www.efc.unc.edu

The State of Water Utility Financial Innovation at the Dawn of the 21st Century

2012 Water and Health Conference:Science, Policy and Innovation

Stacey Isaac BerahzerEnvironmental Finance Center at the University of North Carolina, Chapel Hill

October 31, 2012William and Ida Friday Center for Continuing EducationUNC, Chapel Hill, NC

Outline• Introduction• Why we need innovation• Emerging solutions• Are these innovations

working?

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INTRODUCTION

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Dedicated to enhancing the ability of governments and organizations to provide environmental programs and services in fair, effective and financially sustainable ways

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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

• You can join the on-going research discussion at www.efc.web.unc.edu

• Final research will be at www.waterrf.org

Water Research Foundation Project #4366EPCOR

NEOMSDAqua America

Loveland

Denver

Austin

Water Research Foundation Project #4366 – Utility Partners

Louisville

WHY WE NEED INNOVATION

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Because the Status Quo Will Not Work

• Traditional rate structures create a paradoxical relationship between conservation and financial health

• Revenue is too vulnerable• There is a large national infrastructure gap• Weather is becoming less predictable

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Traditional Rate Structures Create a Paradoxical Relationship Between Conservation and Financial Health

• Encouraging customers to use water more efficiently, causes a significant loss of revenue when customers comply (Janice Beecher’s “conservation conundrum”)

• Average household water use has declined steadily since 1995 (W. B. DeOreo & Mayer, Peter 2012b)

• For a family in a new, high efficiency home, indoor use is falling in the range of 13.3 – 42.7% (W. B. DeOreo & Mayer, Peter 2012b)

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Another Way to Say This …

• Traditional rate structures create a paradoxical relationship between conservation and financial health

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Source: Fayetteville Observer 2/6/04

Revenue is Too Vulnerable

• Utilities tend to rely on volumetric charges for the bulk of their revenue

• Nationally, per capita demand is decreasing• Example: The combined cost savings to the

customers – or revenue loss to utilities – from using WaterSense labeled products in 2010 was $1.3 billion in water and energy bills (Environmental Protection Agency (EPA) 2011)

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Large National Infrastructure Gap• Gap is due to decreasing revenue bases and

increasing costs (and delayed maintenance)• In a 2007 EPA study, gap = $334 billion

through 2026 to simply maintain existing infrastructure

• In a 2012 American Water Works Association (AWWA), gap = $1 trillion by 2035

• The federal government is not funding water infrastructure projects as it did in the past

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Weather is Becoming Less Predictable

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Experts said the storm would be wider and stronger than last year's Irene, which caused more than $15 billion in damage, and could rival the worst East Coast storm on record.

East Village flooding. via http://instagram.com/p/RY57HLNzpI/?fb_action_ids=10151215240594507

EMERGING SOLUTIONS

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Emerging Solutions

• Reducing Costs• New Services• New Pricing Structures

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Reducing Costs

• Energy efficiency• Water Loss Reductions (within the system)• On-site energy generation

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New Services

• New services represent new revenue streams, e.g.– Antenna leases on water towers– Backflow prevention services– Bill payment systems– Bottled water sales(?)– Consulting and education services– Service line insurance, etc. (R. Raucher et al. 2012)  

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New Pricing Structures

• Average wintertime consumption budget-based rates– the utility provider establishes individual customer water

allowances and sets water prices for these customized usage blocks

• Drought surcharges– often implemented soon after a major drought

• Dividend or Cooperative Model– customers who behave as better water stewards (less

use/more consistent use) receive refunds• Cell Phone Model??

Customerselect Pricing Structure

• Inspiration = cell phone plans• Customer buys into a “plan” that allows them a

certain “bundle of consumption:”– x Gallons of water provided– x Gallons of wastewater treated– Access to online usage data– Insurance on service line– Etc.

• Customers who use beyond their “plan” limit face much higher rates

Customerselect Pricing Structure• Inspiration = cell phone plans• Customer buys into a “plan” that allows them a certain “bundle of

consumption”

Plan name Monthly water allotment

Cost for w&s under current rate structure

Customerselect cost (w&s)

Overage

Lifeline 2,000 gallons $18.38-$27.10 $25.99 $12.00/kgal

Basic service/Small family

6,000 gallons $31.46-$62.51 $59.99 $12.00/kgal

Light irrigation/Large family

10,000 gallons $72.86-$107.51 $89.99 $12.00/kgal

Heavy irrigation 15,000 gallons $119.06-$165.26 $129.99 $12.00/kgal

Water waster Unlimited >$176.81 $229.99* NA

Example residential structure

ARE THESE INNOVATIONS WORKING?

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Reducing Costs

• There is a lot of emphasis currently on energy management for water/wastewater utilities, especially since the American Recovery and Reinvestment Act of 2009

• Chemical costs appear to be less controllable to the water utility

• Success at reducing water loss within the system is very utility/state-specific

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New Services

Although new services may hold promise for income generation, they do not come without risk. Without solid business planning acumen and sound financial evaluation of current supplementary services, each supplementary service holds the threat of financial risk as well as reward. In addition, it is necessary that each utility evaluate their administrative capacity to handle such expansion in services beyond their core service lines of selling water and wastewater treatment.

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New Pricing Structures• Average wintertime consumption budget-based rates

– they have been critiqued for their failure to achieve neither the efficiency nor affordability goals of strong rate designs (La France 2010; J. A. Beecher 2012)

– Irvine Ranch Water District in California has used it for about 20 years, between 1992 and 2005, it increased outdoor efficiency by 60%; AND improved revenue stability

• Drought surcharges– this rate model improves efficiency, provides revenue neutrality,

assures distributional equity, and guarantees the conservation of water during drought and water shortage periods (Smith & Wang 2008)

• Dividend Model– little empirical analysis has been conducted

• Cell Phone Model (CustomerSelect Model)

How Many Residential Customers Would Have Exceeded Their Plan?

Customerselect Pricing Structure

Addressing Revenue Stability with the CustomerSelect Model

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2008

0620

0808

2008

1020

0812

2009

0220

0904

2009

0620

0908

2009

1020

0912

2010

0220

1004

2010

0620

1008

2010

1020

1012

2011

0220

1104

2011

0620

1108

$-

$5

$10

$15

$20

$25

$30

$35 Average Residential Water & Irrigation Monthly Bill

Existing Rate Structure

Customer Select Model

Year & Month

YESAre these innovations working?

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Stacey Isaac BerahzerUNC Environmental Finance Centerwww.efc.unc.eduberahzer@unc.edu770-509-3887