Roadmap to Financial Health - efc.sog.unc.edu · PDF fileRoadmap to Financial Health Jeff...
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www.efc.unc.edu
Roadmap to Financial Health
Jeff Hughes
Shadi Eskaf
March 5-6, 2012
Chapel Hill, NC
Session Objectives
1. Improve ability to assess financial health
2. Improve understanding of strategies and
initiatives that support financial health
– Financial Policies
– Supplemental Services
– Pricing and Business Models
– Capital Planning
Is it variable or is it gone??
0
20
40
60
80
100
120
140
160
180
200
220
240
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
An
nu
al M
GD
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
What happened in Seattle
• Prices went up
• Homes became more efficient
• Water users became more efficient
• Decentralized initiatives increased
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
1,100,000
1,200,000
1,300,000
1,400,000
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
0
20
40
60
80
100
120
140
160
180
200
220
240
260
280
Total Water Consumption
Population
Po
pu
lati
on
Source: Seattle Public Utilities
Water Use and Revenue
“Water demand is recalibrating according to
new economic realities and public policy
directives. Ignoring declining demand does
make it go away – or rather, come back. The
intractable manager will remain cash-flow
frustrated. The enlightened manager will be
better positioned for cost recovery in
accordance with a fluid equilibrium.”
Beecher, Janice A. 2010. The Conservation Conundrum: How declining demand
affects water utilities. Journal AWWA, February 2010, 78-80.
Rating Agencies Agency Rating Criteria Assessments and Special Reports Ratings
System
Fitch US Water and Sewer
Revenue Bond Criteria
(8/11)
2012 Water and Sewer Medians (12/8/11)
2012 Outlook: Water and Sewer Sector (12/8/11)
AAA
AA
A
BBB
+,-
Standard
and
Poors
Standard and Poors
Public Finance Criteria
(2007)
Sector Review: Funding Long-Term Needs Remains
The Biggest Risk For U.S. Municipal
Water And Sewer Utilities (1/31/12)
How U.S. Municipal Water And Sewer Bond Ratings
Correlate With Some Key Measures Of
Issuers‘ Credit Quality (9/26/2011)
AAA
AA
A
BBB
+,-
Moody’s
Research
and
Ratings
RATING
METHODOLOGY
Analytical Framework
For Water
And Sewer System
Ratings (8/1999)
WATER AND SEWER SECTOR OUTLOOK:
Water/Sewer Revenue Bonds Have Positive Rating
Trends,
With Billions In Issuance Expected Over Next 20
Years (2/2000)
UK Water Sector Outlook 2011
Industry Outlook (10/2011)
Aaa
Aa
A
Bb
1,2,3
North Carolina Benchmarking
• LGC Memo: Statistical Information on
Water and Sewer Operations
(forthcoming)
• EFC Water and Wastewater Financial
Benchmarking (any day now)
• SOG Benchmarking Project
Indicators
• Operating Ratio = Operating Revenues/ Operating Expenditures
• Operating Margin = (Operating Revenues –Operating Expenses**)/Operating Revenues
**Operating Expenses include Depreciation which is not a cash expenditure
8
Indicators
• Debt Service Coverage = Revenue
available to pay debt service/Debt Service
• Revenues available to pay debt service =
Operating Revenues – (Operating
Expenditures + Other Essential
Expenditures)
Example
• Operating Revenue $3.2 million
• Operating Expenditures $2 million
• Contractual Payment to City $200,000
• Combined Debt Service (P&I) $500,000
• Overall Debt Service Coverage Ratio = (3.2 – 2. – 0.2)/0.5 = 2.0
Reported NC Utilities’ Aggregate Operating
Revenues and Expenses (inc. dep.) (1997-2011)
0
200
400
600
800
1000
1200
1400
1600
1800
2000
$0
$500
$1,000
$1,500
$2,000
$2,500
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Mill
ion
s
Fiscal Year Ending
Number of Utilities
Operating Revenues
Operating Expenses
North Carolina Utilities’ Average Operating
Revenues and Expenditures (1997-2011)
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Fiscal Year Ending
Average Operating Revenues
Average Operating Expenditures
Op. Revenues by Inflation (CPI)
Do Water and Wastewater Rates Cover System Costs?
Small Water Systems vs. Large
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Bille
d W
ate
r (M
GD
) Water Sales (1980-2009)
(Slide provided by Orange Water and Sewer Authority)
Lower than projected demands
have resulted in cumulative
net revenue reduction of about
$7.3 million over last 3 years.
