This summer, the Environmental Finance Center is taking its interest in how environmental projects are funded on the road through a three-week Applied International Environmental Finance program in Quito, Ecuador. The EFC, in collaboration with TripleSalto –a nonprofit organization that generates integral solutions to social, environmental, and economic needs through strategic alliances – decided to sponsor this course based on growing interest in applied international environmental finance projects among current Public Administration, Public Health, and Environmental Engineering Masters students at UNC-Chapel Hill. Continue reading
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.
May 5th, 1:30-4:30pm in Chapel Hill, NC
Free and Open to the Public. Live Web Streaming Available.
Who Pays? With What Money?
The costs of environmental services, programs, and infrastructure continue to rise. At the same time, the individuals, communities, and governments tasked with paying for environmental protection are experiencing significant financial challenges. Whether a billion dollar effort to restore a region’s polluted water supply, a $4,000 project to weatherize a financially disadvantaged family’s home, or a program to replace a small town’s 50-year-old water treatment plant, all environmental initiatives share a common challenge: who will pay and and with what money? Without implementing fair and sustainable solutions to these environmental finance questions, the most brilliantly conceived environmental technology or program will likely fall short of achieving its goals.
This public forum will feature engaging presentations from prominent environmental finance experts and innovators from a variety of perspectives that cut across sectors and issues. This event will foster discussion and identify emerging trends, strategies, and ideas that will help answer the basic “how will we pay” questions at the heart of successful environmental protection.
Water conservation is critical to meeting the future water needs of Texas. Many programs may be implemented to reduce water use, and a number of utilities across the State are making strong efforts to advance water conservation. One of the most effective methods to driving conservation is water pricing. Used effectively, price can provide a signal to users regarding the value and supply of water so they can adjust their demand accordingly. Unfortunately, rates are also the primary revenue mechanism for utilities that are also tasked with protecting public health and the environment. This can create a disincentive to increase conservation. Fixing this conflict requires rethinking the current business model.
Stacey Isaac Berahzer is a Senior Project Director for the Environmental Finance Center at the University of North Carolina, and works from a satellite office in Georgia.
Water rate increases can get even more controversial when there is the perception that the related increase in revenue is going to fund government activities other than water service.
With the economic downturn, local governments are having a harder time balancing their budgets and the temptation to draw from utility funds becomes harder to resist. Stories are popping up in the press, such as objections over a 59% (utility) rate increase over a 13-year period, in order to hold millage rates steady in one local government. Several factors play into whether this is an unusually high rate of increase. Inflation is one important factor. In the last ten years, the Consumer Price Index (CPI) measure of inflation rose by more than 25%. The power of compounding involved with annual rate increases over the 13 years is also an important consideration. But, if we compared this increase to, say about 2,000 utilities from six states across the country, would the 59% be an outlier? Continue reading