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

1. 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 Berahzer Environmental Finance Center at the University of North Carolina, Chapel Hill October 31, 2012 William and Ida Friday Center for Continuing Education UNC, Chapel Hill, NC

2. Outline • Introduction • Why we need innovation • Emerging solutions • Are these innovations working?

3. introduction

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

5. 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 atwww.efc.web.unc.edu • Final research will be at www.waterrf.org

6. Water Research Foundation Project #4366 – Utility Partners Water Research Foundation Project #4366 EPCOR Aqua America NEOMSD Loveland Louisville Denver Austin

7. Why we need innovation

8. 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

9. 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)

10. Another Way to Say This … • Traditional rate structures create a paradoxical relationship between conservation and financial health Source: Fayetteville Observer 2/6/04

11. 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)

12. 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

13. Weather is Becoming Less Predictable 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

14. Emerging solutions

15. Emerging Solutions • Reducing Costs • New Services • New Pricing Structures

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

17. 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)  

18. 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??

19. CustomerselectPricing Structure • Inspiration = cell phone plans • Customer buys into a “plan” that allows them a certain “bundle of consumption:” • x Gallons of water provided • xGallons of wastewater treated • Access to online usage data • Insurance on service line • Etc. • Customers who use beyond their “plan” limit face much higher rates

20. Customerselect Pricing Structure • Inspiration = cell phone plans • Customer buys into a “plan” that allows them a certain “bundle of consumption” Example residential structure

21. Are these innovations working?

22. 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

23. 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.

24. 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)

25. How Many Residential Customers Would Have Exceeded Their Plan? Customerselect Pricing Structure

26. Addressing Revenue Stability with the CustomerSelectModel

27. Are these innovations working? Yes

28. Stacey Isaac Berahzer UNC Environmental Finance Center www.efc.unc.edu berahzer@unc.edu 770-509-3887