Meeting Revenue Challenges
• Costs
• Finance Policies
• New pricing and
business models
• Supplemental services
(behind the meter)
• Affordability programs
• Communication,
communication…
What are you Doing?
Do you have an approved set of
water/wastewater finance policies?
1. Yes
2. No
3. Workin’ on
it…
31%
46%
23%
Yes No Workin’ on it…
Does your utility have a "finance policy" that sets financial targets and goals,
such as reserve balance, debt service ratios, etc.?
If yes: is your "financial policy" Governing Board-approved?
n = 260
Source: NCLM/EFC 2010 NC Water and Wastewater Financial Practices and Policies Survey
Do not have a finance policy
47%
Don't know if have a finance policy
12%
Finance policy is Board-approved
34%
Finance policy is not Board-approved
3% Don't know if
finance policy is Board-approvd
4%
Have a finance policy 41%
Orange Water and Sewer Authority
• http://www.owasa.org/about/FinancialDocu
ments.aspx
Financial Policies and Guidelines:
Internal financial policies 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 20% of annual water volume
revenues
Debt service coverage ratio ≥1.6x coverage
Debt-funded capital ≤65% of total CIP spending
over 5 year planning period
Other Measures
• Supplemental Services
• Affordability Programs
PRICING AND BUSINESS
MODELS
How satisfied are you with your rates and
the revenue they generate?
Not a
t all
– n
eed
an ..
.
Not v
ery
– th
ey n
eed a
...
Som
ewhat
– tw
eaks
...
Ver
y –
no ch
anges
n...
0% 0%0%0%
1. Not at all – need
an overhaul
2. Not very – they
need a lot of work
3. Somewhat –
tweaks needed
4. Very – no
changes needed
How satisfied are you with your rates and
the revenue they generate? (2011)
1. Not at all – need
an overhaul
2. Not very – they
need a lot of work
3. Somewhat –
tweaks needed
4. Very – no
changes needed
Rates background:
GS 160A-314 /153A-277
A) A city may establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by any public enterprise……….
Rates per SL 2008-143/HB 2499
• “water rate structures that are adequate to
pay the cost of maintaining, repairing, and
operating the system, including payment of
principal and interest on indebtedness
incurred for maintenance or improvement of
the water system”
• “also consider the effect of water rates on
water conservation and recommend rate
structures that support water conservation.”
Rate Setting Resource
http://www.efc.unc.edu/publi
cations/2009/GuidelinesDes
igningRateStructures.pdf
Free guide written for
utility managers in
June 2009 (funded by
DENR).
CURRENT RATES
(PRELIMINARY RESULTS)
Annual NC Water and Wastewater
Rates Survey
• Collaboration since 2005 (8 years)
• Funded by the Public Water Supply Section at NC DENR
• In 2012: 494 utilities. 92% of local government, non-profit and multi-
system private utilities
• Free, online information: tables, summary report, Rates Dashboards,
rate sheets at http://efc.unc.edu/projects/NCWaterRates.htm and
http://www.nclm.org
NC League of Municipalities Environmental Finance Center
at the School of Government
Which Rates were Studied?
• Rates for 494 utilities across NC
• Rates for water, irrigation and wastewater
service
• Rates for residential and for non-
residential (small commercial) customers
• Rates for inside and outside customers
• Including base charges and allowances
Preliminary Results
Graphs and data shown in this presentation represent January 2012 rates, and are
PRELIMINARY results.
Please do not quote.
Final results will be shared in March 2012 and be made available at
http://efc.unc.edu/projects/NCWaterRates.htm
Base Charges
Low bills for low
consumption
amount
vs.
Revenue stability
Preliminary results – do not quote
Residential Rate Structures
Water Wastewater
Rate structures applicable to residential customers for consumption up to 15,000 gallons/month only
Preliminary results – do not quote
Pricing Different Services
• ~25% use separate rate structures for
non-residential customers
• ~12% use separate rate structure for
residential irrigation water
Residential Water Bills Among
521 Rate Structures
Preliminary results – do not quote
Affordability of Rates
The “average
North
Carolinian” pays
$69.70/month
for 5,000
gallons of water
and wastewater
Preliminary results – do not quote
Medians:
0.9% water, 1.1% sewer
Changes in Rate Structures and
Rates Since Last Year
• 50% increased rates last year
• 83% changed rates within the past two years
• Only 3% of utilities have not changed rates since 2008.
