Welcome to the Webinar! Webinar will be 90 minutes in length with - - PDF document

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 1

Welcome to the Webinar!

Webinar will be 90 minutes in length with time for questions Audio is through your telephone or computer microphone &

speakers

The webinar phone line will be muted during the presentation

because we are recording

Questions can be typed in throughout the webinar and will be

answered at the end by the speakers

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 2

Webinar Speakers

Mary Ann Dickinson, Alliance for Water Efficiency Thomas Chesnutt, A&N Technical Services, Inc. Bill Christiansen, Alliance for Water Efficiency Megan Chery, Alliance for Water Efficiency

Utility Financial Management: Becoming Harder Than Ever?

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 3

Residential Water Sales Isn’t this a Success Story?

Yes, but with side effects Lowered demand means reduced sales revenue Reduced sales revenue can mean not fully collecting fixed

costs

Short‐run variable costs (water, pumping energy, chemicals) Long‐run capacity costs (supply, transmission, storage, treatment)

Revenue stability therefore becomes an issue – and

conservation is often blamed

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 4

What Really Affects Revenue Stability?

Reduced demand from:

efficient fixture replacement under the plumbing and appliance codes active conservation programs the recession: industrial shift layoffs, home foreclosures

Reduced peak demand in wet years Increased infrastructure costs Rise in other fixed costs Continuing Inflation

The Challenges

The extent of the reduced demand, and therefore reduced

sales, is catching many utilities by surprise

Water costs are rising faster than for other utilities like

energy, telephone, and cable, so rates must rise too

The customers understand very little about their rates, or

bills, or shortages and with auto‐pay are understanding even less

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 5

The Political Reality

• We don’t like to revise our rates
• It is politically unpopular, so rates are

changed as little as possible

• The inevitable inflationary increase is

postponed until it is a crisis, much less increases in other costs

• Conservation is often blamed for

financial challenges – even when there are no active conservation programs in place

• This sends the wrong message to

consumers

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 6

Conservation is Part of the Solution

It is a long‐term cost reducer to the utility Revenue loss is often due to other drivers Every gallon saved is water that does not have to be pumped,

treated and delivered

Conservation is an investment and short‐term effects must be

planned for

Reduced utility costs generally mean reduced customer rates

in the long‐term due to avoided infrastructure capacity increases

Westminster’s Story

Citizens complained about being asked to

conserve when rates would just go up anyway

Westminster reviewed marginal costs for

future infrastructure if conservation had not been done

Since 1980 conservation has saved residents

and businesses 80% in tap fees and 91% in rates compared to what they would have been without conservation

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 7

Systems are Still Growing

2006 EPA Study showed that

52.6% of community water system capital improvement expenditures were for expansion, not just repair and replacement

Efficiency helps with reducing

expansion costs

Long‐term planning is critically

important

What is Financing Sustainable Water?

Practical resources needed for utility employees with

varying technical ability

A Handbook to explain key concepts, provide case studies

and implementation advice

A public domain Rate Model to model various scenarios Web‐based resources to provide the latest research and

information in one location

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 8

FSW: Key Concepts

Revenue instability is a feature of ALL rate structures Efficiency objectives should be identified at the start One size does not fit all Embracing uncertainty enables better decision‐making Better rate analysis requires good data Customer understanding and empowerment is key Sound financial policies can support fiscal sustainability

Building Better Water Rates for an Uncertain World: Handbook and Model

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 9

SECTION I: Introduction SECTION II: Today’s Imperative for Utility Financial Management SECTION III: The Role of Ratemaking SECTION IV: Building a Better (Efficiency‐Oriented) Rate Structure SECTION V: Financial Policies and Planning for Improved Fiscal Health SECTION VI: Implementing an Efficiency‐Oriented Rate Structure Appendices

• Appendix A ‐ Costing Methods
• Appendix B – Demand and Revenue Modeling
• Appendix C – AWE Sales Forecasting and Rate Model User Guide

BUILDING BETTER WATER RATES FOR AN UNCERTAIN WORLD

BALANCING REVENUE MANAGEMENT, RESOURCE EFFICIENCY, AND FISCAL SUSTAINABILITY Thomas Chesnutt, A&N Technical Services

An Alliance for Water Efficiency Handbook

What Do Utilities Have to Achieve?

