1. Rodney Greek, San Diego County Water Authority Debby Cherney, Eastern Municipal Water District Jeffrey Hughes, University of North Carolina – Chapel Hill Moderator: Speakers: Monday, June 1, 2015 2:40 – 3:55 1.5 CPE Managing Revenue in Water Systems

2. Jeff Hughes Environmental Finance Center, UNC School of Government jhughes@sog.unc.edu www.efc.sog.unc.edu Debby Cherney Eastern Municipal Water District cherneyd@emwd.org www.emwd.org

3. Presentation Outline 1. Overview of revenue challenges and trends 2. Strategies that work, sort of work, and may work in the future…. 3. Communicating difficult financial realities 4. Resources

4. 4 Supporting the fair, effective, and financially sustainable delivery of environmental programs through: Applied Research Teaching and Outreach Program Design and Evaluation How you pay for it matters

5. Acknowledgements Our partner water and wastewater utilities

6. www.waterrf.orgwww.waterrf.org and www.efc.unc.eduwww.efc.unc.edu 6 REPORT TOOLS SLIDESBLOG POSTS

7. Revenue Variability at 3 Water Utilities Assessed and compared revenue risk of 3 utilities with different rate structures, climates, customer water use patterns, customer types. Applied each other’s rates on own customer base to identify relationships between revenue risk, rates and use. Listed mitigation strategies. www.ceres.org www.efc.sog.unc.edu

8. REVENUE CHALLENGES AND TRENDS

9. 2010-2020 Sales Trends? What are you seeing in your region?

10. Need a New Business Model? Reclaimed Water Use Begins Conservation Pricing Changes in 2002 and 2007 Source: Orange Water and Sewer Authority

11. Projections Don’t Generate Revenue 11

12. Industry Revenue Growth Roller Coaster Annual change in total operating revenues among the same 485 utilities nationwide Revenues increased Revenues decreased High revenue growth Low revenue growth

13. Revenue vs. rate adjustments (2004 to 2010) 13 Data analysis by the Environmental Finance Center at the University of North Carolina. Data sources: 2010 and 2004 RFC/AWWA Water and Wastewater Rates Survey Data for 82 Utilities 1 to 1 Line

14. STRATEGIES FOR OVERCOMING REVENUE CHALLENGES

15. EASTERN MUNICIPAL WATER DISTRICT RIVERSIDE COUNTY, CALIFORNIA ALLOCATION-BASED CONSERVATION RATES

16. About EMWD Established in 1950 Southwest Riverside County, California — High-growth, arid climate, limited water 555 square mile service area Population: ~785,000 Services: Water / Sewer / Recycled 2014 Water Supplies — 51% imported water — 16% local groundwater and desalters — 33% recycled water EMWD has a long history of having a strong “Conservation Ethic” – it matters all the time, not just in times of drought.

17. California Drought o 2014 was 7th driest and the 9th hottest year on record (137 years) o 94% of state in severe, extreme or exceptional drought o Snowpack is now only 6% of average o Major reservoirs throughout California are at or below normal o California Department of Water Resources (DWR) restricting water diversions o Colorado River watershed snowpack average in 2014, 63% of average in 2015

18. California Regulatory Actions o Jan 17, 2014: Governor Brown declares a drought emergency (calls for voluntary conservation) o Apr 25, 2014: Second executive order asking for redoubling conservation efforts (voluntary) o Jul 29, 2014: State Water Resources Control Board (SWRCB) implements Emergency Water Conservation Regulations (mandatory) o Mar 27, 2015: SWRCB expands Emergency Water Conservation Regulations o Apr 1, 2015: Governor’s Executive Order mandating 25% statewide reduction in potable water use

19. California Regulatory Actions (con’t) o Apr 7, 2015: State Board releases initial regulatory framework to implement the Executive Order. o Apr 28, 2015: State Board releases an update to the framework incorporating the following: o Simplistic sorting of agencies using a three-month July - September 2014 self-reported GPCD o Agencies assigned into groups ranging from 4% to 36% required reductions o Failure to meet targets by February 2016 can result in fines of up to $10,000 per day Regulations provided no acknowledgment of climate, housing density or conservation achievements prior to 2013.

20. Tools and Strategies o How? – Mandatory use restrictions – Customer incentives – Active outreach – Partnering with building industry and county to introduce new landscape ordinances – Allocation-Based Rate Structure EMWD is mandated to cut potable water use by 28%

21. Allocation-Based Rates o Individualized “Budgets” – Encourages efficiency through sharply tiered pricing system – Fair – Identified Over-Use Customers for Targeted Outreach – Appropriate cost nexus by reinvesting in water use efficiency programs and higher cost supplies Indoor Usage Budget Persons x 60 GPD Tier 1: $1.793 Price/CCF Outdoor Usage Budget Irrigated Area x ET Factor Tier 2: $3.280 Wasteful Use More than 50% over budget Tier 4: $10.755 Excessive Use Up to 50% over budget Tier 3: $5.879 Over Allocation Within Allocation

22. Fixed v. Variable o Variable rates capture 100% of variable costs o Fixed service charges capture most of fixed costs, plus include separate line items on the bill for water supply reliability capital charges and sewer system capital charge (R&R) o When we sell less water, we actually drive down our melded cost of water because we buy less of our most expensive supply Fixed Revenue Volumetric Revenue Fixed Expense Volumetric Expense

