Utility Rate Setting for Cost Recovery and Conservation Summary of Research Support Services for the NC State Water Infrastructure Commission

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1 ENVIRONMENTAL FINANCE CENTER AT THE UNC SCHOOL OF GOVERNMENT Utility Rate Setting for Cost Recovery and Conservation Summary of Research Support Services for the NC State Water Infrastructure Commission JUNE 9 AUTHORS JEFFREY HUGHES MARY TIGER SHADI ESKAF

2 Summary In the summer of, the North Carolina General Assembly passed House Bill 99, commonly known as the Drought Bill, into Session Law (SL) 13. Among other requirements, the law requires local governments and large community water systems to have full cost pricing in order to be eligible for state funds for water infrastructure. In addition to covering the costs of operations, maintenance, repair and debt service, the legislation further recommends that the water rate structures support water conservation efforts. In support of this legislation, the State Water Infrastructure Commission (SWIC) engaged the Environmental Finance Center at the UNC School of Government (EFC) to study the relationship between water rates and water use, as well as to provide recommendations on how state funders can evaluate utilities water rates and pricing in light of the legislation. This research was conducted between March 9 and the end of June 9 (see Appendix A for list of research products). This report is a summary of that study. Based on literature review and data analysis, the following report recommends that the North Carolina funders use the ratio of operating revenues to operating expenditures and debt service in order to determine if a utility has full cost pricing. The research also shows that the two most important rate setting practices a utility can do to decrease average residential water use are to increase the combined marginal price of water and sewer, and to increase billing frequency to monthly. Legal Background NC SESSION LAW (b) To be eligible for State water infrastructure funds from the Drinking Water Revolving Fund or the Drinking Water Reserve Fund or any other grant or loan of funds allocated by the General Assembly whether the allocation of funds is to a State agency or to a nonprofit organization for the purpose of extending waterlines or expanding water treatment capacity, a local government or large community water system must demonstrate that the system: (1) Has established a water rate structure that is adequate to pay the cost of maintaining, repairing, and operating the system, including reserves for payment of principal and interest on indebtedness incurred for maintenance or improvement of the water system during periods of normal use and periods of reduced water use due to implementation of water conservation measures. The funding agency shall apply guidelines developed by the State Water Infrastructure Commission in determining the adequacy of the water rate structure to support operation and maintenance of the system.

3 (5) Does not use a rate structure that gives residential water customers a lower perunit water rate as water use increases. NC HOUSE BILL 99 SECTION 17. The State Water Infrastructure Commission. shall develop guidelines for water rate structures that are adequate to pay the cost of maintaining, repairing, and operating the system, including payment of principal and interest on indebtedness incurred for maintenance or improvement of the water system. The guidelines shall also consider the effect of water rates on water conservation and recommend rate structures that support water conservation Methodology and Analysis Full cost pricing. The Environmental Finance Center has an extensive history of working with North Carolina utilities on financial issues, particularly on using industry best practices and full cost pricing. For this research, the EFC supplemented this background with a literature review and an examination of full cost pricing practices among utilities in the southeastern United States. In addition, the EFC used the North Carolina Department of the State Treasurer s Local Government Commission (LGC) data and worked with LGC staff to identify the most available and applicable financial data to measure cost recovery. The LGC collects audited financial statements from government owned utilities each year. The LGC database is the most complete centralized source of financial information on government owned utilities in North Carolina. Conservation oriented rates. The Environmental Finance Center, in collaboration with the North Carolina League of Municipalities (NCLM), collects annual data on water and sewer pricing from government owned and non profit utilities in North Carolina. The EFC/NCLM utility rates database contains pricing information for over 95 percent of these utilities. The EFC merged the rates data with utilities water use data collected by the Division of Water Resources (DWR) at the North Carolina Department of Environment and Natural Resources (DENR). DWR provided water use data from the 1997,, and 7 Local Water Supply Plans and the annual update in. The EFC cleaned the data, and merged them with utility pricing data and secondary data from multiple sources, listed below in the table. The EFC examined the relationship between systems average residential water use in 7 and against water pricing and several factors, using bi variate analyses and several multivariate regression models (in consultation with Professor Roger vonhaefen at NC State University). In the regressions, the EFC tested various structural models and confirmed the consistency of the results. While various models were used, the general specification of the pooled cross sectional model, weighted by the system size (i.e. number of connections), is as follows for system i and year t:

4 ln(avg. res. use) it = α + β 1 (price variable) it + β (% of time in restrictions, avg. temp., total prec., rate structure, rate structure price subsidy, % of time in different stages of drought, number of connections, billing frequency, connections/mile of pipe, % urban pop., avg. household size, median # of rooms in homes, median age of homes, % senior citizens, median household income, % poverty, % with income >$15k, % adults with Bachelor s degree, age of oldest meters, finished storage capacity, Central Coastal Plain Capacity Use Area cutback system) it Data Variable Source Demand Average residential monthly water use DWR: 7 Local Water Supply Plan (dependent and annual update variable) Conservation % of year in voluntary and/or mandatory restrictions DWR: Water conservation and measures % of year spent in drought stages drought water use weekly reporting Water marginal price or combined water and sewer marginal price at average usage or at 5, GPM Pricing Billing frequency Rate structure type (increasing block, uniform rate, etc.) EFC and NCLM annual rates survey Weather Average annual temperature Total annual precipitation NC State Climate Office System characteristics Demographics Housing characteristics Number of connections # of connections/miles of pipe Age of oldest meters Finished water storage capacity (MG) % urban population % senior citizens Median household income % poverty % of population with >$15, annual income % of adult population with Bachelor s degree or higher Average household size Median number of rooms in homes Median age of homes Public Water Supply Section at NC DENR: SDWIS database DWR: 7 Local Water Supply Plan and annual update Census Additional variables were used to correct for the endogenous effect of pricing on water use, although those variables are not included in the final model and therefore do not appear in the table above. Key findings Full cost pricing. Determining whether a utility employs full cost pricing begins with looking at how the systems operating revenues and operating expenditures compare. Operating revenues include the sale of water to customers and other services that are usually provided under standard rate schedules or by contractual agreements (e.g. interlocal agreements for the sale of bulk water). Operating expenditures are the costs of

5 operating and maintaining infrastructure, meter reading, billing, customer service, administration and other general expenses. Operating expenditures do not include capital or depreciation expenses. Operating expenses, however, include depreciation and is calculated using a different accounting technique. If a utility s operating revenues equal its operating expenditures, it is generally meeting its day to day needs with its rates (without consideration for paying off current debt or building reserves for future capital investments). If a utility s operating revenues are less than their operating expenditures, it is not recovering the day to day costs of running the system, and implies that the utility does not have high enough rates. The data from the Local Government Commission show that during Fiscal Year 7, the operating revenues of 3 local government utilities (1 percent) did not cover their operating expenditures. However, the Drought Bill requires a utility to cover the costs of debt service (principal and interest) for capital improvements and if necessary build up a reserve for future capital needs. Given that much of water and sewer infrastructure is not funded on a pay as you go basis or with grants, many communities turn to debt to finance their infrastructure. But that debt, of course, comes at a cost. Whether in the form of low interest state revolving funds or revenue bonds, long term USDA loans or general obligation bonds, nearly all forms of debt will carry interest as well as various transactional fees which the utility will have to cover. Including principal and interest as an expense will require revenues to balance the equation, but only for those systems with outstanding debt. The data collected from the NC Local Government Commission show that the operating revenues of 1 local government utilities (7 percent) did not cover their operating expenditures and principal and interest payments during Fiscal Year 7.

