The Challenge for Water Utilities of Aligning Financial and Demand - PowerPoint PPT Presentation

The Challenge for Water Utilities of Aligning Financial and Demand Reduction Goals: Alternative Business Models David Tucker, Project Director Environmental Finance Center School of Government University of North Carolina at Chapel Hill drtucker@sog.unc.edu www.efc.unc.edu

Overview 1. The Environmental Finance Center 2. Smart Management for Small Water Systems project 3. 2013 N.C. Water and Wastewater Rates Dashboard 4. Problems with the Current Business Model 5. Alternative Business Models for Water Utilities

The EFC • Our Mission – The EFC at UNC is dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective and financially sustainable ways. • Our Website – http://efc.unc.edu

Ripped from the Headlines 4-22-13

Smart Management for Small Water Systems

Smart Management for Small Water Systems

Smart Management for Small Water Systems • A joint project of all members of the Environmental Finance Network nationwide. • For systems with 10,000 or fewer customers. • Project will continue through August 2013. • We are glad to provide direct technical assistance in any of the 7 grant areas. • Project website: http://efcnetwork.org • To request direct technical assistance: • Click on “Assistance” at top of screen. • Then click on “Request One-on-One Assistance” and fill out online form.

2013 N.C. Water and Wastewater Rates Dashboard

Defining a Resilient Business Model for Water Utilities • Water Research Foundation Project #4366 • Objectives: – To define new financial approaches and paradigms for water utilities in addressing current and future fiscal challenges – To explore new methods of identifying and reducing the risks associated with revenue variability • On-going research discussion at www.efc.web.unc.edu • Final research will be at www.waterrf.org 9

GENERAL TRENDS & GROWING CONCERNS

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.

Water Sales (1980-2009) (Slide provided by Orange Water and Sewer Authority) Lower than projected demands 9.0 have resulted in cumulative 8.5 net revenue reduction of about $7.3 million over last 3 years. Billed Water (MGD) 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Water Sales Declines

All Over the Southeast

Challenge: Uncertain Revenue Changes in water use have had: 16 14 12 10 8 6 4 2 0 A large A small No impact A small A large negative negative positive positive impact impact impact impact Source: Water Resource Foundation/Environmental Finance Center

Growing Affordability Concerns 35% ¡ 2010 Water ¡ 30% ¡ Percent ¡of ¡NC ¡U9li9es ¡ 25% ¡ Wastewater ¡ 20% ¡ 15% ¡ 10% ¡ 5% ¡ 0% ¡ <= ¡0.25% ¡ 0.25 ¡-­‑ ¡0.5% ¡ 0.5 ¡-­‑ ¡0.75% ¡ 0.75 ¡-­‑ ¡1% ¡ 1 ¡-­‑ ¡1.25% ¡ 1.25 ¡-­‑ ¡1.5% ¡ 1.5 ¡-­‑ ¡1.75% ¡ 1.75 ¡-­‑ ¡2% ¡ 2 ¡-­‑ ¡2.25% ¡ 2.25 ¡-­‑ ¡2.5% ¡ > ¡2.5% ¡ Total ¡Bills ¡in ¡One ¡Year ¡as ¡% ¡of ¡MHI ¡of ¡Community ¡Adjusted ¡to ¡2008 ¡ Source: NCLM/EFC 2010 Water and Wastewater Rates Structures in North Carolina .

Growing Affordability Concerns 35% ¡ 2012 Water ¡ 30% ¡ Percent ¡of ¡NC ¡U9li9es ¡ 25% ¡ Wastewater ¡ 20% ¡ 15% ¡ 10% ¡ 5% ¡ 0% ¡ <= ¡0.25% ¡ 0.25 ¡-­‑ ¡0.5% ¡ 0.5 ¡-­‑ ¡0.75% ¡ 0.75 ¡-­‑ ¡1% ¡ 1 ¡-­‑ ¡1.25% ¡ 1.25 ¡-­‑ ¡1.5% ¡ 1.5 ¡-­‑ ¡1.75% ¡ 1.75 ¡-­‑ ¡2% ¡ 2 ¡-­‑ ¡2.25% ¡ 2.25 ¡-­‑ ¡2.5% ¡ > ¡2.5% ¡ Total ¡Bills ¡in ¡One ¡Year ¡as ¡% ¡of ¡MHI ¡of ¡Community ¡in ¡2010 ¡ Source: NCLM/EFC 2012 Water and Wastewater Rates Structures in North Carolina .