Preliminary results – do not quote
Changes in Rates Since Last Year Half of the rate increases
were for more than 4%.
Preliminary results – do not quote
www.efc.unc.edu
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012
Utilities Changing Water Rates (Among the Same 361 NC Utilities)
0%
2%
4%
6%
8%
10%
12%
14%
2009 2010 2011 2012
Water Rate Increases for 5,000 Gallons/Month (Among the Same 361 NC Utilities)
Median - 75th
25th - Median
$0
$10
$20
$30
$40
$50
$60
$70
2008 2009 2010 2011 2012
Median Water Monthly-Equivalent Bill (Same 361 NC Utilities Throughout the 5 Years)
14,000 gallons/month
10,000 gallons/month
5,000 gallons/month
2,000 gallons/month
Rates Dashboards • Interactive tool to compare rates (bills)
among all utilities, or utilities with similar characteristics:
– System size (number of accounts or revenues)
– Technology (water source type or river basin)
– Location (regional council, 50 miles distance)
– Economic development tiers
• Available online at www.efc.unc.edu/RatesDashboards/
Webpages on NC Rates
(with report, tables, Dashboards, more)
www.efc.unc.edu/projects/NCWaterRates.htm
www.nclm.org
The 2012 report, tables and Rates Dashboard will be
available in March 2012
PRICING
I think our utility’s business model in 15
years will….
Pricing Case Studies
1. City of Raleigh source water protection
component
2. City of Charlotte base charge
modification
3. Beufort Jasper
Source: Lisa Creasman, CTNC/UNCWI
Does your utility pay for watershed protection or land
acquisition from the revenues it collects from customers? n = 261
Yes 12%
No 77%
Don't know 11%
Source: NCLM/EFC 2010 NC Water and Wastewater Financial Practices and Policies Survey
INCREASING REVENUE
STABILITY BY INCREASING FIXED
CHARGES
Revenue and Expenses for Charlotte-Mecklenburg Utilities in a Given Year
Source: CMU Director Doug Bean’s presentation to the Charlotte City Council on
December 1, 2008.
Are there alternatives?
What would you do?
• Recent extreme drought revealed water supply vulnerability and the need for water efficiency and conservation
• Extreme monthly/yearly revenue variations have been problematic
• Annual average across the board rate increases of 7.5% over last 5 years with some unscheduled increases as high over 10%.
City of Charlotte Rate Study 2011, Red Oak Consulting
City of Charlotte Rate Study 2011, Red Oak Consulting
Charlotte-Mecklenburg Utilities
Adopted Rate Increase
Water Rates
Fixed Charges
Billing Charge $2.40
Availability Fee $2.25
Usage Rates
Tier 1: 0-4 ccf $0.98
Tier 2: 4-8 ccf $1.96
Tier 3: 8-16 ccf $3.41
Tier 4: <16 ccf $5.32
Sewer Rates
Fixed Charges
Billing Charge $2.40
Availability Fee $4.30
Usage Rate $4.14
Sewer Cap
Single-Family Res 16 ccf
Multi-Family Res 11 ccf
Non-Res None
2010
2011
2012
2012
ALTERNATIVES TO THE
CLASSIC PRICING MODEL
Case Study: Beaufort-Jasper Water and Sewer Authority
The Customerselect Model This model is based on the plans offered by the majority of cell phone
service providers, in which an allotment of use is included in one fixed
charge. The customer chooses a plan and pays an overage fee if
he/she uses more.
Plan name Monthly water allotment
Cost for w&s under current rate structure
Customerselect cost (w&s)
Overage
Lifeline 2,000 gallons $12.00-$31.02 $25.99 $12.00/kgal
Basic service/Small family
6,000 gallons $40.53-$69.06 $59.99 $12.00/kgal
Light irrigation/Large family
10,000 gallons $78.57-$88.95 $79.99 $12.00/kgal
Heavy irrigation 15,000 gallons $92.41-$106.25 $99.99 $12.00/kgal
Water waster Unlimited >$106.25 $139.99* NA
See your local Verizon Wireless store
Example residential structure
Potential Benefits
• Increased revenue stability: Customers “lock into” plans
• Gives customer a choice: This means less administrative burden than budget-based rates of utility determining block rate for customers
• Moves more to a model of water and sewer service, rather than a commodity
• Promotes conservation, especially around the “break points”
• Relatively easy to add ancillary services (like service line protection) a la carte
Potential Challenges
• Complicates budgeting process:
-How do you predict what plan customers will choose?
