Revenue Resilience in Water & Sewer Industry

http://efc.sog.unc.edu

@EFCatUNC

Revenue Resilience in a Changing Industry:

Water and Sewer Utility Needs

NC Local Government Budget Association Annual Conference

Pinehurst, NC

December 11, 2014


@EFCatUNC 2

Dedicated to enhancing the ability of

governments and other organizations

to provide environmental programs and

services in fair, effective, and

financially sustainable ways through:

• Applied Research

• Teaching and Outreach

• Program Design and Evaluation

How you pay for it matters

Revenue Resiliency:

Trends – Factors - Strategies

Assessing the

Revenue Resilience of

the Industry’s

Business Model

Factors Influencing

Revenue Resilience

Strategies and

Practices for Revenue

Resilience

• Trends in Financial

Performance

• Operating

Revenues

• Operating

Expenses

• Debt

• Pricing Trends and

Financial Resilience

• Service Area Size and

Diversity

• Water Use and Weather

• Economic Conditions

• Capacity Utilization

• Economic Regulation

and Governance

• Financial Management

Strategies

• Credit Rating Agencies

• Demand Projections

• Alternative Rate Designs

• Rate Stabilization

Reserves

• Rethinking Utility

Services

• Financial Performance

Targets

• Customer

Affordability/Assistance

Programs

• Rate Adjustment

Approaches

Challenges to the Utility Business Model

1. Paradoxical relationship between revenue

stability and conservation promotion

Source: Fayetteville Observer 2/6/04


2. Water utility revenue variability does not

match utility cost variability


3. Large and looming national infrastructure

needs gap

10,000

12,000

14,000

16,000

18,000

20,000

22,000

4.0

4.5

5.0

5.5

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OWASA Water Sales


4. Weather (and customer demand) uncertainty

Slide presented by Ed Kerwin, Director of Orange Water and Sewer Authority

10,000

12,000

14,000

16,000

18,000

20,000

22,000

4.0

4.5

5.0

5.5

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6.5

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2002/03

Drought


10,000

12,000

14,000

16,000

18,000

20,000

22,000

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

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9.0

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OWASA Water Sales

2007/08

Drought




10,000

12,000

14,000

16,000

18,000

20,000

22,000

4.0

4.5

5.0

5.5

6.0

6.5

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UNC starts to

use reclaimed

water




Household water use in North

America

When controlling for weather and other variables…..

A household in the 2008 billing year used 11,678 gallons less annually than an

identical household did in 1978.

Rockaway, T.D., P.A. Coomes, J.Rivard & B. Kornstein. (2011) Residential water use trends in North America. Journal AWWA. February 2011, 76-89.

Why?

Parameter 1990 2007 Allotment – gpd

Household use –

gpd

208 187 -21

PMDI 0.29 0.75 -2.6

People per

household

2.52 2.38 -5

Educational index 2.45 2.81 +1.3

Average home

value

$120,100 $144,600 +3.5

Home size 2,155 sq. ft. 2,281 sq. ft. +0.6

Total =18.8

18.8 GPD attributed to increased installation of low-flow appliances

Breakdown of Louisville (KY) Water Company residential water decline

between 1990 and 2007

Rockaway, T.D., P.A. Coomes, J.Rivard & B. Kornstein. (2011) Residential water use trends in North

America. Journal AWWA. February 2011, 76-89.

Challenge: Uncertain Revenue Changes in water use have had:

0

2

4

6

8

10

12

14

16

A largenegativeimpact

A smallnegativeimpact

No impact A smallpositiveimpact

A largepositiveimpact

Source: Water Resource Foundation/Environmental Finance Center

Key Findings

Business model is not completely broken,

but…

• The past five years have been trying ones

for the industry

• In order to raise sufficient and predictable

revenues in the future, utilities must move

beyond the approach of small rate

modifications

Revenue Resiliency:

Trends – Factors - Strategies

Assessing the

Revenue Resilience of

the Industry’s

Business Model

Factors Influencing

Revenue Resilience

Strategies and

Practices for Revenue

Resilience

• Trends in Financial

Performance

• Operating

Revenues

• Operating

Expenses

• Debt

• Pricing Trends and

Financial Resilience

• Service Area Size and

Diversity

• Water Use and Weather

• Economic Conditions

• Capacity Utilization

• Economic Regulation

and Governance

• Financial Management

Strategies

• Credit Rating Agencies

• Demand Projections

• Alternative Rate Designs

• Rate Stabilization

Reserves

• Rethinking Utility Services

• Financial Performance

Targets

• Customer

Affordability/Assistance

Programs

• Rate Adjustment

Approaches

Alternative Rate Designs

• PeakSet Base Model: inspired by the

demand ratchet rates of energy utilities

– Case study: Consumption-based fixed

revenue water rate system in David, California

• CustomerSelect Model: inspired by cell

phone plans

• WaterWise Dividend Model: inspired by

retail cooperative organizations

– Case study: DC Water

Alternative Rate Designs

Available online at:

http://www.brainshark.com/waterrf/vu?pi=zH4z10coY8zK6Ecz0

Additional EFC Resources

Assessment of the Fixed vs. Variable Charges

and Revenues for NC Utilities

Water Utility Revenue Risk Assessment Tool

Measuring and Mitigating Water Revenue

Variability: Understanding How Pricing Can

Advance Conservation Without Undermining

Utilities Revenue Goals

Available at efc.sog.unc.edu


@EFCatUNC

Environmental Finance Center at the University of North Carolina

School of Government, Knapp-Sanders Building

CB #3330

Chapel Hill, NC 27599-3330

USA

Mary Wyatt Tiger

[email protected]

919-843-4958

Revenue Resilience in Water & Sewer Industry

Business

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