6 Conservation oriented rates. The research was designed to study the relationships between water usage for specific utilities and the following: pricing signals, rate structures, billing periods, the application of voluntary and/or mandatory watering restrictions, utility demographic data, climate data and other factors that are likely to influence usage. The analysis showed the total marginal price to be negatively correlated with average residential water use. The total marginal price is the price for the next 1, gallons for both water and sewer combined. Therefore, a utility that charges $./1, gallons for water and $5./1, gallons for sewer has a total marginal price of $7./1, gallons. The marginal price was computed both at 5, gallons per month ( gallons above the median residential water consumption in NC), and also at the average consumption point for each individual utility. Notably, while the total marginal price for water and sewer was negatively correlated with average residential water use (i.e.: the higher the price, the lower the average use), the marginal price of water alone was not. This is perhaps because most people are more aware of changes to their total bill, combining both water and sewer prices, rather than scrutinizing to find the amount they are paying for just water. Hence, utilities wishing to encourage water conservation through pricing should consider the marginal price of both water and sewer services, and not only one service at a time. The analysis shows that, in North Carolina, utilities with marginal prices that are 1 percent higher than other utilities had, on average, about 3 percent lower average residential water use, controlling for all other confounding factors. This price elasticity of.3 is in line with findings from the literature. While each utility is unique, this finding provides utilities a general reference point when estimating the likely effect on water use following a significant rate increase. As rates have increased over time, average water use has declined steadily from 1997 through. The price of water and sewer may have yet a more significant impact if customers could easily view the marginal price impact of water use and conservation. The Environmental Protection Agency recommends that utilities send a bill that is understandable and informative. Research shows that this type of price related information (e.g. showing the rate information or the customer s 1 month history of water use directly on the bill) will increase a customer s response to price by as much as 3 percent 1. Unfortunately, statelevel data on what is shown on utility bills were not available for this research. However, there is no reason to suspect that North Carolina would be an anomaly to this best practice. On a related note, the research shows that billing frequency is highly correlated with average residential water use. The results show that the more often that utilities bill their customers, the less their customers use, on average. This is more than likely the case because customers are more aware of their bills and water use and can respond more quickly to high utility bills when they are billed monthly as opposed to bimonthly or 1 Gaudin, S. () Effect of price information on residential water demand. Applied Economics, 3:,

7 quarterly. This is especially important in the midst of an irrigation season, where bimonthly bills may come well after the season has ended. Recommendations Full cost pricing. There are no universally accepted benchmarks for full cost pricing, and any benchmark belies the fact that there are major variations from one utility to the next. Nevertheless, the operating margin excluding depreciation (operating revenues less operating expenditures) provides a useful tool for determining an individual utility s financial position with respect to revenues and expenditures. Given this, the Environmental Finance Center recommends that the basic test to gauge whether utilities meet the baseline requirement of the Drought Bill should be whether they cover operating expenditures (not including depreciation or principal or interest) with operating revenues. If a utility does not meet this requirement, the most direct way to reach compliance would be to increase rates immediately. A utility may be able to reduce expenditures, but this would pose the significant risk that essential services were reduced therefore undercutting the intent of the drought bill. The legislation also calls for coverage of principal and interest, as well. In this case, a utility s operating revenues should meet or exceed the operating expenditures including principal and interest payments. The EFC recommends this ratio be a second degree revenue test for full cost recovery, with qualification. There are a number of legitimate reasons why in a given year a utility might not meet this requirement. They include, but are not limited to: Utility has significant capital reserves due to impact fees (which are not calculated in the operating revenues). Utility has very large reserves and is intentionally keeping rates low to prevent over charging customers and draw down the reserves. Utility is in start up phase and must pay for a lot of expenditures and debt upfront without serving a lot of customers. The local government has used utility service as an economic development incentive and has transferred money from the general fund to help pay for it and subsidize its rates. The utility has lost a major customer and a major source of revenue. If a utility is not able to cover debt service and operating expenditures with its operating revenues, one option is to allow the utility to produce documentation showing future revenue projections that will cover operating expenditures, principal and interest or a plan showing steps taken to assure the financial sustainability of the water system (e.g. approved multi year financial plan, existence of reserve funds or regionalization). If a utility is able to produce adequate justification, there could be a probationary period of three years to grow into full cost recovery.

8 None of the tests above take into consideration the fact that many utilities have relied significantly on grant funding or capital contributions (e.g. developer installed and financed facilities) to build their capital stock. In these situations, the ability to cover debt service will not be an accurate test of whether a utility s revenues are sufficient to cover capital needs. One of the most common accounting costs relating to capital other than debt service is depreciation expense. A test that includes depreciation would be an option for assessing the cost recovery status of utilities without significant debt service obligations. For example, a utility with revenues that cover all operating expenditures, but only 5% of depreciation could be instructed to submit documentation explaining their strategy for maintaining their capital. A utility that covers between 5% and 1% of depreciation could be required to recognize that they could have a problem. Establishing the depreciation funding target that qualifies as full cost pricing is difficult due to the inherent weakness of depreciation as an indicator of capital cost (older systems may have lower depreciation numbers, yet their capital needs are usually greater), however simply covering 1% of depreciation in most cases would not assure that revenues cover all aspects of capital. 13% or 15% is probably a more realistic threshold. As directed by NC (b) (1) (), to be eligible for state funding, utilities must be able to recover full cost of operations, maintenance, and debt even in times of water shortage restrictions. The state can evaluate how well a utility s finances can withstand restrictions on water use by applying the following conservation revenue vulnerability tests: Historic water usage A utility with a history of high irrigation time usage can suffer financially when drought time restrictions are implemented. Moreover, a utility with higher than average usage suggests water waste, and strong conservation messaging has the potential to bring water consumption down quickly and significantly. Utility managers should understand the historic water usage of the service area and use it predict how customers will respond to conservation messaging and restrictions. The State can review the annual updates to the Local Water Supply Plan data, collected by DWR, in which utility managers specify water use in each month. A utility has high irrigation time usage when the average water use between April and October exceed the average water use in the other months by at least 5 percent. Percentage of revenues generated from the base charge component If the vast majority of a utility s revenues are collected in variable rates, significant conservation by its customers can significantly reduce revenues. Utilities with higher base charges will ensure a more consistent supply of revenue. If the portion of the residential total water and sewer bill for 1, gallons/month that is attributed to the base charges is less than percent, then the utility s revenues may be vulnerable to significant conservation by its customers during watering restriction times. Fund reserve/days Cash on Hand Utilities rely on their reserves for many purposes ranging from rate stabilization to

9 emergency equipment replacement. One way the LGC assesses utility reserves is by calculating the days cash on hand, a ratio of unrestricted cash times 35 days divided by total operating expenditures. If reserves are ample, a utility can draw upon it during revenue shortfalls that result from lower than expected customer consumption or to phase in a major rate change. If used in this manner, the reserve can be called a rate stabilization fund. However, there is a risk to relying solely on fund reserves because the length of a drought can be unpredictable. A utility with fewer days cash on hand than the length of the billing period is vulnerable to financial insecurity, particularly during watering restriction times. Additionally, a utility must always have a large enough fund reserve to exceed the cost of the single most expensive asset (e.g.: the largest pump) so that a utility may immediately replace the asset in an emergency. Use of water shortage rate Temporary drought surcharges have been shown in the literature to provide a significant price incentive to encourage conservation during drought periods, while allowing the utility to recover lost revenue through lower sales, and avoid consequential permanent rate increases. There are additional implementation issues that need to be considered before explicitly requiring the measurements listed above for state funding that this research did not investigate. In some instances, a regional government or utility may be the applicant for funds for a project that primarily benefits citizens served by another utility. Similarly, some applications may be submitted for an interconnection between two or more utilities. It is not clear how tests should be conducted in these cases. As with any exacting policy, perverse incentives must be thought through and anticipated. For example, one way of assuring that revenues cover expenditures is for a utility to fire a number of their essential staff thereby reducing expenditures this clearly would have a negative impact on public health. And finally, there are some cases where exceptions to the requirement must be made. An example of such a case might include when a dire public health issue is at stake and a utility with contaminated wells needs funds to quickly connect to a safer source of water. Conservation oriented rates. The Drought Bill already prohibits local governments and large community water systems applying for state funds from charging their residential customers using decreasing block rate structures. One issue that must be resolved is the practice of some utilities that use a single decreasing block rate structure for all of their customers, but have set the first block at a high enough consumption level that all of the residential water use would actually be charged at a uniform rate while their nonresidential customers are being charged a decreasing block rate (an implied residential

