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Revenue Resilience in Water & Sewer Industry

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Presentation slides for "Revenue Resilience in a Changing Industry: Water & Sewer Utility Needs," presented by Mary Tiger at Winter 2014 NCLGBA Conference on December 11, 2014.

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Revenue Resilience in Water & Sewer Industry

  1. 1. 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
  2. 2. http://efc.sog.unc.edu @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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. Challenges to the Utility Business Model 1. Paradoxical relationship between revenue stability and conservation promotion Source: Fayetteville Observer 2/6/04
  7. 7. Challenges to the Utility Business Model 2. Water utility revenue variability does not match utility cost variability
  8. 8. Challenges to the Utility Business Model 3. Large and looming national infrastructure needs gap
  9. 9. 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 8.5 9.0 CustomerAccounts WaterSales(milliongallonsperdayaverage) OWASA Water Sales Challenges to the Utility Business Model 4. Weather (and customer demand) uncertainty Slide presented by Ed Kerwin, Director of Orange Water and Sewer Authority
  10. 10. 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 8.5 9.0 CustomerAccounts WaterSales(milliongallonsperdayaverage) OWASA Water Sales Challenges to the Utility Business Model 4. Weather (and customer demand) uncertainty 2002/03 Drought Slide presented by Ed Kerwin, Director of Orange Water and Sewer Authority
  11. 11. 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 8.5 9.0 CustomerAccounts WaterSales(milliongallonsperdayaverage) OWASA Water Sales 2007/08 Drought Challenges to the Utility Business Model 4. Weather (and customer demand) uncertainty Slide presented by Ed Kerwin, Director of Orange Water and Sewer Authority
  12. 12. 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 8.5 9.0 CustomerAccounts WaterSales(milliongallonsperdayaverage) OWASA Water Sales UNC starts to use reclaimed water Challenges to the Utility Business Model 4. Weather (and customer demand) uncertainty Slide presented by Ed Kerwin, Director of Orange Water and Sewer Authority
  13. 13. 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.
  14. 14. 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.
  15. 15. Challenge: Uncertain Revenue Changes in water use have had: 0 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. Alternative Rate Designs Available online at: http://www.brainshark.com/waterrf/vu?pi=zH4z10coY8zK6Ecz0
  21. 21. 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
  22. 22. http://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 mwtiger@sog.unc.edu 919-843-4958

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