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With Asset Management, Money Comes First
September 25, 2009
Dealing with the consequences of aging infrastructure is one of the largest challenges facing the water and sewer industry and there has been no lack of reporting on that topic. A recent look through the national papers immediately gives at least four major examples:
- Los Angeles - 35 main breaks in three weeks!
- Tampa - water main break closes major street.
- San Diego - raw sewage spills into ocean causing beach closure.
- Macon, GA – old concrete sewer main breaks during recent flooding.
The water and sewer industries have rightly focused attention on the issue of infrastructure. However, you can’t separate the issue of aging infrastructure from the issue of financial capacity. In truth: to manage infrastructure is to manage money. One of the biggest hurdles existing right now for utilities who want to do something about their aging infrastructure problem is that they don’t have the money they need to do much of anything. Too many in the industry just assume that problem away. After all, if it has to be done, then ratepayers will need to pick up the financial impact, right? Well, it just isn’t that easy. Those of us who have had the luxury of making major adjustments to water and sewer rates for a community can tell you that the reasons for the increase, as good as they may be, fall on deaf ears in many cases.
When it comes to the aging infrastructure issue, there are not many in the rate-paying public who are ready to see the massive price tag. The bottom line is that, as an industry, we are playing catch up to this problem. We are catching up from the perspective of physically replacing these assets, and we are trying to catch up to the money too. The best place to start dealing with the money is to start quantifying the replacement requirements and getting those expenditures accounted for in a comprehensive financial plan. This is really the only way that utilities will be able to see the financial impacts to their ratepayers and develop replacement plans that will manage their customers’ expectations as smartly as they are trying to manage the utility’s assets.
Comments (2)Connection Fees Anyone?
September 22, 2009
Utility managers should understand that you only get one chance to charge new customers connecting to your system for the capital costs of providing them the capacity they need for service. Connection charges (aka. system development fees, impact fees, tap fees, capacity charges, etc.) are the right way to ensure intergenerational equity between existing customers and new ones. If designed and applied correctly, these fees can help keep rates lower in the long run while the utility continues to expand its system for a growing customer base. However, once the customers are already connected, your opportunities are reduced like they were for this small utility in Indiana. To avoid a big rate increase like the one in the Indiana example, this utility could have been charging all their new customers a cost-based connection charge all along. Instead, they get to explain to their users why system growth (double the planned capacity) is going to cost them a 23% rate increase.
Comments (0)StepWise Ratemaking Course for Elected Officials
September 20, 2009
The following links will take you to PDF files for the 4-hour seminar on water and sewer rates. The seminar is a short course that we present from time to time with the targeted audience being elected officials and general managers. It’s not a hands-on course that teaches the ins and outs of utility rates and the rate setting processes, but it is a broad overview of these issues with special emphasis on how elected officials can manage the risk of rate shock through competent rate setting processes tied to effective communications strategies. The seminar addresses four key areas:
- Why water and sewer rates are important.
- The right way to adjust water and sewer rates.
- How to get communities/customers to more readily accept needed rate increases.
- How to make rate setting part of a utility’s normal processes.
click to download Part 1 |
Part 1 – Intro & Why Rates Are Important - The first segment in the seminar addresses the importance of utility rates in the normal governance of any publicly owned water or sewer utility. The concept of risk is introduced with changes in rates being described as an event with a high probability of occurrence and a potentially high consequence that depends on the magnitude of the change in the rate. We introduce the concept of utility ownership and how customers’ reactions to rates can be compared to corporate shareholders’ reactions to low returns. We conclude the session by suggesting that managing the rate setting process is akin to managing customers expectations and,therefore, is a most effective tool for managing risk. |
click to download Part 2 |
Part 2 – The Right Way – The second segment of the seminar addresses the rate setting process. Starting with alignment of financial plans and strategic plans (like a utility master plan, or other long-range plan), this second and longest segment describes how rate setting starts with sound planning and financial policies before moving on to cost-of-service allocations and, ultimately, rate design. The intent of this segment is provide elected officials with exposure to rate making processes; we provide some simple examples to help the information sink in. |
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click to download Part 3 |
Part 3 – Making it Work - The final session focuses on using the information gained during the rate setting process to communicate more effectively with customers. General communication strategies are discussed,with more attention given to the process of ongoing customer relations. The session demonstrates how to tie-in the rate making process to the communication plan. The final segment in this session talks to the implementation of rate setting as a normal business process for the utility; it shows where the the rate setting process fits and talks to some of the challenges facing utilities for implementation. |
What Not to Expect from a Water or Sewer Rate Consultant
September 17, 2009
Many times, elected officials have the wrong ideas about what a water or sewer rate consultant will bring to the table. In this example from Fort Smith, AK we see an elected body that questions why the city would spend so much on the consulting contract. Their rationale for going ahead? The consultant might find a way to increase revenues by $4 million without having to increase rates. This is a case where the rationale is wholly irrational.