10 uniform rate). This practice does not contradict the spirit of the Drought Bill in encouraging water conservation at the residential level. The EFC recommends that in order to comply with NC (b) (5) (), the following tests should be applied: Prohibition of a decreasing block rate structure for any rate structure (including irrigation rate structures) designed specifically for residential customers only, or Allowance for single block decreasing rate structures if the utility uses a rate structure for both residential and non residential customers and has set the block at a high enough level (normally, gallons per month) to avoid applying to residential use. Based on analysis from the EFC/NCLM rates survey, as of January 9, nine percent of the local government and non profit utilities in North Carolina were charging residential customers using less than 15, gallons/month a decreasing block rate structure. These utilities would have to change their rate structures to comply with NC (b) (5) () prior to applying for any State funding for infrastructure capital. The above is the only legislative requirement on conservation oriented rates. However, Section 17 of the Drought Bill specifies that these guidelines should also consider the effect of water rates on water conservation and recommend rate structures that support water conservation. Informed by the results of the analysis of water rates and usage, the EFC makes the following recommendations on designing rate structures that support water conservation. Set high marginal prices for water and sewer combined (or water alone for wateronly utilities) at the utility s average residential consumption level. Information about the range of marginal prices can be obtained from rates surveys, such as the EFC/NCLM annual statewide rate survey. The relative strength of the marginal price may be assessed against prices set by other utilities statewide. Design a rate structure such that will result in a significant bill decrease for a residential customer that reduces water consumption. This suggests using lower base charges, not including consumption allowances with the base charge, and setting high marginal prices wherever possible. However, encouraging conservation is only one objective of rates, and should not be used at the expense of recovering the full costs of service and providing revenue stability to the utility. Many utilities, particularly small ones, may find it necessary to charge high base charges and including a consumption allowance to ensure financial sustainability. Use a uniform rate structure with a high marginal price, or use an increasing block rate structure with at least three blocks within the first, gallons/month of use. The first block should be set near the wintertime average residential water use for the utility.

11 Utilities with residential increasing block rate structures must use substantial rate differentials between blocks (i.e.: rates should increase by at least 5 percent from one block to the next). Create a residential irrigation meter rate structure and charge a higher marginal price for irrigation water than for standard household water. For utilities with increasing block rate structures, irrigation rates should at least be as high as the most expensive block marginal price for the standard household use. Water use through irrigation meters are not usually charged sewer rates. Use a monthly billing period. Provide price and use information on customer s bills. Review and increase rates frequently (e.g.: once a year) to continue encouraging conservation through rates. Plan for and implement the use of drought surcharges that are tied to drought conditions, water storage levels and the water shortage response plans and water. Temporary drought surcharges have been shown in the literature to provide a significant price incentive to encourage conservation during drought periods, while allowing the utility to recover lost revenue through lower sales, and avoid consequential permanent rate increases.

12 Appendix A Final Deliverables to SWIC June 3, 9 Deliverable Status Status report on rate setting guidelines Completed January Summary tables of pricing signals and Completed See Web site rate structures pdfs/nclm_efc_annualw&wwratestables 9.pdf Summary tables of water demand data Completed Appendix B by system characteristics Summary of analysis of relationship Completed Appendix C between rates and demand Statistical regression between rates Completed Appendix D and usage controlling for other factors Draft rate setting guidelines Completed Appendix E Presentation of key findings to SWIC Completed June 19, 9 Presentation to stakeholders The EFC focused on presenting comprehensively to SWIC and SWIC members. The EFC presented monthly at SWIC meetings on many rate issues, including HUC, full costs pricing and conservation (see below for SWIC presentations). See Appendix F for more on HUC reports Preparation of presentation materials Completed Appendix G for use by SWIC Study report summarizing conclusions Completed Report

13 EFC Presentation to SWIC, SWIC members and SWIC Committees 1. SWIC HUC Committee March, 9 The EFC introduced a computation tool to evaluate the number of systems that would be included or dropped out a given HUC scenario.. SWIC Meeting March, 9 The EFC presented a report on the proportion of NC utilities that would meet various affordability criteria based on two alternatives (see Appendix F1): a. Single target: An upward adjustment in the existing % MHI target with an opt out provision based on percent of persons in poverty b. Sliding scale: Adoption of a sliding scale for % MHI based on community MHI 3. SWIC Meeting April 17, 9 The EFC presented a refined report on the proportion of NC utilities that would meet various affordability criteria based on two alternatives (see Appendix F): a. Single target: An upward adjustment in the existing % MHI target with an opt out provision based on percent of persons in poverty b. Sliding scale: Adoption of a sliding scale for % MHI based on community MHI. SWIC Meeting May 15, 9 The EFC presented SWIC members with a summary of usage and rates in North Carolina (see Appendix C) 5. SWIC Meeting June 19, 9 The EFC presented SWIC members with research and draft rate setting guidelines for

14 Research in the Relationship between Residential Water Use and Building Year of Homes Counties Economic Tier Homeownership Marginal Price of Water Median Household Income Population Density Poverty Precipitation Price of Water Rate Structure Type Regional Governments Riverbasins Savings from Behavior Change Senior Citizens System Size Temperature Urban Population Utility Type Use of Watering Restrictions In North Carolina for the years of 7 and

15 Building Year of Homes The following graph and table summarize average residential water use for NC water systems, based on the average building year of homes in their service area. The data indicate that there is a weak relationship between the age of a system s housing stock and its average household water use. Average Residential Water Use (kgal/month) s 195s 19s 197s 19s 199s Building Year of Homes 7 Building Year of Homes in Service Area Average Residential Water Use (kgal/month) & # of systems in category 7 19s.5 (3). () 195s.7 (1).1 (35) 19s.9 (11).79 (13) 197s.5 (17).37 (1) 19s 5.1 (9).71 (5) 199s 5.3 ().59 (3) Sources of data: *Building Year of Homes: Census *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

16 7 Water Use and Building Year of Homes Average Residential Water Use (kgal/month) 1 1 y =.13x R² = E Median Building Year of Homes Water Use and Building Year of Homes Average Residential Water Use (kgal/month) 1 1 y =.1x R² = Median Building Year of Homes

17 Counties The following maps and table summarize average residential water use for NC water systems in the state s 1 counties. 7 Source of data: *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

18 County Average residential water use (kgal/month)* County Average residential water use (kgal/month) * 7 7 Alamance.5 (). () Johnston 3.3 () 3.9 (9) Alexander 5.9 (3) 5. (3) Jones.71 (). (3) Alleghany 5.53 (1) No data Lee. (3) 3. () Anson.3 (7). (5) Lenoir.7 (5).5 () Ashe 7.37 ().5 () Lincoln.7 () 5. (1) Avery. (). () Macon.95 (1).5 (1) Beaufort 3.9 (7) 3. () Madison.1 (3) 5.1 () Bertie 3.75 () 3.9 (3) Martin.51 ().5 (7) Bladen.5 (7).7 (7) McDowell 3.71 (). (1) Brunswick. (9). (11) Mecklenburg. () 5.93 (1) Buncombe 5.17 (5).1 (5) Mitchell 5.1 ().1 (1) Burke 5. (7) 5.1 (7) Montgomery.53 (7) 3.9 (5) Cabarrus 5.31 () 5. () Moore.5 (1).5 (13) Caldwell.5 (). () Nash 3.9 () 3. (9) Camden 3.3 () 3.1 () New Hanover.39 () 5. () Carteret.1 (9) 3.33 () Northampton.1 (13).7 (11) Caswell 5.1 (1).9 (1) Onslow 5.3 () 5. () Catawba 5.3 () 5.1 () Orange.7 (3).7 (3) Chatham 5. (). (3) Pamlico 3.7 () 3.3 () Cherokee 3. ().9 () Pasquotank 3. ().1 () Chowan 5.3 () No data Pender.1 () 3.5 (3) Clay 5. (1) 5.37 (1) Perquimans.9 () 5.3 () Cleveland 5. (7).5 () Person No data.17 (1) Columbus 5.5 (11).7 () Pitt 5.7 ().59 () Craven.31 (). (1) Polk 5.79 (3).17 () Cumberland 5.1 (9).51 (7) Randolph.53 ().13 () Currituck 5.1 ().1 () Richmond 5.3 () 5. (3) Dare.5 (7).7 () Robeson.1 () 5. (7) Davidson 3.99 (5).5 (5) Rockingham.3 ().19 () Davie. ().37 (1) Rowan. (7).3 (7) Duplin.7 (11).7 (9) Rutherford. (7). (7) Durham.9 (1). (1) Sampson. (7) 5.1 () Edgecombe.71 () 5.1 () Scotland 5.19 () 5.51 (5) Forsyth 5.1 (1).95 (1) Stanly 5.1 (7) 5.7 () Franklin 3.9 (5) 3.71 (5) Stokes 5.5 (3) 3.51 (3) Gaston 5.19 (9). (11) Surry 3.3 (3) 3.1 () Gates.9 (1) 5.3 (1) Swain.1 (1) 3. (1) Graham 5.3 () 1.1 (1) Transylvania 3.93 (3) 3. (3) Granville No data 3.97 (3) Tyrrell. () 3.75 (1) Greene 5. (3).9 (3) Union 5.37 () 5.1 () Guilford.3 (). (3) Vance No data 5.7 (1) Halifax.15 () 5.93 () Wake 5.3 (5) 5.5 () Harnett 5.39 () 5. () Warren.31 () 5.1 () Haywood 3.97 ().5 (5) Washington.1 ().19 (3) Henderson.7 ().53 () Watauga.99 (3).71 (3) Hertford 5.7 (5) 5.7 (3) Wayne 5. ().1 () Hoke 3.3 (1).7 (1) Wilkes 5.9 (). () Hyde 3. (1) No data Wilson.7 ().59 () Iredell.15 () 5.3 () Yadkin 5.3 ().51 () Jackson. () 5.3 () Yancey 3. (1) No data * Number in parenthesis indicate the number of water systems

