Water Authority (FY2011) Gwinnett County Department of Water Resources (FY2011) Louisville Water Company (FY2011) San Antonio Water System (FY2011) Water District No. 1 of Johnson County, Kansas (FY2011) Denver Water (FY2010) Northeast Ohio Regional Sewer District (FY2010) Orange Water and Sewer Authority (FY2010) Baltimore City Water & Sewer (FY2009) AAA Median for Days Cash on Hand AAA Median for All-In ADS Coverage AA Median for Days Cash on Hand AA Median for All-In ADS Coverage A Median for Days Cash on Hand A Median for All-In ADS Coverage Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill and Raftelis Financial Consultants, Inc. Data Sources: Utility's audited financial statements; 2013 FitchRatings. Debt service coverage ratio is calculated as (total operating revenues - total operating expenses excluding depreciation) / debt service. Fitch measures "All-in ADS Coverage" as current-year revenues available for debt service / current-year total debt service.

20 Ratio of Total Reserve Funds to Total Operating Expenses (excluding depreciation) & Debt Service Ratio of Total Reserve Funds to Total Operating Expenses Analysis by the Environmental Finance Center at the University of North Carolina, Chapel Hill. Notes: Data obtained from utility CAFRs. Unless otherwise indicated, the data used in these calculations are for Fiscal Year Ratios were calculated by dividing the total reserve fund level by total operating expenses, including depreciation..

21 Types of affordability programs Options facing payment-troubled customers Percent N Payment plan to allow customer to pay amount over time 76% 231 Customer referral to private, nonutility agency 54% 163 Customer referral to a local gov. agency for assistance 49% 149 Education 35% 105 In-home conservation assistance 25% 76 Special billing arrangements 21% 64 Change in the rate customer is charged 8% 24 Other 8% 24 One-time bill credit from utility funds 3% , Best Practices in Customer Payment Assistance Programs, Water Research Foundation #4404

22 On a scale of 1-5, how well would affordability programs work with your utility or the utilities you work with? 1. Very well 2. Pretty well 3. Maybe so, maybe not 4. Not well 5. Dreadfully 20% 23% 53% Source: Informal Survey Administered by EFC/RFC at ACE 2012 Session 0% 3%

23 Product diversity Customer line repair programs Self administered Third party Selling services to other enterprises Meter reading and billing Project management

25 PRICING PRACTICES

26 Alternative Rate Adjustment Procedures Beginning October 1, 2008 and on the first day of October of each year thereafter, the water and sewer rates in effect as of September 30th, 2008 and each year thereafter shall be increased by 5 percent. The 5 percent rate increase shall be computed each year by increasing the previous year's rates by 5 percent. Said rates shall remain in effect until modified, amended or terminated by the Authority.

27 Cumulative Increase to Bill for 5,000 gal/month Since 2003 Cumulative Increase to Bill for 7,756 gal/month Since 2000 Cumulative Increase to Bill for 5,000 gal/month Since 2000 Cumulative Increase to Bill for 5,000 gal/month Since 2008 Rising Rates... 80% 70% 60% 50% 40% 30% 20% 10% 0% Wisconsin: 563 Utilities Georgia: 352 Utilities 80% 70% 60% 50% 40% 30% 20% 10% 0% Texas: 194 Utilities 80% 70% 60% 50% 40% 30% 20% 10% 0% % Ohio: 325 Utilities 70% 60% 50% 40% 30% 20% 10% 0% Data analyzed by the Environmental Finance Center at the University of North Carolina, Chapel Hill. Rates data for all utilities in this analysis were known for all consecutive years. Data sources: Rates surveys conducted by GEFA/EFC (GA), OH EPA (OH), WI PSC (WI), TML (TX).

28 $60 $50 $40 $30 $20 $10 Median Water Monthly-Equivalent Bill (Same 650 NC and GA Utilities) 14,000 gallons/month 10,000 gallons/month 5,000 gallons/month 2,000 gallons/month $ Data analyzed by the Environmental Finance Center at the University of North Carolina. Data source: EFC and NC League of Municipalities Annual NC State Rate Survey,

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

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

30 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

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

33 Variable Revenue in the Research Triangle Area 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

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

35 2011 Data analyzed by the Environmental Finance Center at the University of North Carolina. Data sources: EFC and NC League of Municipalities Annual NC State Rates Survey, 2011, & EFC and GA Environmental Finance Authority Annual Rates Survey, 2011.

36 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

37 Evolving Pricing: Water Utility 2.0?

38 Skepticism Among the Judges

39 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

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

41 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)

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

43 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)

44 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

45 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

46 QUESTIONS??? COMMENTS!!!

Jeff Hughes, Environmental Finance Center at UNC

Jeff Hughes, Environmental Finance Center at UNC 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