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. 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. 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
- 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. 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. 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
- 7. Challenges to the Utility Business Model 1. Paradoxical relationship between revenue stability and conservation promotion Source: Fayetteville Observer 2/6/04
- 8. Challenges to the Utility Business Model 2. Water utility revenue variability does not match utility cost variability
- 9. Challenges to the Utility Business Model 3. Large and looming national infrastructure needs gap
- 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 Slide presented by Ed Kerwin, Director of Orange Water and Sewer Authority
- 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 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
- 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 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
- 13. 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
- 14. 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.
- 15. 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.
- 16. 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
- 17. 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
- 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. 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
- 20. 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
- 21. Alternative Rate Designs Available online at: http://www.brainshark.com/waterrf/vu?pi=zH4z10coY8zK6Ecz0
- 22. 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
- 23. 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
Editor's Notes
- This alone would create a financial challenge for utilities in the best of circumstances. Unfortunately though, the industry is not facing the best of circumstances. In fact, the American Society of Civil Engineers gave the nation’s drinking water and wastewater infrastructure a grade of D – passing, but barely. Much of the current infrastructure, which was installed decades ago, will need to be rehabilitated or replaced in the very near future. The American Water Works Association and US Environmental Protection Agency agree that there is a large and looming national infrastructure needs gap. The amount of subsidized funding available to pay for the upcoming rehab and replacement costs will not cover it. Utilities will have to generate even more revenues to pay for this upcoming wave of infrastructure re-investment – most likely from increased rates.
- Why does the water industry even need a new business model? Simply put – your customers are using less of your product. You can’t count on growing demand to cover it. Last year, there was a report published in Journal AWWA that said that a household in 2008 used about 12,000 less gallons annually than it did in 1978. For those of you that aren’t quick with math – that’s 1,000 gallons per month. These findings are being echoed by Peter Mayer and William DeOreo in the preliminary reports of an update to their hallmark residential end water use study expected to be published in 2014.
- Now – the 2011 paper attributed the decline to increased efficiency standards set forth in the 1992 Energy Policy Act – and to a much lesser degree, declining household size. But we all know there are lots of utilities out there that are actively encouraging customer efficiency and conservation through programming and rates.
- In May 2011, we asked about 20 utility leaders from some of the largest drinking water utilities in the continent what these changes were doing to their revenue. We didn’t even categorize it as a “decrease” in water use – we simply asked what “changes” were doing to their revenue. Not one, not one utility said that “changes in water use have had a positive impact.” In fact, most reported that changes in water use were having a large impact.
- This research reinforces the growing sentiment among many in the industry that the general water utility business and pricing model is not as robust and resilient as once thought. Most water utilities rely on the sale of one essential product, and historically, many utilities have raised sufficient and predictable revenue through small rate modifications. While this approach has never been foolproof, the quantitative analyses throughout this report offer additional evidence that the last five years has been a particularly trying time for this business model.