19 NC Economic Tiers The following graph and table summarize average residential water use for NC water utilities, based on the NC Department of Commerce designated Economic Tier. The data does not indicate a relationship between the economic tier and household water use. Average Residential Water Use (kgal/month) Economic Tier 7 Average Residential Water Use (kgal/month) & NC Economic Tier # of systems in category 7 1, Most distressed.77 (). (17).75 (19). (1) 3, Least distressed.77 (93). (7) Sources of data: *Economic Tier: NC Department of Commerce *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

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21 Home Ownership The following graph and table summarize average residential water use for NC water systems, based on the percentage of households that are renter occupied (vs. owner occupied). The data indicate a positive relationship between the percentage of renters that a service area has and its average residential water use. Average Residential Water Use (kgal/month) % % % % % of Service Population that Rented in 7 Average Residential Water Use (kgal/month) & % of Households Occupied # of systems in category by Renters 7 % 5. (5). (53) %.5 (57). () % 5. (17).79 (115) %.9 ().7 (5) Sources of data: *Home ownership: Census *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

22 Average Residential Water Use (kgal/month) Water Use and Renters y = 1.1x R² =.5 % 1% % 3% % 5% % 7% % % of Service Population that Rented in Average Residential Water Use (kgal/month) 1 1 Water Use and Renters y = 1.35x R² =.3 % 1% % 3% % 5% % 7% % % of Service Population that Rented in

23 7 Marginal Price Marginal Price at 5, gallons Water Use and at 5, gallons Average Residential Water Use (kgal/month) y =.13x R² =.9 $ $ $ $ $ $1 Marginal Price These scatter plots summarize average residential water use for NC water systems based on the marginal price at 5k, 1k and 1k gallons of water use in one month. Average Residential Water Use (kgal/month) 1 1 y =.71x +.1 R² =.7 $ $ $ $ $ $1 $1 Marginal price is the price of using Average Residential Water Use (kgal/month) 1 1 at 1, gallons y =.15x R² =.3 $ $ $ $ $ $1 $1 the next unit of consumption. For example, if a customer has used 5, gallons in a month, the marginal price is the cost of using an additional 1, gallons for a total of, gallons. The data indicate a weak negative relationship between a system s average residential water use and marginal prices at all three consumption Average Residential Water Use (kgal/month) 1 1 at 1, gallons y =.953x +. R² =.19 $ $ $ $ $ $1 $1 levels. at 1, gallons at 1, gallons 1 1 Average Residential Water Use (kgal/month) 1 y =.173x R² =.3 $ $ $ $ $ $1 $1 Sources of data: *Marginal Price: EFC and NCLM Annual Rate Survey *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates Average Residential Water Use (kgal/month) 1 y =.17x +.95 R² =.15 $ $ $ $ $ $1 $1

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25 Median Household Income The following graph and table summarize average residential water use for NC water systems, based on Median Household Income in. Although utilities with a MHI average of over $9, had a higher average residential water use in 7, when removed from the scatter plot, the data show no relationship between a community s MHI and average household water use. Average Residential Water Use (kgal/month) Median Household Income 7 Average Residential Water Use (kgal/month) & Median Household Income # of systems in category in 7 $1, $19,999. (1). (1) $, $9,999.7 (17).59 (1) $3, $39, (175).53 (15) $, $9, (1). (5) $5, $59,999.3 (1).5 (1) $, $9, (3). (3) $7, $79,999.1 (3).1 (3) >$9,.9 () 5.13 () Sources of data: * MHI: Census *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

26 Average Residential Water Use (kgal/month) Water Use and Income y = 1E x +.77 R² = 5E 5 $ $1, $, $3, $, $5, $, $7, $, Median Household Income in Average Residential Water Use (kgal/month) 1 1 Water Use and Income y = 1E 5x +.91 R² =.59 $ $1, $, $3, $, $5, $, $7, $, Median Household Income in

27 Population Density The following graph and table summarize average residential water use for NC water systems, based on population density. The data indicate a weak positive relationship between the population density of a service area and its average residential water use. Average Residential Water Use (kgal/month) , 1, 1,5 1,5, >, Population Density (ppl/sq mile) in 7 Population Density (ppl/sq. mile) Average Residential Water Use (kgal/month) & # of systems in category 7 5. (13).7 (1) 5 1,.9(13). (1) 1, 1,5. (13).7 (3) 1,5,. (37). (1) >, 5.3 (15) 5.33 (11) Sources of data: *Population density: Census *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

28 Average Residential Water Use (kgal/month) Water Use and Population Density y =.x +.7 R² = Population Density (ppl/sq. mile of land) in Average Residential Water Use (kgal/month) 1 1 Water Use and Population Density y =.x +.1 R² = Population Density (ppl/sq.mile of land) in

29 Poverty The following graph and table summarize average residential water use for NC water systems with varying degrees of poverty. The difference between the 7 and data implies that systems with lower percentages of poverty experienced more water conservation in. Average Residential Water Use (kgal/month) % 1 % 3% 3 % 5% % of Service Population in Poverty in 7 % of Service Population in Poverty Average Residential Water Use (kgal/month) & # of systems in category 7 1%.7 ().51 () 1 %.7(3).1 (19) 3%.9 (11).75 (1) 3 % 5.1 (3).77 (17) 5%. (). () Sources of data: *Poverty: Census *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

30 Average Residential Water Use (kgal/month) Water Use and Poverty y =.117x +.73 R² = 3E 5 % 5% 1% 15% % 5% 3% 35% % 5% 5% % of Service Population in Poverty Average Residential Water Use (kgal/month) 1 1 Water Use and Poverty y = 1.51x +.37 R² =.5 % 5% 1% 15% % 5% 3% 35% % 5% 5% % of Service Population in Poverty in

31 Water Use and Precipitation These scatter plots summarize average residential water use for NC water systems and the total annual and irrigation seasonal precipitation. In all but one case, the data indicate a weak negative relationship between precipitation and average residential water use. Sources of data: *Precipitation: State Climate Office of North Carolina *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

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33 7 at 5, gallons at 5, gallons Average Residential Water Use (kgal/month) y =.35x R² =.31 $ $1 $ $3 $ $5 $ Water bill at 5, gallons Water Use and the Price of Water These scatter plots summarize average residential water use for NC water systems based on Average Residential Water Use (kgal/month) 1 1 y =.x R² =. $ $1 $ $3 $ $5 $ Water Bill at 5, gallons Average Residential Water Use (kgal/month) at 1, gallons y =.1x R² =.3 $ $ $ $ $ $1 $1 Water bill at 1, gallons the water bill for 5k, 1k and 15k gallons of water use in one month. The data indicate that a system s a weak negative relationship between the price of water all three consumption levels and a system s average residential water use. They also indicate that this inverse relationship is stronger with higher water bills at 5k, than at Average Residential Water Use (kgal/month) 1 1 at 1, gallons y =.19x R² =.191 $ $ $ $ $ $1 $1 Water Bill at 1, gallons at 15, gallons 1k and 15k. at 15, gallons Average Residential Water Use (kgal/month) y =.13x R² =.3 $ $5 $1 $15 $ Water bill at 15, gallons Sources of data: *Water Bill: EFC and NCLM Annual Rate Survey *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates Average Residential Water Use (kgal/month) 1 1 y =.79x R² =.171 $ $ $ $ $ $1 $1 $1 $1 Water Bill at 15, gallons

