American Idol for Water Utility Finance: The Results Show

Doug Scott, Janice Beecher and Jeff Walker give ratings to the merit of affordability programs. The EFC sends a special thank you to Jeff, Jan and Doug for their participation and sense of humor!

Mary Tiger is the Chief Operating Officer for the Environmental Finance Center and Project Manager for “Defining a Resilient Business Model for Water Utilities” Project funded bythe Water Research Foundation.

Last week at the AWWA Annual Conference and Exposition (ACE) in Dallas, four adaptations to the classic utility business model “auditioned” before a panel of expert judges. Jan Beecher (Director of the Institute of Public Utilities at Michigan State), Doug Scott (Managing Director of Fitch Ratings’ US Public Finance Group), Jeff Walker (Director of Project Development for the Texas Water Development Board), and an audience of 40 utility officials and stakeholders evaluated the finalists based on the ability of each approach to:

• Benefit the efficient and penalize the wasteful user
• Facilitate adequate revenues across all volumetric sales conditions
• Offer reasonable affordable service for the poorest customers
• Provide financial stability for the utility and the customers
• To be administered, justified and communicated by the utility to customers

Here are the results:

Low-income assistance programs: Although they show up as an expense to the utility or third party implementers, low-income assistance programs can mean more revenue for utilities. A business case can be made by calculating the revenue saved and recovered from theoretical decreases in shut-off notices, disconnections, and non-payments. Anecdotally, however, affordability programs may help a governing board mitigate the impact of a rate increase to its low-income customers that is broadly applied to the customer base at-large. This modification was presented using a case study of the City of Baltimore’s Department of Public Works’ Low Income Water Assistance Program.

• Beecher (4 out of 10) “Utilities have to address affordability, but in order for an affordability program to work effectively, it must be targeted. I think affordability programs have to be part of the dialogue, but it’s not really a workable solution for small systems.”
• Scott (5 out of 10) “Lenders don’t really want to see handouts, but creditors recognize the political capital of these types of programs. It’s not always a good expense and there would be concern if the program rises to a high level of expense for the utility.”
• Walker (5 out of 10) “I have no problem with affordability programs.”

Property-tax financed fire protection: In addition to providing clean drinking water to the public, water utilities build and maintain infrastructure necessary to provide fire protection. While not common practice, there are some utilities that collect all or a portion of this revenue from property taxes rather than from rates and charges to customers through their water bills. This is done under the premise that fire protection is a public good more associated with the value of the property than the amount of water that a customer uses – and that the provision of this public good costs the utility more than it would cost to build and maintain a system whose sole purpose was to deliver water for typical demand. This modification highlighted EPCOR’s Fire Hydrant Service Fee and the Halifax Regional Water Commission’s charge to the City of Halifax for Public Fire Protection.

• Beecher(7) “This brings to the forefront the issue of fire protection, so I like that. And it is a more equitable charge for the fixed costs associated with fire protection. The problem that I see with it is that it misses a big opportunity to educate the public. It should be partnered with an aggressive conservation model.”
• Scott(7) “Well, I like this one better than the last. I do think that citizens need to see this charge on a monthly bill. There is a disconnect when it is funded by property taxes.”
• Walker(8) “I like it, but of course, there is the issue of how you deal with the fire protection demanded by tax exempt properties.”

Peak-set Base Pricing Model: The Peakset Base Pricing Model would charge individualized base charges based on a customer’s maximum period of consumption. This theoretical model developed by the WaterRF research team is inspired by power utilities’ demand charges, yet grounded in the limitations of prevalent water metering technology. Under this rate structure, a customer’s base charge would be individually set based on their three-year rolling average peak month of demand. The utility would still charge variable rates, but they would constitute a lower proportion of a customer’s bill. This model would allow the utility to build more of its cost recovery into the base charge while still promoting customer conservation and efficiency. In particular, it would encourage steady water use. (Future research and blog posts will further explore and describe this model.)

• Beecher(8) “This model is intriguing. I like that it relates to customer classification. I think it should target the largest customers first. I do worry about customers understanding the mixed signals.”
• Scott(8) “This model provides a steady stream of revenue for the utility, which makes it very attractive to me. I like that it helps customers manage their peak demand.”
• Walker(7) “I like that the base rate is set based on use, rather than need – but what happens if people really conserve?”

WaterWise Dividend Model: Owned by their members, cooperative organizations return profit to their “owners” once financial obligations are met. Many times these cooperatives return larger “dividends” to the “owners” that bought more of their product over time. Under the theoretical “WaterWise Dividend” business model developed by the WaterRF research team, water utilities seeking revenue stability and efficient customers would adopt an inspired model. However, rather than rewarding customers that used more, they could return conservation dividends to customers that used less. The definition of “less” could be established off of a customer budget (for those utilities with budget-based rates) or relative to an individual customer’s historic use. (Future research and blog posts will further explore and describe this model.)

• Beecher(2) “This one confuses me. It’s half institutional choice, half rate choice. There are little nuggets of goodness, but there are legal issues. Rebate schemes confuse customers.”
• Scott(1) “This is the hardest one to pull off. I’m not feeling it. It’s too complex to explain and sends the wrong signal when we’re engaging in this dialogue about infrastructure investment.”
• Walker(1) “This one doesn’t work for me. You just don’t give away your reserves.”

 Audience reaction to how well each approach would work with their utility or the utilities they work with:

What do you think?