Water and sewer utilities get their funding from up to three sources: user charges, development fees and, in decreasing cases, taxes. In the Fort Smith example, the news report says that the problem is that the revenues are short of the operating expenses by $4 million. If so, the only two rational solutions are to: a) increase revenues by way of increasing the user charges by $4 million, or b) to decrease operating expenses by $4 million. Of course, the city could find any middle ground between rate increases and cost reductions too.
These kind of shortfalls are not uncommon and, in fact, they are increasing in their frequency and magnitude. As existing infrastructure wears out and has to be replaced, the capital costs of replacing those assets is high – think of it like having to replace your house after you’ve already repaid the mortgage – and those costs are going to be reflected in the water and/or sewer rates.
Comments (0)Coverage from Rocky Mtn. AWWA/WEA Conference
September 14, 2009
This blog post will be updated periodically as we are attending the Rocky Mountain Sections of AWWA and WEA’s annual conference in Albuquerque, NM. We will be providing some insights and notes from the proceedings.
Opening Session
The opening session featured commentary from Albuquerque Mayor, Martin Chavez. While his comments were brief, they were very much on point. In commenting about the importance of water, he said that “water is the No. 1 issue.” He said the issues surrounding water were bigger than health care, and bigger than other hot topics that grab the headlines. We couldn’t agree more. Especially in arid states like New Mexico, the lack of water resources to serve growing populations makes water one of the largest economic issues if not THE largest economic issue.
Mayor Chavez told the crowd of about 200 that even though water is incredibly important, it is never an issue that will get anyone elected but is definitely an issue that if left unattended will get one fired from public office. This is an excellent point that all elected officials should keep in mind. Constituents are generally “tuned out” with water issues unless something goes wrong. If water or sewer services fail, you can bet that customers will be immediately angry. It’s also true that many times the way that customers determine that something is “wrong” with the services is when they see large increases to their monthly bills. Both “failures” deserve attention and both can, as Mayor Chavez puts it, get you fired from public office. (side note: StepWise will be speaking to the topic of political risk in water and sewer utility governance during a half-day seminar next week at the Special Districts Association of Colorado’s annual conference in Keystone, CO; we hope to see you there).
Workshops
I attended just one of the many technical sessions, this one on the topic of master planning. I was surprised earlier in the week when I was asked to co-present at this session. It was a presentation that I had prepared much earlier (about two years ago) for another firm I was working with at the time. The presentation is entitled “Master Planning +” with the “+” meant to accentuate the fact that the idea of the presentation is to introduce a new concept for traditional master planning that would include additional planning elements. Under Master Planning + utilities would focus not only on new assets needed to keep pace with growth, but also renewals & replacements, operations, staffing, and financial planning. In this way, the utility uses the master planning process that they are already familiar with to engage in more strategic planning focused on meeting levels of service, community values, and matching economic resources to the long-term vision.
During the workshop, we saw at least one excellent example where one utility, the City of Santa Fe, NM, has taken a bold step toward the Master Planning + concept. The bottom line from the session was that utilities stand to save millions over the long-term by perpetuating a more strategic approach to planning.