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35 Rate Structures The following graph and table summarize average residential water use for NC water systems, based on their rate structure type. The data show that systems with uniform rates, systems experienced the largest range of usage. They also indicate that those systems with decreasing block rates did not experience a large change in median residential water use. Average Residential Water Use (kgal/month) Rate Structure Type 7 Average Residential Water Use (kgal/month) & Rate Structure Type # of systems in category 7 Increasing/Decreasing Block.1 (13).11 (1) Increasing Block.73 (7). (75) Uniform Rate.7 (171).51 (19) Decreasing Block 5.1 (51).97 (39) Implied Uniform Rate 5. (19).75 () Sources of data: *Rate Structures: EFC and NCLM Annual Rate Survey *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

36 Average Residential Water Use (kgal/month) Rate Structure and Water Use Average Residential Water Use (kgal/month) Rate Structure and Water Use

37 Councils of Government The following maps and table summarize average residential water use for NC water systems in the state s 17 regional governments, or Councils of Government. The data show that four regions out of the 17 experienced an increase in average residential water use from 7 to. Utilities in the High Country COG averaged the largest decrease of average residential water use, from. kgal/month to.. 7 Source of data: *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

38 Average Residential Water Use (kgal/month) & NC Regional Government # of systems in category 7 Albemarle. (5).37 (19) Cape Fear 5.9 (9).5 (3) Centralina 5.31 (5).3 () Eastern.5 (9). (7) High Country. (). (15) Isothermal. (19).33 (15) Kerr Tar. (). (11) Land of Sky 5. (1).5 (11) Lumber River.77 (5).9 (3) Mid Carolina.71 (19).7 (13) Mideast.53 (3).33 (7) NW Piedmont.7 (13).1 (11) Piedmont Triad.5 (3).5 (31) Southwestern.5 (1).7 (1) Triangle J.1 (35). (33) Upper Coastal.7 (3).59 () Western Piedmont 5. () 5.15 ()

39 River Basins The following maps and table summarize average residential water use for NC water systems in the state s 17 major river basins. Based on the data, four out of the 17 experienced an increase in 7 Source of data: *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

40 NC River Basin Average Residential Water Use (kgal/month) & # of utilities in category 7 Broad.95 (17).3 (1) Cape Fear.71 (91). (7) Catawba 5. (39) 5.5 (3) Chowan 5.1 (1) 5. (1) French Broad.7 ().7 (1) Hiwassee.3 (3) 5. (3) Little Tennessee 5.5 (5) 3.97 () Lumber 5.7 (33) 5.1 (7) Neuse.59 (53). (5) New 5. (5) 3. () Pasquotank.3 ().31 (17) Roanoke.55 (3).9 (9) Savannah No data No data Tar Pamlico.3 (37).35 (3) Watauga. (3) 3.93 (3) White Oak.35 (9) 3.1 (9) Yadkin PeeDee.97 (3).5 (55)

41 7 Water Use and Behavioral Bill Savings These scatter plots summarize average residential water use for NC water systems based on the marginal bill savings from behavior change. In this case, the behavioral marginal savings is the change in price from significantly altering water use behavior (i.e. moving from 1, gallons month to 5,, or more drastically from 15, gallons per month to 5,). The data indicate that the savings from this type of behavior change (i.e. significant conservation) is inversely related to average residential water use. Sources of data: *Price of Water: EFC and NCLM Annual Rate Survey *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates In dollars Average Residential Water Use (kgal/month) 1 1 In dollars Average Residential Water Use (kgal/month) 1 1 Change in water bill from 1, gallons to 5, gallons per month y =.33x R² =. $ $1 $ $3 $ $5 Change in water bill from 1k to 5k y =.13x R² =. $ $ $ $ $ $1 $1 Change in water bill from 15k to 5k Percent decrease Average Residential Water Use (kgal/month) 1 1 y = 1.9x R² =. % 1% % 3% % 5% % 7% Percent decrease Percent decrease in water bill from 1k to 5k Change in water bill from 15, gallons to 5, gallons per month Average Residential Water Use (kgal/month) 1 1 y = 1.95x R² =.13 % 3% % 5% % 7% % 9% Percent decrease in water bill from 15k to 5k

42 Water Use and Behavioral Bill Savings These scatter plots summarize average residential water use for NC water systems based on the marginal bill savings from behavior change. In this case, the behavioral marginal savings is the change in price from significantly altering water use behavior (i.e. moving from 1, gallons per month to 5,, or more drastically from 15, gallons per month to 5,). The data indicate that the savings from this type of behavior change (i.e. significant conservation) is inversely related to average residential water use. In dollars Average Residential Water Use (kgal/month) 1 1 In dollars Change in water bill from 1, gallons to 5, gallons per month y =.15x +.3 R² =.5 $ $1 $ $3 $ $5 $ Change in water bill from 1k to 5k Percent decrease Average Residential Water Use (kgal/month) Change in water bill from 15, gallons to 5, gallons per month 1 1 Percent decrease y = x R² =. 1% % 3% % 5% % 7% Change in water bill from 1k to 5k Sources of data: *Price of Water: EFC and NCLM Annual Rate Survey *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates Average Residential Water Use (kgal/month) 1 1 y =.91x +.7 R² =.113 $ $ $ $ $ $1 $1 Change in water bill from 15k to 5k Average Residential Water Use (kgal/month) 1 1 y = 1.5x R² =.7 % 3% % 5% % 7% % 9% Change in water bill from 1k to 5k

43 Senior Citizens The following graph and table summarize average residential water use for NC water systems with varying percentages of senior citizens. The scatter plots indicate a negative relationship between a service area s percentage of senior citizens and average residential water use. Average Residential Water Use (kgal/month) % 5 1% 1 15% 15 % 5% >5% Senior Citizens, as percentage of population, in 7 Senior Citizens, as a percentage of population Average Residential Water Use (kgal/month) & # of systems in category 7 5%.9 () 5.9 (3) 5 1% 5.1 (5).53 (13) 1 15%.79 (17). (11) 15 %.75 (19).71 () 5%.79 (71). () >5%.35 (3) 3.9 (5) Sources of data: *Senior Citizens: Census *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

44 Average Residential Water Use (kgal/month) Water Use and Senior Citizens y = 1.5x R² =. % 1% % 3% % 5% % Senior Citizens, as a Percentage of Service Population in 1 Water Use and Senior Citizens Average Water Use (kgal/month) 1 y =.39x +.3 R² =.7 % 5% 1% 15% % 5% 3% 35% % 5% 5% Senior Citizens, as a Percentage of Service Population in

45 Utility System Size The following graph and table summarize average residential water use for NC water systems, based on size of their system (i.e. # of service connections). The data indicate a weak positive relationship between system size and the average residential water use. Average Residential Water Use (kgal/month) < , 1, 3, 3, 5, 5, 1, 1,, >, # of service connections 7 # of Service Connections Average Residential Water Use (kgal/month) & # of systems in category 7 <5 3. (5) 3.7 (5) (). (57) 5 1,.7 (1).7 (9) 1, 3,.59 (1).1 (133) 3, 5,. (5).1 () 5, 1,.53 ().3 () 1,, 5. (1) 5. () >, 5.37 (). () Sources of data: *Service Connection Data: Public Water Supply Section of NC DENR (SDWIS database) *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

46 Average Residential Water Use (kgal/month) Water Use and System Size y = 1E 5x +.73 R² =. 1,, 3,, 5,, 7,, 9, # of Service Connections* Average Residential Water Use (kgal/month) 1 1 Water Use and System Size y = 1E 5x +.99 R² =.5 1,, 3,, 5,, 7,, 9, # of Service Connections* * Systems with >1, and those that reported an average residential water use of were removed from scatter plot.

