Over the past 6 months*, the EFC has continued to investigate how utilities across NC are faring as the ongoing pandemic continues to create a variety of challenges related to revenue and operations. The big picture takeaway is that some things are improving while some things remain the same. Many utilities continue to feel a variety of impacts from COVID-19 on utility revenues and practices, some utilities are transitioning to pre-pandemic billing practices, and some utilities will be providing funds for bill payment assistance to customers who have past due bills.
This week, the EFC is releasing a report, funded by the NC Policy Collaboratory, that details some of the on-going impacts on water and wastewater utilities that have resulted from COVID-19 and the implementation of NC’s Executive Orders 124/142, which prohibited disconnection of residential customers and mandated the establishment of payment plans. As part of its research, the EFC interviewed staff from 16 different utilities and collected survey responses from a total of 34 utilities between August and December 2020. This research included utilities across the state that varied in size from 42-300,000 accounts and which had a wide variety of financial health characteristics.
Non-residential water customers use nearly 43% of public water supplied in the United States. In fact, their portion of public water demand has increased over the past twenty years as water efficiency in the residential sector has improved. Studying customer behavior has become an essential management strategy for most businesses. Yet this group of water customers is largely understudied by utilities, in large part because it is an extremely diverse customer classification. There are many ways to slice-and-dice the data. This blog post describes one way of identifying the big changes that big customers make.
The study: Over the past year, the Environmental Finance Center has worked with the North Carolina Urban Water Consortium and Valor Analytics to develop meaningful and feasible metrics to track non-residential water customers’ behavior. Utilities can incorporate these metrics into their practices to better understand and anticipate non-residential water customer water use and revenue impacts.
Meaningful metrics: One such metric is called the plateau: a significant and sustained change in water use behavior.
Successful and long-lasting businesses are all about capturing and creating value. Value creation or value added can broadly be defined as taking an action where the benefits of the action exceed the costs of the action. For example, value creation can manifest itself through increased quantity and improved quality. Value capture has to do with retaining a portion of value in a transaction with the consumer and is typically achieved through pricing. When looking at environmental products or services, the role of creating and/or capturing value may not be readily apparent. Continue reading
It can be hard being a water utility when nobody needs you. Or worse yet, when you have to push people away. But the news seems rife with such stories of unrequited demand for service from water utilities that invested so much in the relationship, and the infrastructure, now only to be left kind of empty.
This is Part 2 of a 2 part blog post on utility financial risk. Part 1 focuses on utility revenue risk, and Part 2 focuses on utility debt risk.
In our first blog post on utility financial risk, we discussed how debt risk in addition to revenue risk were significant contributing factors in the Energy Future Holdings bankruptcy, the largest bankruptcy of a leveraged buyout on record. While it is relatively rare for utilities to declare bankruptcy, it is not unusual for utilities to carry high levels of debt. In fact, utilities often have capital structures with high amounts of debt combined with highly rated credit quality, signaling that they have a strong ability to repay that large debt. Typically as debt levels increase, the risk and cost of bankruptcy increases, and credit quality decreases. The degree to which bankruptcy risk increases as debt increases varies between companies and industries. For most companies, there is a certain optimum level of debt where the company balances out the benefit of a tax shield and the risk/cost of bankruptcy. Determining this optimal capital structure is difficult for all companies, not just utilities.