Comments (0)Water Rate and Sewer Rate Increases are Sign of Times
A scan through the news from across the country will reveal that water and sewer rate increases are accelerating and are increasing in magnitude. A closer examination of these individual situations will reveal that the increases are necessary mostly because of issues that could have been prevented with some planning. However, some increases are headed your way soon for things that can’t be foreseen, like regulatory action. In this sewer rate example from Missouri we see a small community’s plight when faced with a regulatory action. In this case, the State regulator caused the the city’s residents to abandon their septic systems and to connect to the city’s sewer system. The costs of compliance included the costs of the initial connections, but are now continuing to escalate in the form of treatment chemicals, etc.
Regulatory action is likely to increase rather than decrease during the term of the current federal administration. If the President’s agenda from his campaign is any indicator, we can expect to see more regulatory actions on water and wastewater systems, especially in the area of energy use, and greenhouse gas emissions.
Comments (0)The Cost of Equity in Muni Utility Rates
September 7, 2009
From the archives, I found this article that I wrote a few years ago. It was first published in the Rocky Mountain Section of the AWWA/WEA magazine. The article speaks to how much the ratepayers of a utility should expect as a return for the equity they provide as part of a utility’s capital structure. We have since tied the notion of return on equity to the phenomenon we call “rate shock” (the negative reaction of ratepayers when faced with a sudden increase in user charges); StepWise has theorized that rate shock is largely a result of failing to meet the ratepayers (owners) expectations for return on investment. More on this topic to come in the days ahead. In the meantime, here’s the article.
Comments (0)
The Value of Simple Rates Cannot be Overstated
September 4, 2009
Intricate rate designs can be helpful in reaching certain community goals, but elected officials in particular should never underestimate the value of simplicity. In this example from Frankfort, KY (http://bit.ly/11h0OB) we see how customers can become easily confused with their utility bills and how that confusion can increase when multiple utilities are billed together. In this case too, each of the utilities implemented rate increases at the same time, further compounding the issue. Simplicity is not only valuable, but it is also many times the best rate structure alternative as discussed in a presentation we made at the American Water Works Association earlier this year.
Comments (0)California Gov. Letter to Salazar: “We are Trapped…”
September 3, 2009
Governor Schwarzenegger’s letter to Interior Sec. Ken Salazar is a telling story of the kind of frustration that comes with trying to balance environmental, agricultural, and municipal water supply interests of a state’s finite water resources. The situation in California is a serious one and you can see the Governor’s frustration in this letter. The point to be made for this blog, however, is that Gov. Schwarzenegger’s frustrations are nothing new to anyone who has ever had to plan for long-term water supplies for his/her community. Ten to twenty-year lead times between concept and construction are the rule and longer waits abound. These water supply projects, too, are among the very most expensive that any community, be it Los Angeles or Hometown USA, will ever consider. These are major capital expenditures that communities can plan for and although the costs of these things are fuzzy when looking 20-years ahead, one important thing to do is to start letting your ratepayers know what is in store them. Aligning long-range financial planning with long-range resource plans is essential; it’s a process that will help you figure out your financing options and understand clearly just how much will be required from ratepayers. That way, when the time for design and construction approaches and rates have to be adjusted, there is less surprise for everyone.
Comments (0)Elementary Rate Design
September 2, 2009
Many water and sewer utility managers look to their closest consulting engineer as their “expert” on water and sewer rates. Usually, the query is because there is an emergency of some kind, as is the case in this Vermont example. What we see in this case is a community whose water and sewer demand rates have dropped for whatever reason, resulting in a shortfall of revenue required to operate both utilities. The recommendation from the engineer is to increase the “base” rates in order to stabilize revenue. It’s not a terrible recommendation, but it’s also not necessarily a fair solution. A financial expert, like those here at StepWise, would have provided other options in this case. For example, the residents of this Vermont town might be interested in knowing just how much of the sewer costs are incurred to treat excessively strong wastewater the kind of which is normally discharged by commercial customers (things like mortuaries, bakeries, breweries, etc.); perhaps one solution would have been to identify those costs and cause those creating high-strength sewer water to pay the full cost of its treatment. The point is that consulting engineers, unless they have both the education and experience in utility rates, are probably not a utility manager’s best option for solving these kinds of problems. With water and sewer rates, the quick solution is rarely the best one.
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