47 Water Use and Temperature These scatter plots summarize average residential water use for NC water systems and the average annual and irrigation seasonal temperature. The data indicate a weak positive relationship between temperature and average residential water use. Sources of data: *Temperature: State Climate Office of North Carolina *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

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49 Urban Population The following graph and table summarize average residential water use for NC water systems with varying degrees of urban population. The data show a slight trend for more urban utilities to have a higher average residential water use. Average Residential Water Use (kgal/month) % % % % 1% Urban Population, as a Percentage of Service Population, in 7 Urban Population, as a percentage of Average Residential Water Use (kgal/month) & # of systems in category service population 7 %.5 ().3 (17) %.3 (17). (15) %.7 (). (5) %.3 (3). () 1% 5. (17).7 (1) Sources of data: *Urban population: Census *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

50 Average Residential Water Use (kgal/month) Water Use and Urban Populations y =.x +.57 R² =.157 % 1% % 3% % 5% % 7% % 9% 1% % Urban Population in Average Residential Water Use (kgal/month) 1 1 Water Use and Urban Populations y =.95x +.31 R² =.199 % 1% % 3% % 5% % 7% % 9% 1% % Urban Population in

51 Utility Type The following graph and table summarize average residential water use for various types of NC water systems. 7 Average Residential Water Use (kgal/month) Authority County For Profit (statewide) Municipal Private not for profit Sanitary District Utility Type 7 Average Residential Water Use (kgal/month) & Utility Type # of systems in category 7 Authority 5.71 ().7 (5) County. (79). (73) For profit (statewide). (1) 5.3 (11) Municipal. (37).55 () Private not for profit.7 (3).3 () Sanitary District.31 (11).17 (11) Sources of data: *Utility Type: EFC and Local Government Commission *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

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53 Water Use and Restrictions These scatter plots summarize average residential water use for NC water systems based on the percentage of the year the system spent in watering restrictions (both voluntary and mandatory) and in just mandatory restrictions. The data indicate a positive relationship between the implementation of restrictions and average residential water use across systems; this was especially the case in 7. Sources of data: *Restrict ion data: NC DWR Weekly Drought Reports *Average Residential Water Use: NC DENR, Division of Water Resources, Local Water Supply Plans and annual updates

54 Appendix C Preliminary Results on Residential Water Use in North Carolina and its Relationship to Rates Prepared by the Environmental Finance Center on May 1, 9 for the State Water Infrastructure Commission 1. Residential Water Use in NC Preliminary data from the Annual Update to the Local Water Supply Plans, and the 7, and 1997 Local Water Supply Plans, Division of Water Resources NCDENR Average Residential Water Use Over Time 1% 9% 9, 9,999 GPM Percent of Water Systems % 35% 3% 5% % 15% Average Residential Water Use in (n=3 active community water systems) 7% 3% % Percent of Water Systems that are Active Today % 7% % 5% % 3% % 1% % 1997 (n=) (n=57) 7 (n=5) (n=3),,999 GPM 7, 7,999 GPM,,999 GPM 5, 5,999 GPM,,999 GPM 3, 3,999 GPM,,999 GPM 1, 1,999 GPM 1% 5% % % 7% % 1% 1% Average residential water use has been declining over the years. The median in was, gallons/month. % 1, 1,999 GPM,,999 GPM 3, 3,999 GPM,,999 GPM 5, 5,999 GPM,,999 GPM 7, 7,999 GPM,,999 GPM 9, 9,999 GPM

55 . Seasonal Variation in Water Use in North Carolina Preliminary data from the Annual Update to the Local Water Supply Plans, and the 7, and 1997 Local Water Supply Plans, Division of Water Resources NCDENR Median Ratio of Monthly Total Use Over January's Total Use Median Seasonal Variation in Total Water Use During 1 Month Periods 1997 (n=3) (n=5) 7 (n=) (n=39) Between 1997 and 7, summertime to wintertime variation in use generally increased, meaning that water systems were facing more and more pressure in meeting their summertime demands. However, in, the trend reversed. There was generally less summertime to wintertime variation in use in than in 7.

56 1 3. Relationship between Residential Rates and Water Use in Preliminary usage data from the Annual Update to the Local Water Supply Plans, Division of Water Resources NCDENR Rates data from the NC League of Municipalities/Environmental Finance Center s Rates Survey for FY 7 ( Survey) Residential Water Rates and Water Use in (n=35) Average Residential Water Use (1, gallons/month) y =.3x R² =.1 $. $1. $. $3. $. $5. $. 9 Water Bill for 5, Gallons/Month Average Residential Water Use (1, gallons/month) Water use is slightly negatively correlated with water bills. However, combined water and sewer bills and prices are not correlated with use. Residential Combined Water & Wastewater Rates and Water Use in (n=3) y = 1E 7x R² =. $. $. $. $. $. $1. $1. Combined Water and Wastewater Bill for 5, Gallons/Month

57 1 Residential Water Rates and Water Use in (n=35) Average Residential Water Use (1, gallons/month) y =.75x +. R² =.1 1 $. $. $. $. $. $1. $1. Water Price for the Next 1, Gallons after 5, Gallons (Marginal Price) 9 Average Residential Water Use (1, gallons/month) The same applies with the volumetric rates (the marginal price $/1, gallons). Water use is negatively correlated with water volumetric rates, but not combined water and sewer volumetric rates. Residential Combined Water & Wastewater Rates and Water Use in (n=3) y = 1E 7x R² =. $. $. $. $. $. $1. $1. $1. $1. $1. $. Combined Water and Wastewater Price for the Next 1, Gallons after 5, Gallons (Marginal Price)

58 Appendix D Statistical regression between rates and usage ln(avg. res. use) it = α + β 1 (price variable) it + β (% of time in restrictions t, avg. temp., total prec., rate structure, rate structure price subsidy, % of time in different stages of drought, number of connections, billing frequency, connections/mile of pipe, % urban pop., avg. household size, median # of rooms in homes, median age of homes, % senior citizens, median household income, % poverty, % with income >$15k, % adults with Bachelor s degree, age of oldest meters, finished storage capacity, Central Coastal Plain Capacity Use Area cutback system) it Regressed on Log Average Residential Use in 1, Gallons/Month Two stage pooled cross sectional model for 7 and water system data, weighted by the system size (number of connections), using robust standard errors. Variable Coefficient Robust Standard Error Log Marginal Price for Water and Sewer at 5, Gallons/Month (Instrumented) ** Percent of Year with Either Voluntary or Mandatory Watering restrictions.3.5 Average Temperature in the Year (degrees F).1.1 Total Precipitation in the Year (inches).. Using an Increasing Block Rate Structure (versus Uniform Rates).13.7 ** Using a Decreasing Block Rate Structure (versus Uniform Rates).1.3 Price Subsidy of Block Rate Structure..1 Percent of Year in Drought Stage 1 (versus Stage ) Percent of Year in Drought Stage (versus Stage ).1. Percent of Year in Drought Stage 3 (versus Stage ).. Percent of Year in Drought Stage (versus Stage ).33.1 * System Size (Number of Service Connections).. Using Bimonthly Billing (versus Monthly)..5 Using Quarterly Billing (versus Monthly).1. * Service Population Density: Estimated Number of Accounts Per Mile of Pipe.. ** Percent Urban Population in.7. * Average Household Size in.39.1 ** Size of the Homes: Median Number of Rooms in Owner Occupied Homes in.1.7 * Median Age of Homes.. Percent of Population that is over 5 Years of Age in.11. Median Household Income in.. ** Percent of Population in Poverty in.9.7 Percent of Households with More than $15, Income in..97 ** Percent of Adult Population with at least a Bachelor's Degree.9. *** Age of the Oldest Water Meters.. Finished Water Storage Capacity in Million Gallons.. Is a Central Coastal Plain Capacity Use Area System with Cutback Requirements.1.11 Constant (Intercept) 1..9 n: 55. / F(7,97): 1.3 / R squared:.35 / Root MSE:. Notes: Number in parantheses is robust standard errors. *** statistically significant at 1% level, ** statistically significant at 5% level, * statistically significant at 1% level.