Ends of Water Utilities: Water Services

Reliable Delivery of Quality Water Handling of Waste water, Storm water, Watershed management

By what financial means do utilities achieve these

ends?

Cost Recovery (Short term) Resource Efficiency (Short and Long term) Fiscal Sustainability (Long term)

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 10

Why Is This Hard To Achieve?

• Why is this harder than ever?
• New Challenges and Constraints
• scarce supply
• rising and uncertain costs (source, distribution, treatment)
• regulations
• larger public role and more exposure for utility
• Increased Uncertainty
• weather
• economic factors
• declining demand
• changing customer bases
• How is this done?
• How can water utility rates help incentivize efficiency, contribute to revenue stability, and

support long‐term financial health?

• I want details‐‐designing and implementing efficiency‐oriented rate structures

What Questions Need Answers for Better Rates?

Customer Consumption Variability—How can weather,

drought/shortage, or external shock affect customer consumption?

Demand Response—If I change rates, what happens to demand

volume and revenue?

Drought Pricing—How should I plan for water rates under the

contingency of nonzero drought/shortage occurrence?

Probability Management—What is the likelihood of deficit? Fiscal Sustainability—What are likelihoods over a 5‐year time

horizon

Affordability—Can customers afford water service?

In an uncertain world, what information could lead to better water rates?

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 11

Water Flow and Flow of Economic Logic

System Design Costs Water Rates Demand

The Heart of the Problem

Water rates have traditionally been focused solely on

historical cost‐recovery

When system costs change quickly, and perhaps

unpredictably, historical rates do not reflect today’s cost consequences

Rates do not then give customers correct information to

make consumptive decisions

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 12

Water Rates: A Balancing Act for Water Utilities Revenue Generation‐(to pay prudent costs) Resource Efficiency‐(to avoid consumptive or productive waste) Fiscal Sustainability‐(for sustainable water service delivery)

(Other details include Customer Acceptance, Affordability, Legality, etc.)

Do Nothing Do Water Efficiency

Customer Bills

Water Rates, Efficiency, and Revenue

What is Conservation?

• any reduction in human water

consumption?

• minimizing loss or waste, that is

any water reaching the ocean? Nope.

• Conservation is Resource Efficiency.

What is Efficiency? Technical Efficiency – Energy per unit mass Financial Efficiency‐‐Dollars per Output

• Resource Efficiency‐Cost and

Benefits broadly defined (TBL) Conservation that squanders other resources is not very efficiency-oriented.

What is an Efficient Water Rate?

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 13

More Specifically …………..

Price Should Signal the Additional (Marginal) Costs of

Extra Production, Treatment, and Delivery. This provides……the Basis For Consumptive Decisions to Match Production Costs.

If prices reflect costs resources are used prudently.

Definition of Efficient Pricing

Water Efficiency can improve prospects for fiscal sustainability as water utilities redefine the changing level of “water service” that their customers demand. The “service capacity” of a water utility to deliver various water services can be crippled or enabled by its “financial position”.

Fiscal sustainability is a government’s ability and willingness to

generate inflows of resources necessary to honor current service commitments and to meet financial obligations as they come due, without transferring financial obligations to future periods that do not result in commensurate benefits.

See, Preliminary Views of the Governmental Accounting Standards Board on major issues to Economic Condition Reporting: Financial Projections. No 13‐3, Nov 29, 2011 http://www.gasb.org/cs/ContentServer?site=GASB&pagename=GASB%2FDocument_C%2FGASBDocumentPage&cid=1176159500453

Better Rates: Efficiency and Sustainability

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 14

• 1. Utility Rates Signals to Customer Cost of Providing Water Service…

customers need this information to make consumption decisions

• 2. Customer Consumption Decisions Signals to Utility Willingness to

Pay for Water Service…

utilities need this information to make production decisions Historically some have underestimated the willingness for customers to pay for reliable water service and/or water quality

Price Signal – A Two‐Way Street

Embedding water rate setting within Financial Management:

• Water Rate Setting is not a theoretical exercise
• Water Rate Setting occurs within Financial Planning
• Water Rate Setting can be guided by Financial Policies

See Rothstein and Galardi, (2012) Financing Water Utilities’ Sustainability Initiatives: Challenging Institutionalized Governance and Market Failures.

