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

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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

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

• rganizations 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.

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

Billed Water (MGD)

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.

Water Sales Declines

All Over the Southeast

Challenge: Uncertain Revenue Changes in water use have had:

2 4 6 8 10 12 14 16 A large negative impact A small negative impact No impact A small positive impact A large positive impact Source: Water Resource Foundation/Environmental Finance Center

Growing Affordability Concerns

0% ¡ 5% ¡ 10% ¡ 15% ¡ 20% ¡ 25% ¡ 30% ¡ 35% ¡ <= ¡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% ¡ Percent ¡of ¡NC ¡U9li9es ¡ Total ¡Bills ¡in ¡One ¡Year ¡as ¡% ¡of ¡MHI ¡of ¡Community ¡Adjusted ¡to ¡2008 ¡ Water ¡ Wastewater ¡

Source: NCLM/EFC 2010 Water and Wastewater Rates Structures in North Carolina.

2010

Growing Affordability Concerns

0% ¡ 5% ¡ 10% ¡ 15% ¡ 20% ¡ 25% ¡ 30% ¡ 35% ¡ <= ¡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% ¡ Percent ¡of ¡NC ¡U9li9es ¡ Total ¡Bills ¡in ¡One ¡Year ¡as ¡% ¡of ¡MHI ¡of ¡Community ¡in ¡2010 ¡ Water ¡ Wastewater ¡

Source: NCLM/EFC 2012 Water and Wastewater Rates Structures in North Carolina.

2012

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)

100%

Total Revenues: $93,928,438

99%

Total Operating Revenues: $93,280,648

Water Sales to Customers: $92,024,666

98%

Commodity Charges: $71,719,095

76%

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

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.

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, 2011, & EFC and GA Environmental Finance Authority Annual Rates Survey, 2011.

2011

Charlotte-Mecklenburg Utilities

Water and Sewer Revenues: fixed versus variable

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2009 2010 2011 2012* Variable Fixed

Data sources: Mickey Hicks, CFO, Charlotte-Mecklenburg Utilities

TRADITIONAL BUSINESS MODELS

Utility Business Model

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

Utility Business Model

Utility Revenues Utility Rates Customer Consumption

The Utility Business Model Continuum

Customer Conservation Incentive Decoupling of Revenues and Usage

Complete decoupling Revenue completely based on usage Customer has little to no incentive to conserve Customer has a strong incentive to 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.

• 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

• I. PeakSet Base Model

Current BJWSA residential rate structure ¡ PeakSet base residential rate structure ¡ % fixed revenue ¡ 18% ¡ 57% ¡ Base rate ¡ $6.00/meter – water + $6.00/meter - irrigation ¡ $1.85/kgal applied to 3- year rolling average of peak month of demand ¡ Variable rate ¡ $3.46/kgal of previous month’s use ¡ $0.52/kgal of previous month’s use ¡

Varying Degrees of Revenue Stability

Current Residential Rate Structure ¡ High Fixed (AR1) ¡ Medium Fixed (AR2) ¡ Low Fixed (AR3) ¡ % Fixed Revenue ¡

18% 57% 47% 37%

Base Rate ¡

$6.00/meter – water + $6.00/meter - irrigation $1.85/kgal of historic peak demand $1.49/kgal of historic peak demand $1.12/kgal of historic peak demand

Variable Rate ¡

$3.46/kgal of previous month’s use $0.52/kgal of previous month’s use $1.25/kgal of previous month’s use $2.01/kgal of previous month’s use

$- $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 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) Water Charge Fiscal Year 2011 (kgal consumed)

Current Rate ($647.744) AR1 ($621.548)

How would it impact individual customers?

Comparison of monthly charges for water under current rate and a PeakSet Base model

Rate ¡structure ¡ ¡ (annual ¡charge ¡for ¡water) ¡

FY10 ¡Peak ¡Demand ¡ 24,100 ¡gallons ¡

Resident 1

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

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
• 2. Pretty well
• 3. Maybe so, maybe

not

• 4. Not well
• 5. Dreadfully

Poll taken by EFC of approximately 30 utility staff officials at 2012 AWWA’s ACE in Dallas

• II. CustomerSelect Rate Model

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-$146.68 $81.30 $6.83/kgal unlimited >$154.18 $162.60 NA

• 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)

¡$-­‑ ¡ ¡ ¡ ¡ ¡$5,000,000 ¡ ¡ ¡$10,000,000 ¡ ¡ ¡$15,000,000 ¡ ¡ ¡$20,000,000 ¡ ¡ ¡$25,000,000 ¡ ¡ Actual ¡charges ¡ from ¡exis9ng ¡ rates ¡ Projected ¡charges ¡ from ¡customer ¡ select ¡rates ¡ Total ¡in ¡ FY11 ¡ From ¡Base ¡ Charges ¡

Revenue Stability with CustomerSelect

How would it impact individual customers?

How would it impact individual customers?

How would it impact individual customers?

How would it impact utility revenues?

• 0.6
• 0.4
• 0.2

0.2 0.4 0.6 0.8 1 1-3 kgal (39%) 4-7 kgal (46%) 8-20 kgal (15%)

• ver 20 kgal (.51%)

All Charges Under Customer select Rates Compared to Actual Charges in FY11 Accounts' Average Use in FY10 based on 2012 Tiers (portion of residential customers / tier)

Changes to Annual Charges by Switching to Customer Select Rates in FY11 (water & irrigation)

25th to 75th Percentile Median

WaterWise Dividends

• Works like a co-op.
• Once financial obligations are met,

“dividends” are returned to the “owners,” the rate-payers.

• Those who reduced their usage / peak

more could receive larger dividends.

• Communicates to customers the utility is a

not-for-profit entity.

WaterWise Dividends

• Largely theoretical at this point.
• But has been tried by D.C. Water.
• Jan. 2013 they announced they finished

FY 2012 with a surplus.

• Will refund $4.2 M at a rate of $0.10 per

ccf and $1 per ERU.

• ERU = Equivalent Residential Unit (a

stormwater unit of measurement).

Challenge: Breaking the Inertia

MaQ ¡Williams, ¡Water ¡ Advisory ¡CommiQee ¡ Member ¡to ¡the ¡City ¡of ¡ Davis ¡(CA) ¡Water ¡Division ¡

www.efc.unc.edu

The Challenge for Water Utilities of Aligning Financial and Demand Reduction Goals: Alternative Business Models

David Tucker, Project Director Environmental Finance Center, UNC-CH School of Government drtucker@sog.unc.edu