59 Appendix E Rate Design Guidelines per Drought Bill Draft Presented to SWIC by UNC Environmental Finance Center Cost Recovery NC SESSION LAW (b)(1) Has established a water rate structure that is adequate to pay the cost of maintaining, repairing, and operating the system, including reserves for payment of principal and interest on indebtedness incurred for maintenance or improvement of the water system during periods of normal use and periods of reduced water use due to implementation of water conservation measures. 1. Data sources Funders can use the following data sources to calculate revenue tests below. For many utilities, these reports are pre existing and prevent the creation of new reports. a. Last available audited financial report from the Local Government Commission database b. Last approved annual budget c. Approved multi year capital investment plan and/or budget d. Multi year financial plan. Definitions a. Annual operating expenditures Expenditures are necessary costs to operate and maintain treatment plants, wells, lines, pumping, transmission and distribution facilities, and the cost of customer service and administrative and general expenses. They are typically measured and reported on for a period of one year corresponding to the fiscal time period of the entity being reported on. Operating expenditures do not include capital and depreciation expenses and expenditures that would significantly extend the lives of the facilities beyond those initially contemplated, as well as taxes. b. Annual operating revenue Operating revenues include the sales of water to general customers and other services that are usually provided under standard rate schedules or by contractual agreements. Typical operating revenues include: Unmetered sales Metered sales Sales for resale (wholesale) Other special sales Private fire protection Public fire protection Miscellaneous service revenue Forfeited discounts Rents from water property Other water revenues DRAFT GUIDELINES Page 1

60 Operating revenues do not include merchandising and contract of services, tax revenues, gains or losses from the sale of property, rental of non operating property, interest income, transfers from the government entity general fund, and other items not usually directly related to the provision of water service. c. Annual interest payment The annual interest payment is the amount of money paid in interest on debt in a year. d. Annual principal payment The annual principal payment is the amount of money paid on the principal on debt in a year. e. Depreciation The loss in service value not restored by current maintenance as applied to depreciable capital assets, typically applied at a pre determined depreciation rate. The funds resulting from depreciation are available for replacements, improvements, expansion of the system, or for repayment of the principal portion of outstanding debt. Depreciation is not accounted for in operating expenditures (see above) f. Fund transfer A fund transfer is the movement of money from one fund to another, for example from a municipality s general fund into the water and sewer enterprise fund. A fund transfer from a general fund to an enterprise fund may occur if a utility is not recovering its costs with revenues, or may be payment for economic development services by the utility. g. Reserves This number provides an indication of the adequacy of a utility s unrestricted cash and investment balances. The LGC measures this with days cash on hand, a ratio of unrestricted cash times 35 days dived by total operating expenditures. If reserves are ample, a utility can draw upon it during revenue shortfalls that result from lower than expected customer consumption or to phase in a major rate change. If used in this manner, the reserve can be called a rate stabilization fund. However, there is a risk to relying solely on fund reserves because a drought can be unpredictable. h. Fixed cost These are expenses for a utility that do not fluctuate based on how much water the utility sells. Fixed costs include billing costs, operations and debt service. In many cases, fixed costs comprise the bulk of a utility s expenses. i. Variable costs These are expenses for a utility that fluctuate based on how much water the utility sells. Variable costs include power and chemicals. In many cases, variable costs comprise a relatively small percentage of a utility s expenses. DRAFT GUIDELINES Page

61 j. Asset management Asset management is a process for providing the public with cost effective service through the creation, acquisition, maintenance, operation, rehabilitation and disposal of assets for existing and future customers. It is focused on long term utility management and can minimize the life cycle cost of an asset or group of assets. 3. Revenue tests and corrective measures/justifications Primary Test: Are operating revenues greater than operating expenditures (not including depreciation or principal or interest)? The most direct way to reach compliance would be to increase rates immediately. A utility may be able to reduce expenditures, but this would pose the significant risk that essential services were reduced therefore undercutting the intent of the drought bill. Secondary Test: Are operating revenues greater than operating expenditures plus debt service (principal and interest)? If a utility is not able to cover debt service and operating expenditures with its operating revenues, one option is to allow the utility to produce documentation showing future revenue projections that will cover operating expenditures, principal and interest or a plan showing steps taken to assure the financial sustainability of the water system (e.g. approved multi year financial plan, existence of reserve funds or regionalization). If a utility is able to produce adequate justification, there could be a probationary period of three years to grow into full cost recovery. Tertiary Test: Are operating revenues more than operating expenditures, including depreciation? A test that includes depreciation would be an option for assessing the cost recovery status of utilities without significant debt service obligations. For example, a utility with revenues that cover all operating expenditures, but only 5% of depreciation could be instructed to submit documentation explaining their strategy for maintaining their capital. A utility that covers between 5% and 1% of depreciation could be required to recognize that they could have a problem. Establishing the depreciation funding target that qualifies as full cost pricing is difficult due to the inherent weakness of depreciation as an indicator of capital cost (older systems may have lower depreciation numbers, yet their capital needs are usually greater), however simply covering 1% of depreciation in most cases would not assure that revenues cover all aspects of capital. 13% or 15% is probably a more realistic threshold. DRAFT GUIDELINES Page 3

62 Conservation Oriented Rates 1. Data sources a. Rate structures b. Water shortage vulnerability i. Drought status ii. Safe yield iii. Unused water treatment capacity iv. Unused wastewater treatment capacity. Definitions a. Fixed charge b. Commodity charge c. Block structure i. Decreasing ii. Uniform iii. Simple Increasing iv. Seasonal v. Water budget d. Marginal price e. Average price f. Average bill g. Temporary water shortage rates (drought surcharge) 3. Anticipated conservation impact of rates tests a. Block structure b. Average price (5 K, 15 K for water only and combined water and wastewater) c. Price of next 1, gallons (marginal price) (5 K, 1K, 15 K) d. Percentage change in bill of next 1, gallons (5K, 1K, 15K) e. Price of next 5, gallons (5K to 1 K) f. Percentage change in bill of next 5, gallons (5K) g. Billing period h. Bill information. Measures a. Increase rates b. Reduce water productions c. Rate structure change d. Adoption of water shortage rate program 5. Conservation revenue vulnerability test a. Historic usage analysis b. Historic revenue analysis c. Percentage of revenues generated from fixed charge component d. Days cash on hand/fund reserve e. Operating Revenue/Operating Expenditures DRAFT GUIDELINES Page

63 Estimating the proporation of NC utilities that would meet various affordability criteria March, 9 Two alternatives are examined: Alternative 1 (Single Target): An upward adjustment in the existing % MHI target. Modification to Alternative 1 : Opt out provision based on percent of persons in poverty. Alternative (Sliding Scale): Adoption of a sliding scale for % MHI based on community MHI i.e.: more affluent communities face higher % MHI targets. Notes: All rates used are January 9 rates (source: NCLM EFC Rates Survey). Median Household Income is adjusted to levels using HUD/NC Commerce adjustment factors. Percent poverty is as reported in Census. Prepared by the Environmental Finance Center. Page 1 of

64 Alternative 1 (Single Target): Upward Adjustment in the Percent of Median Household Income (Adjusted to ) Target If the affordability target is adjusted up to >=.% MHI for combined water and wastewater bills for, GPM (ignoring utilities serving only water or only wastewater) 1 out of 33 rate structures would qualify: 7% If the affordability target remains at >= 1.5% MHI for combined water and wastewater bills for, GPM (ignoring utilities serving only water or only wastewater) 9 out of 33 rate structures would qualify: 7% If the affordability target for water remains at >=.75% MHI for water bills alone for, GPM 353 out of 519 water rate structures would qualify: % Page of

65 Modification to Alternative 1 (Single Target): Opt out provision based on percent of persons in poverty Poverty Rate in Census Poverty Rate of the Served Community Number of water utilities (some also serve wastewater) % of utilities Cumulative > 1% poverty rate 197 % % 1. 1% 17 7% 9% 1.3% 11 % 9% Less than % 3 % 1% Total 7 1% As shown above, if the affordability target is adjusted up to >=.% MHI for combined water and wastewater bills, 7% of the rate structures would qualify. What if the utilities that do not meet the >=.% MHI target can opt out of this requirement and qualify solely on their percent poverty? If the affordability target is >=.% MHI for combined water and wastewater bills for, GPM (ignoring utilities serving only water or only wastewater), or the utility's percent poverty is >1% 31 out of 33 rate structures would qualify: % If the affordability target is >=.% MHI for combined water and wastewater bills for, GPM (ignoring utilities serving only water or only wastewater), or the utility's percent poverty is >1.3% 9 out of 33 rate structures would qualify: 77% Page 3 of