Efficiency and Sustainability

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 15

Building a Better Efficiency‐Oriented Structure

Identify and Prioritize

Ratemaking Objectives

Determine Revenue

Requirements

Allocate Costs Design A Rate Structure Evaluate the Rate Structure

against Objectives

Deciding on a Rate

Structure

Specific Costs Joint Costs Annual Rate Revenue Requirements Allocation to System Functions Allocation of Functions as Joint or Specific Cost Categories Classification of Costs by Service Characteristics Allocation to Customer Classes Design of Rates & Charges By Customer Class

• There is not one single objective
• f rate making
• Cost recovery
• Efficient Pricing
• Affordability
• Most rate analyses focus on

feasibility

• Better analysis can yield better

tradeoffs from competing

• bjectives

Deciding on a Water Rate

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 16

Understand Objectives ‐ Long‐Term or Short‐Term

• Users face cost consequences of consumptive behavior
• Long term Water Use Efficiency programs (investment) vs.
• Short term shortage management (minimizing shortage costs)

One Size Does Not Fit All

• a single rate structure may not work for all classes of service (one class with

large variation in size and uses)

Potentially Viewed by Customers as Punitive

• Communication issue about accuracy of price signal

Customer’s Ability to Modify Behavior/Usage

• Target programs – make WUE programs work for your customers

Efficient Pricing – Issues/Concerns

• US Conf. of Mayors/AWWA

Report

• Average Bills less than some

fraction of median income in community (USEPA) does not guarantee “affordability.”

• Flaw of Averages
• Need in depth and

informative understanding of affordability.

• See AWE Sales Forecasting

and Rate Model for an example

Affordability of Water Service

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 17

Introduction to Rate Setting

Budget‐based water rates Marginal/Incremental Cost

pricing

Volumetrically‐based Fixed

Charges

“Value of Service” pricing Policy‐based rates Drought pricing Additional “innovative” rate

structures

$- $0.50 $1.00 $1.50 $2.00 $/Unit Consumption Graph 2 Declining Block Consumption Charge

A DECISION FRAMEWORK FOR EFFICIENT WATER RATE DESIGN

Primary Choice: Options Implications

• 1. Recover all costs

through rates and charges External tax support Some revenues sources from outside the water rate structure. No external tax support Recovers all costs through rates and charges attached to water service.

• 2. Differentiate rates and

charges by customer class Same rates for all customers Recovers revenues under a single rate structure for all customers Class-based rates Recovers revenues through different rate structures for different groups of customers (such as residential, commercial, and industrial).

• 3. Design the fixed

component of the customer bill No fixed charges Recover all revenues through variable charges. Same fixed charge for customers Recovers metering, billing, and other

• charges. Reflects no cost variations

based on customer-class distinctions. Different fixed charge for customers Reflects cost variations in metering, demand, billing, and other factors based on meter size or other customer-class distinctions.

• 4. Vary rates by season

(Peak Pricing) Year-round rates No variation in rates by season of use. Seasonal rates Rates that vary for two or more time periods within a year, reflecting seasonal variation in costs.

• 5. Vary rates by block of

water usage (Block Rates) Uniform rate The rate does not vary with usage for all customers or all customers within a class (uniform rates by class). Block rates Requires a determination of: (1) the number of blocks,

Decision Framework for Efficient Rates

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 18

Self‐Assessment—

Identifying the Problem

Modeling Water Demand

Variability

Modeling Water Revenue

Variability

Customer Bill Analysis –

Rate Impacts

Tools for Evaluating and Building Better Rates

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 19

Knowing How Demand Varies is Key

Short Term

• If water rates change, how does demand?
• If water supply availability changes, how can demand change?

Long Term

• Capacity Sizing can be expensive
• Building too much capacity can result in capacity that is never used.
• Building too little results in poor reliability and customer shortage costs
• Does this have anything to do with sustainability?