-When will they “lock in”?
-Can they change plans? How often? What is the optimal length of the contract?
• Does not fit with seasonal use of water: Water use is not as consistent month-to-month as cell phone use. Allowing roll-overs could help this, but would dissuade conservation.
• Customers will request real-time water use information: In order to provide this service, metering upgrades will be required.
The Peak-Set Base Model Under this rate structure, a customer’s base charge would be
individually set based on their three-year rolling average peak. This
would allow BJWSA to build more of their cost recovery into the base
charge while still promoting customer conservation and efficiency. It
would particularly encourage steady water use.
Example residential structure
Use by other utilities/industries
Energy utilities use a similar pricing model with demand charges. Demand charges are based on the highest rate of electrical flow (or current) during a billing period. The demand charge will be a large part of the bill if the customer uses a lot of power over short period of time, and a smaller part of the bill if the customer uses power at a more or less constant rate throughout the month.
Most water meters are not capable of capturing the highest rate of flow over a billing period. However, with relative ease, water utilities could adopt an inspired model by basing a year’s base charge on the previous three year’s rolling average.
Impact of Peak-Set Base on Utility
and Residential Customers
Potential Benefits
• Increased revenue stability: There would be a
larger percentage of revenue coming from base
charge.
• Promotes steady customer water use: A high
peaking ratio would be costly to a customer all
year long.
• Customers can expect more steady bills: This
might also mean reduced customer cutoffs.
• Would not require metering upgrades
Potential Challenges
• Requires methodology for determining base charges for new customers
• Potentially requires billing software upgrade
• BJWSA may expect more meter re-reads and high bill disputes because of the long-term impact of a high meter read.
• A customer that is planning moving will not have a large incentive to conserve.
Dividend Model
At the end of the fiscal year, BJWSA would return “profit”
to customers in the form of a dividend; the dividend
would be based on the water “stewardship” of that
customer. A dividend model could be combined with
existing or any other pricing model. BJWSA could define
water “stewardship” in any number of ways: budget-
based, customer-select, or relative to customer use
(average water use or peaking factor).
Example Structure
The following example shows a method for calculating dividends based on a customer’s recent water use compared to the rolling average of the past three years. After a third party audit, it is deemed that BJSWA earned $500 profit. In the following sample, there are six customers that reduced their average water use this year compared to the past three years. Their portion of the profits are calculated based on each “steward’s” share of the reduction. The following table shows how BJWSA might provide water stewardship dividends to their customers.
Example Structure 3-year
rolling
average (2008-2010)
2011
average water use
Reduction
(1 – 2011
average water
use/3-year
rolling average)
Portion of
Reduction
(Customer
reduction x total reduction)
Portion of
Profit (% of
total reduction x utility profit)
Household A
3,000 2,500 17% reduction 14% of total reduction
$70
Household B
8,000 4,000 50% reduction 41% of total reduction
$205
Household C
5,500 5,350 3% reduction 2% $10
Household D
4,000 4,200 No reduction 0% $0
Business A 2,500 2,450 2% reduction 2% $10
Business B 10,000 8,000 20% reduction 16% $80
Business C 500,000 350,000 30% reduction 25% $125
122% 100% $500
Potential Benefits
• This model drives the message that BJWSA is not a for-profit entity: “Profits” are returned to customers.
• Provides a positive way for BJWSA to interact with customers: Palmetto Electric issues checks on December 1.
• Ensures that utility first-and-foremost meets financial goals
• Depending on how this model was set up, it most likely would not require metering or billing upgrades.
Potential Challenges
• Added administrative costs of calculating
and cutting checks
• Disincentive to conserve during first years
as a customer establishes a baseline
• The more people that act as water
stewards, the less money there is to go
around more customers. This could be
discouraging.
NC Rate Setting Resources
• Guide to Billing…, Kara Millonzi Rates Book
• EFC Web Resources (data, guidelines, dashboard)
• LGC Data
• Painful Art of Rate Setting
• Rates Course 2/23/2010
• Rate Setting Guide
• AWWA M1 Guide
• Rural Water Association
• Consultants
• NCLM/EFC Practices Survey (Coming soon!!)
www.efc.unc.edu
Environmental Finance Center
University of North Carolina
CB #3330, Knapp-Sanders Building
Chapel Hill, NC 27599-3330
USA
Jeff Hughes
919-843-4956