66 Alternative (Sliding Scale): Adoption of a Sliding Scale for % MHI Targets Based on MHI (Adjusted to ) Instead of using a single % MHI affordability target for all utilities, this alternative uses targets that are on a sliding scale based on community's income levels (see graph). In this example, the affordability target for combined water and wastewater bills for, GPM would be: 1) starting at.75% for low income communities ) around.% MHI for middle income communities 3) starting at.5% MHI for high income communities The affordability target is based on an equation, which is a linear relationship with median household income, setting the lowest income communities at.75% MHI and the median income community at.% MHI. See graph. % MHI Affordability Targets on a Sliding Scale An Example I Affordability Target % MHI.% 7.%.% 5.%.% 3.%.% 1.% Lowest 5% of Communities Highest 1% of Communities.% $1, $, $3, $, $5, $, $7, $, $9, Community's Median Household Income (Adjusted to Latest Year) $1, If the affordability target is a sliding scale based on MHI as described above 13 out of 33 rate structures would qualify: 3% Page of

67 SECOND DRAFT Estimating the proportion of NC water systems that would meet various affordability criteria April 1, 9 Two alternatives are examined: Alternative 1 (Single Target): An upward adjustment in the existing % MHI target. Modification to Alternative 1 : Opt out provision based on percent of persons in poverty. Alternative (Sliding Scale): Adoption of a sliding scale for % MHI based on community MHI i.e.: more affluent communities face higher % MHI targets. Notes: All rates used are January 9 rates (source: NCLM EFC Rates Survey). Median Household Income is adjusted to levels using HUD/NC Commerce adjustment factors. Percent poverty is as reported in Census. Served population sizes are estimated from water system sizes in SDWIS, data. Actual population sizes may vary. Prepared by the Environmental Finance Center. Page 1 of

68 Alternative 1 (Single Target): Upward Adjustment in the Percent of Median Household Income (Adjusted to ) Target If the affordability target is adjusted up to >=.% MHI for combined water and wastewater bills for 5, GPM (ignoring water only systems) 13 out of 1 water systems would qualify: Qualified systems serve 55,3 out of the 5,5,333 individuals in the sample: 3% 1% If the affordability target remains at >= 1.5% MHI for combined water and wastewater bills for 5, GPM (ignoring water only systems) out of 1 water systems would qualify: 7% Qualified systems serve 1,55,159 out of the 5,5,333 individuals in the sample: 33% If the affordability target for water remains at >=.75% MHI for water bills alone for 5, GPM 37 out of 553 water systems would qualify: 5% Qualified systems serve 1,7,5 out of the,5,771 individuals in the sample: 7% Page of

69 Modification to Alternative 1 (Single Target): Opt out provision based on percent of persons in poverty Poverty Rate in Census Poverty Rate of the Served Community Number of water systems (some also serve wastewater) % of utilities Cumulative > 1% poverty rate 5 1% 1% 1. 1% 1 5% % 1.3% 1 % 9% Less than % % 1% Total 553 1% As shown above, if the affordability target is adjusted up to >=.% MHI for combined water and wastewater bills, 3% of the water systems would qualify. What if the utilities that do not meet the >=.% MHI target can opt out of this requirement and qualify solely on their percent poverty, as long as they meet a reduced target of 1.5% MHI? If the affordability target is >=.% MHI for combined water and wastewater bills for 5, GPM (ignoring water only systems), or >= 1.5% MHI with a >1% poverty customer base 199 out of 1 water systems would qualify: Qualified systems serve 1,,31 out of the 5,5,333 individuals in the sample: 7% 19% If the affordability target is >=.% MHI for combined water and wastewater bills for 5, GPM (ignoring water only systems), or >= 1.5% MHI with a >1.3% poverty customer base 37 out of 1 water systems would qualify: Qualified systems serve 1,37, out of the 5,5,333 individuals in the sample: 5% 3% Page 3 of

70 Alternative (Sliding Scale): Adoption of a Sliding Scale for % MHI Targets Based on MHI (Adjusted to ) Instead of using a single % MHI affordability target for all utilities, this alternative uses targets that are on a sliding scale based on community's income levels (see graph). In this example, the affordability target for combined water and wastewater bills for 5, GPM would be: 1) starting at.75% for low income communities ) around.% MHI for middle income communities 3) starting at.5% MHI for high income communities The affordability target is based on an equation, which is a linear relationship with median household income, setting the lowest income communities at.75% MHI and the median income community at.% MHI. See graph. % MHI Affordability Targets on a Sliding Scale An Example I Affordability Target % MHI.% 7.%.% 5.%.% 3.%.% 1.% Lowest 5% of Communities Highest 1% of Communities.% $1, $, $3, $, $5, $, $7, $, $9, Community's Median Household Income (Adjusted to Latest Year) $1, If the affordability target is a sliding scale based on MHI as described above 15 out of 1 water systems would qualify: Qualified systems serve 355,13 out of the 5,5,333 individuals in the sample: 3% % Page of

71 SECOND DRAFT Estimating the proportion of NC water systems that would meet various affordability criteria April 1, 9 Two alternatives are examined: Alternative 1 (Single Target): An upward adjustment in the existing % MHI target. Modification to Alternative 1 : Opt out provision based on percent of persons in poverty. Alternative (Sliding Scale): Adoption of a sliding scale for % MHI based on community MHI i.e.: more affluent communities face higher % MHI targets. Notes: All rates used are January 9 rates (source: NCLM EFC Rates Survey). Median Household Income is adjusted to levels using HUD/NC Commerce adjustment factors. Percent poverty is as reported in Census. Served population sizes are estimated from water system sizes in SDWIS, data. Actual population sizes may vary. Prepared by the Environmental Finance Center. Page 1 of

72 Alternative 1 (Single Target): Upward Adjustment in the Percent of Median Household Income (Adjusted to ) Target If the affordability target is adjusted up to >=.% MHI for combined water and wastewater bills for 5, GPM (ignoring water only systems) 13 out of 1 water systems would qualify: Qualified systems serve 55,3 out of the 5,5,333 individuals in the sample: 3% 1% If the affordability target remains at >= 1.5% MHI for combined water and wastewater bills for 5, GPM (ignoring water only systems) out of 1 water systems would qualify: 7% Qualified systems serve 1,55,159 out of the 5,5,333 individuals in the sample: 33% If the affordability target for water remains at >=.75% MHI for water bills alone for 5, GPM 37 out of 553 water systems would qualify: 5% Qualified systems serve 1,7,5 out of the,5,771 individuals in the sample: 7% Page of

73 Modification to Alternative 1 (Single Target): Opt out provision based on percent of persons in poverty Poverty Rate in Census Poverty Rate of the Served Community Number of water systems (some also serve wastewater) % of utilities Cumulative > 1% poverty rate 5 1% 1% 1. 1% 1 5% % 1.3% 1 % 9% Less than % % 1% Total 553 1% As shown above, if the affordability target is adjusted up to >=.% MHI for combined water and wastewater bills, 3% of the water systems would qualify. What if the utilities that do not meet the >=.% MHI target can opt out of this requirement and qualify solely on their percent poverty, as long as they meet a reduced target of 1.5% MHI? If the affordability target is >=.% MHI for combined water and wastewater bills for 5, GPM (ignoring water only systems), or >= 1.5% MHI with a >1% poverty customer base 199 out of 1 water systems would qualify: Qualified systems serve 1,,31 out of the 5,5,333 individuals in the sample: 7% 19% If the affordability target is >=.% MHI for combined water and wastewater bills for 5, GPM (ignoring water only systems), or >= 1.5% MHI with a >1.3% poverty customer base 37 out of 1 water systems would qualify: Qualified systems serve 1,37, out of the 5,5,333 individuals in the sample: 5% 3% Page 3 of

74 Alternative (Sliding Scale): Adoption of a Sliding Scale for % MHI Targets Based on MHI (Adjusted to ) Instead of using a single % MHI affordability target for all utilities, this alternative uses targets that are on a sliding scale based on community's income levels (see graph). In this example, the affordability target for combined water and wastewater bills for 5, GPM would be: 1) starting at.75% for low income communities ) around.% MHI for middle income communities 3) starting at.5% MHI for high income communities The affordability target is based on an equation, which is a linear relationship with median household income, setting the lowest income communities at.75% MHI and the median income community at.% MHI. See graph. % MHI Affordability Targets on a Sliding Scale An Example I Affordability Target % MHI.% 7.%.% 5.%.% 3.%.% 1.% Lowest 5% of Communities Highest 1% of Communities.% $1, $, $3, $, $5, $, $7, $, $9, Community's Median Household Income (Adjusted to Latest Year) $1, If the affordability target is a sliding scale based on MHI as described above 15 out of 1 water systems would qualify: Qualified systems serve 355,13 out of the 5,5,333 individuals in the sample: 3% % Page of