Modeling Water Demand Variability

Source: James and Lee, Economics of Water Resource Planning, 1971

Note: Not Recent News

ECONOMIC DEMAND VERSUS DEMAND REQUIREMENTS

Why Worry About Price Elasticity?

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 20

What is Net Revenue Volatility?

Empirical view of Volatility: Definition in Finance

One year change

BigScary

Scary Question: How does sales variation affect Net Revenues

(Revenues minus Costs)

Typically the more revenues collected on variable/commodity

charges the more potential for revenue volatility (up and down)

Exception: Seasonal Rates (Peak season demand can be less variable)

Annual Sales Volatility,

standard deviation of ≈ 7 %

Net Revenue = Revenue – Costs ±2.6%

Short Term Uncertainty looks manageable; Don’t Celebrate Yet.

Monte Carlo Simulation Results

‐

=

Short Term: The Shape of Uncertainty and Revenue Risk

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 21

Long Term Risk – Average Outcome vs. Likely Outcomes

Flaw of Averages

Fact 1 – Planning for the future is rife with uncertainties. Fact 2 ‐ Most people are not happy with Fact 1 and prefer

to think of the future in terms of average outcomes.

Fact 3 ‐ The “flaw of averages” states that plans based on

average assumptions are, on average, wrong. ‐adapted from Savage (2012) Flaw of Averages The cyclist is safe on the average path On average, the cyclist is dead

dead.

See www.probabilitymanagment.org

AWE Sales Forecasting and Rate Model

Typical water rate models assume that future sales are known with certainty, and do not respond to price, weather, the economy, or supply shortages—that is to say, not the world we live in.

The AWE Sales Forecasting and Rate

Model addresses this deficiency:

• Customer Consumption Variability—weather,

drought/shortage, or external shock

• Demand Response—Predicting future block sales

(volume and revenue) with empirical price elasticity's

• Drought Pricing—Contingency planning for revenue

neutrality

• Probability Management—Risk theoretic simulation of

revenue risks

• Fiscal Sustainability—Sales forecasting over a 5 Year

Time Horizon

• Affordability—Can customers afford water service?

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 22

Better Revenue Prediction Changing to more fixed revenue generation

• political risks for customer disempowerment and affordability cost.

Contingency funds

• Including a reserve fund, a rate stabilization account, or the nest egg for

(too many) rainy days.

Inclusion of a risk margin in the determination of revenue requirements Contracts for Drought Derivatives (in which there is a thriving market for farmers) Adjustment of rates on a more frequent basis

Hedging Against Revenue Risks from Volatility

Recall the default coping mechanism lies on the cost side

deferring capital investment; laying off personnel;

• r avoiding expenditures on needed maintenance.

Involuntary adjustments to agency expenses can disrupt the ability

• f water utilities to fulfill their mission of providing reliable,

quality water service.

Crisis‐driven cutbacks can be avoided with better rate design for an uncertain world.

Hedging Against Revenue Risks from Volatility

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 23

Designing better water

rates involves change

Change entails political

risks

Understanding

customer bill changes gives an informed basis for these risks

Customer Bills and Bill Impact Analysis

Financial policies are guidelines for financial management decisions; administrative procedures cover the detailed steps needed to accomplish business processes. Administrative procedures are an important complement to financial policies because they ensure that day‐to‐day activities are in line with financial policies.

Kavanagh, Shayne, “Developing Financial Policies that Work” in Government Finance Review, April 2004, Volume 20 No. 2

Financial Policies

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 24

Three Types of Financial Policies

• 1. Actionable – policies linked to specific

performance measures AND dictate actions based on the status of those indicators.

• 2. Performance measures – performance

measures alone, without a prescribed course

• f action.
• 3. Philosophical – general policy goals.