23. Water Use Efficiency Results

24. EMWD Net Revenue

25. StageDate Approved DescriptionActions Stage 1April 2011Supply WatchVoluntary reduction up to 10% Stage 2April 2014Supply AlertVoluntary reduction up to 25% Stage 3August 2014 (3a) Mandatory Waste Reduction 3a: No variance adjustments; observation based penalties 3b: Tier 3 budgets decreased by 50% 3c: Tier 3 budgets decreased by 100% Stage 4Mandatory Outdoor Reduction Watering schedules limited (1-2 days/week) 4a: Tier 2 budgets decreased by 10% 4b: Tier 2 budgets decreased by 50% 4c: Tier 2 budgets decreased by 100% Stage 5Mandatory Indoor Reductions Catastrophic stage (50% reduction in demand) 5a: Tier 1 budgets decreased by 10% 5b: Tier 1 budgets decreased by 30% 5c: Tier 1 budgets decreased by 50% Water Shortage Contingency Plan

26. Hypothetical Impact of a Stage 4b o At Stage 3a, District projects 68,000 AF of tiered water sales per year. o At Stage 4b, District could see acre-foot sales decrease by 20% or more  Stage 4b projected to increase revenue over the near-term (5-8 months).  District projects FY 2016 revenue increase of approximately $5 million. o Notes: Base case sales using FY15 actual monthly sales per tier. Stage 4b effective July 1 assuming no Tier 3 sales; 50% of tier 2 sales become Tier 4; monthly reduction in Tier 4 sales until 90% reduction achieved. FY 2016 revenue projection assumes some form of revenue adjustment during July through September.

27. Evolving Pricing: Water Utility 2.0?

28. Source: Fayetteville Observer 2/6/04

29. Fixed vs. Variable Revenues and Expenses

30. Rethinking Rate Models, Projections, and Cash Flow Plans o More conservative o Rate models with less (or no) dependence on revenues from high volume or high block sales o “Excess” revenues transferred to reserve funds or used for increased pay as you go cash capital funding

31. Conservative Pricing Paired with Rebates or Dividends o Dividends linked to sales, cost of service, and/or policy goals ACE 2012: Skepticism Among the Judges…

32. Base charges generate much higher portion of revenues Base charges are customized to match customer’s impact Historic consumption patterns replace “meter size” as dominant determent of base charge. Comparison of BJWSA existing residential rates to a “revenue neutral” PeakSet Base model (2012 EFC analysis) Existing BJWSA residential rate structure PeakSet base residential rate structure % fixed revenue18%57% Monthly base rate$6.00/meter for water$1.85 x rolling 3 yr. avg. of peak month sales (kgal) Variable rate$3.46/kgal$0.52/kgal PeakSet Base

33. Matt Williams, Water Advisory Committee Member to the City of Davis (CA) Water Division

34. Feedback from Expert Panel 8: “This model is intriguing.” 8: “This model provides a steady stream of revenue for the utility, which makes it very attractive to me.” 7: “I like that the base rate is set based on use.”

35. CustomerSelect Rate Model

36. COMMUNICATING DIFFICULT REVENUE TRUTHS

37. The Future? o Revenue needs are outpacing inflation o Price increases often have to outpace revenue requirements increase needs o Price levels should not be the only financial metric a board focuses on

38. Comprehensive Revenue Metric? 38 $563 $753 $298 $282 $524 $1,032 $497 $582 $414 $643 $669 $843 $0 $200 $400 $600 $800 $1,000 $1,200 Asheville Big Falls 2004 Big Falls 2005 Chapel Hill Concord Durham Fayetteville Greensboro Raleigh Sanford Wilmington Winston-Salem 2004 2005

40. Water Research Foundation – Rate Approval Process Communication Strategy and Toolkit (#4455) Principal Investigators Other Team Members

41. *Summary Statistics Analysis Conducted by UNC Environmental Finance Center Which statement below best describes the water rate increase that was proposed to the local government governing body for approval? (n=1,349) © 2015 Water Research Foundation. ALL RIGHTS RESERVED.

42. Utilities where rate adjustment requests were more likely to cover essential costs tended to: o Be overseen by more experienced staff member o Have a more trusting staff-board relationship o Include capital information with request o Include alignment with a master plan o Have less of an existing affordability challenge o Be in a larger city © 2015 Water Research Foundation. ALL RIGHTS RESERVED. Analysis Conducted by UNC Environmental Finance Center

43. © 2015 Water Research Foundation. ALL RIGHTS RESERVED.

44. Where Can You Find More? http://efc.unc.edu Or subscribe to the Environmental Finance blog! http://efc.web.unc.edu

45. Water Utility Revenue Risk Assessment Tool Free to download and use at www.waterrf.org www.efc.sog.unc.edu o Excel tool (simplified) o Focus on residential revenues o Utility inputs own: – Rate structure details (can compare 2) – Residential customer water use profile – Weather patterns – Assumptions on price elasticity o Tool estimates the proportion of revenues that may be lost due to changes in water use patterns due to: – Rate increase, alone or plus: – Normal weather pattern changes, or – One-time, significant and sudden conservation effort

46. Whiteboard Video Intro Draft version available temporarily at https://www.youtube.com/watch?v=sInAMJwU_LEhttps://www.youtube.com/watch?v=sInAMJwU_LE

47. Please provide feedback on the session o Quick Text Feedback 1.Step 1 - Text “GFOA” to 22333 2.Step 2 - Did the session meet your expectations for being high quality and relevant to your job? Exceeded Expectations– Text “T13EXC” Met Expectations – Text “T13MET” Did Not Meet – “T13NOT” o To provide more detailed evaluation on the session or full conference go to www.gfoa.org/evals