The challenge of driving revenue increases through rate increases Preliminary Results

High Rates Alone Won’t Save a Utility Source: EFC/NCLM 2012 Water and Wastewater Rates and Rate Structures in North Carolina

RATE CHALLENGES

Short Term Fixed vs. Variable

Revenue tied to Consumption WaterOne (Johnson County), KS (FY2011) Total Operating Total Revenues: Revenues: $93,928,438 $93,280,648 99% 98% 76% 100% Water Sales to Customers: $92,024,666 Commodity Charges: $71,719,095

The Variable Charge Portions of All Customers’ Bills in FY2010 Cary 91.1%* (FY2010) Charlotte 82%** (FY2008) Raleigh 75.4%* (FY2010) OWASA 75%** (FY2012) Durham 73.5%* (FY2010) Cape Fear 59%** (FY2012) Sources: * Billing records from utilities analyzed by the Environmental Finance Center at the University of North Carolina, ** reported by utility

Fixed versus variable: 2007-11 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

The conservation conundrum • Water utilities face a dilemma in encouraging water conservation – By selling less water, utilities have to increase rates to cover their costs – Customers are essentially being asked to pay more for less water • But as new capacity becomes harder to find and more expensive, conservation/efficiency may be the least-cost option in the long-run

STRATEGIES

Strategies • Increase understanding of problem and resolve to deal with it • Change what you sell: Service not gallons • More rigorous finance policies • New pricing models – PeakSet Base rate model – CustomerSelect rate model – WaterWise Dividend rate model

2007 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, 2007, & EFC and GA Environmental Finance Authority Annual Rates Survey, 2007.

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.

Charlotte-Mecklenburg Utilities Water and Sewer Revenues: fixed versus variable 100% 90% 80% 70% 60% 50% Variable 40% Fixed 30% 20% 10% 0% 2009 2010 2011 2012* Data sources: Mickey Hicks, CFO, Charlotte-Mecklenburg Utilities

TRADITIONAL BUSINESS MODELS

Utility Business Model Utility Revenues Public information campaigns Customer Utility Rates Consumption Technology Restrictions Weather

Utility Business Model Utility Revenues Customer Utility Rates Consumption

The Utility Business Model Continuum decoupling Complete Revenues and Decoupling of Usage completely based on Revenue usage Customer has little Customer has a Customer Conservation Incentive to no incentive to strong incentive to conserve conserve

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.

I. PeakSet Base Model • Inspiration: electricity peak charge • A customer’s base charge would be individually set based on their three-year rolling average peak Comparison of BJWSA current residential rate to a “revenue neutral” PeakSet Base model Current BJWSA PeakSet base residential rate residential rate structure ¡ structure ¡ % fixed revenue ¡ 18% ¡ 57% ¡ Base rate ¡ $6.00/meter – water + $1.85/kgal applied to 3- $6.00/meter - irrigation ¡ year rolling average of peak month of demand ¡ Variable rate ¡ $3.46/kgal of previous $0.52/kgal of previous month’s use ¡ month’s use ¡

Varying Degrees of Revenue Stability Current Residential High Fixed Medium Fixed Low Fixed Rate (AR1) ¡ (AR2) ¡ (AR3) ¡ Structure ¡ % Fixed 18% 57% 47% 37% Revenue ¡ $6.00/meter – $1.85/kgal of $1.49/kgal of $1.12/kgal of water + Base Rate ¡ historic peak historic peak historic peak $6.00/meter - demand demand demand irrigation $3.46/kgal of $0.52/kgal of $1.25/kgal of $2.01/kgal of Variable Rate ¡ previous month’s previous month’s previous month’s previous month’s use use use use