Revenue and Expense Forecasting Revenue Management and Fiscal Sustainability Rate Stabilization – Financial Planning Adaptive Rate Design Revenue Recovery Mechanisms Cost Recovery Mechanisms Conclusion: Transformational Change for Efficiency

Financial Planning

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 25

Policies And Planning for Fiscal Sustainability

Integrated and Collaborative Planning Securing Buy‐In from Leadership Getting to Yes: Approval from Elected

Officials

Internal Communications and

Customer Service

The Public as Partners Clear Signals and Empowered

Customers

Maintaining Dialogue and Fine‐tuning

Implementation and Public Engagement

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 26

AWE Sales Forecasting and Rate Model

Our free public domain model addresses this deficiency:

Customer Consumption Variability—weather, drought/shortage, or external shock Demand Response—Predicting future block sales (volume and revenue) with empirical price elasticity's Drought Pricing—Contingency planning for revenue neutrality Probability Management—Risk theoretic simulation of revenue risks Fiscal Sustainability—Sales forecasting over a 5 Year Time Horizon Affordability—Can customers afford water service?

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 27

Bill Impacts Screenshot

• 3. Bill impacts of Proposed rates

Under your Proposed rates, the volume charge may go up for some customers and down or stay the same for others. The Bill Impacts Table shows the percentage of bills that will go down, stay the same, or go up ‐‐ and by how much. Charts showing the distribution of bill impacts for each customer class are provided on the Bill Impacts worksheet. Affordability Index % Change in Average and Median Annual Water Service Cost by Customer Class Current Proposed Average Annual Water Service Cost Median Annual Water Service Cost Affordability index equals Customer Class Current Proposed % Change Current Proposed % Change the median annual water Single Family $777 $804 3.4% $650 $672 3.3% cost for the primary Multi Family $4,254 $4,294 0.9% $1,930 $1,942 0.6% residential customer class CII $3,323 $3,382 1.8% $1,481 $1,504 1.5% divided by median Landscape $5,599 $6,007 7.3% $2,503 $2,720 8.7% household income. Not in use Not in use Bill Impacts Table % of bills decreasing by No More Than % of bills increasing by Customer Class more than 20% 15 to 20% 10 to 15% 5 to 10% +/‐ 5% 5 to 10% 10 to 15% 15 to 20% more than 20% Single Family 0% 0% 21% 38% 9% 4% 17% 11% 0% Multi Family 0% 1% 38% 25% 4% 4% 18% 12% 0% CII 0% 0% 25% 20% 28% 7% 9% 10% 0% Landscape 0% 0% 26% 12% 33% 2% 6% 20% 0% Not in use Not in use

Single Family Customer Class Bill Impact Histogram

% Decrease in Bill % Increase in Bill

Avg and median bill impacts Bill Impact Histograms Affordability Indicator

Designing Drought Rates

Rate Design Tables Rate Performance Indicators Drought Stage Selector

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 28

Are Future Sales and Revenue Uncertain? Drought Pricing

Shortages are when, not if. Imposing curtailments on

customers affects revenues

This can be planned for,

communicated, and effectively implemented.

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 29

Do Drought Restrictions Affect Sales?

1991: End of 5‐ Year Drought 1991: End of 5‐ Year Drought

Example with the AWE Model

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 30

Financing Sustainable Water: Additional Resources

Managing Weather Risk

Wide swings in revenue between wet

years and dry years

Can market‐based financial tools be used

for managing weather risk (insurance, derivatives)?

Ex: municipal snow removal insurance AWE published white paper in July, 2014 www.FinancingSustainableWater.org

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 31

New Real World Examples

Public engagement and implementation

strategies

Volumetric rates and long‐term planning Budget‐based rates designed for revenue stability Policies to support fiscal sustainability Find them in the Handbook and on the website

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 32

Financing Sustainable Water: What’s Next

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 33

What’s Next?

Workshops in Texas and California this fall Working with utilities to use the model Collecting feedback to incorporate into Version 2 Technical assistance and training services offering for

members

Need assistance? Contact Bill at bill@a4we.org

New Resources and Content

Video tutorials for model New case studies and tools Communications materials for

utility use Messaging for customers Animated video

Alliance for Water Efficiency 9/9/2014 Financing Sustainable Water Webinar 34

In Closing

Have questions? Type them in! A PDF of the presentation as well as the recorded webinar will

be posted online at www.a4we.org/webinars.aspx

Download the Handbook and Model at

www.FinancingSustainableWater.org

Next Webinar: Ensuring Safety and Efficiency in Building

Water Systems (Oct 16)