Guest author Catherine Noyes is an Associate Consultant at Raftelis Financial Consultants.
Through the 1960s, the utility business was all about protecting public health – making sure that technology was in place to ensure safe and reliable water and wastewater service to a growing population. In the 1970s, the focus on public health was expanded to include the environment. The EPA was established, and the federal government enacted legislation to protect clean air and water. With this legislation came large federal grants, which funded expansions to the nation’s water and sewer infrastructure.
Fast-forward to present day. Public health is still a priority. The environment is still a priority. Stricter regulations have routinely been enacted to raise the level of protection to both people and the planet. And yet forty years later, the federal grants have largely disappeared, leaving utilities around the country to rely primarily on borrowed money and rates that have likely not been designed to recover the true full cost of service when they need to repair, replace, or extend service. In other words, current rates recover the cost of subsidized water operations, but future subsidies aren’t going to be available to cover the costs associated with the repair and replacement of existing systems. And so financial viability was added to the list of priorities.
It is these priorities that, in 2006, inspired the six major industry associations and the EPA to sign an agreement formally supporting effective utility management (EUM) in the water industry. The Effective Utility Management Steering Committee, which was chartered by the initial agreement, identified common elements and best practices to support joint water utility sector management strategy. These elements included the Ten Attributes of Effective Utility Management, which indicate where effectively managed utilities focus and what they strive to achieve, and the Keys to Management Success, which complement the Attributes and enhance utility management effectiveness.
The Ten Attributes of Effective Utility Management encapsulate the three priorities above, as well as other significant issues (customer service, employee and leadership development, etc.) that arise in the operation of a water or wastewater utility. EUM serves as a framework to help utility executives, governing boards, policy-makers, and regulators improve utility performance, through the use of planning, implementation, measurement, and performance monitoring against the Ten Attributes. Within the framework, and taking into consideration each utility’s individual situation, utility leadership can prioritize the Attributes and learn from industry best practices to improve organizational performance.
Specifically focusing on the financial viability priority, EUM cites well-managed utilities as “Understanding the full life-cycle costs of the utility and establishing and maintaining an effective balance between long-term debt, asset value, operations and maintenance expenditures, and operating revenues.” Downward pressures on revenue, due to falling sales and a traditional pricing model that is ill-equipped to recover the full costs associated with providing service, has made maintaining this “balance” difficult for many utilities.
One of the keys of EUM is measurement, with the understanding that you can’t manage what you can’t measure. The EUM Primer discusses the importance of establishing predictable rates to adequately cover costs, meet community expectations, provide for reserves, maintain support from bond rating agencies, and plan and invest for future needs. There are a number of metrics typically associated with financial viability, including budget management effectiveness (debt ratio, revenue to expenditure ratio, O&M expenditures or capital expenditures, etc.).
One technique that some utilities have used to drive performance in conjunction with EUM is Lean, which is a set of principles and methods focused on the systematic elimination of non-value added activity. Lean offers several methods that help to ensure that resources are being used in the most effective way possible. For example, The City of Pompano Beach Utilities Department (Department) serves approximately 80,000 customers in Pompano Beach, Florida. The Department has used both an EUM assessment and Lean process-improvement tools to develop an action plan to move improvement activities forward. As a result, the Department has seen significant operational and management results, including increased water efficiency, improved customer satisfaction, and enhanced financial viability.
According to the Resource Guide to Effective Utility Management and Lean, “One of the most frequently cited benefits of Lean is cost savings, which maps to the Financial Viability Attribute in the EUM system. Cost savings and cost avoidance are realized from process changes that allow utilities to avoid investing in costly new controls and increase machinery and process efficiency.”
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