WRF Drought Webcast Series Financial Resiliency During Droughts

Transcription

1 No part of this presentation may be copied, reproduced, or otherwise utilized without permission. WRF Drought Webcast Series Financial Resiliency During Droughts July 21, 2015

2 WRF Drought Webcast Series July 9 - Turf Replacement Programs On Demand July 16 - Using Cost-Benefit Analyses to Compare Drought Management Practices On Demand July 21 - Financial Resiliency During Droughts July 30 - Customer Communications During Drought

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4 WRF Resources Case Studies on Utility Rates and Financing Challenges Rate Restructure Communication: Workshop Report and Presentations 4455 Rates and Revenues: Water Utility Leadership Forum on Challenges of Meeting Revenue Gaps 4405 Defining a Resilient Business Model for Water Utilities Water Budgets and Rates Structures: Innovative Management Tools Managing the Revenue and Cash Flow Effects of Conservation Impacts of Demand Reduction on Water Utilities Revenue Instability and Conservation Rate Structures - 839

5 Presenters Sanjay Gaur, Raftelis Financial Consultants Robert Shaver, Alameda County Water District

6 Steps in Developing Drought Rates How should water be allocated? How much will this cost us? How should we recover this? How will this affect my customers?

7 HOW SHOULD WATER BE ALLOCATED? Step 1

8 How do we allocate water during a shortage? Command & Control Historical Usage Efficiency Standards Financial Contribution Economic Efficiency

9 Finding your Sweet Spot Command & Control Historical Usage YOUR AGENCY Efficiency Standards Financial Contribution Economic Efficiency

10 Finding your Sweet Spot GOAL: To determine a set of criteria that can evaluate these policy approaches. YOUR AGENCY Command & Control Historical Usage The criteria that are most important will help guide an agency to the right policy approach.

11 Equity - What is fair? Social / Moral - Enough to meet water needs? Business - In proportion to financial contribution? Economist - As much as customers are willing to pay for?

12 Important to Assign Value to End-Uses of Water Sanitary / Health & Safety Economic Recreational Outdoor Aesthetic Necessary Use Least Water Discretionary Use Most Water

13 What other criteria may be of importance? Easy to implement Easy to administer Easy to understand Freedom of choice Nexus for drought pricing

14 Command and Control Target wasteful water use by adopting Drought Ordinance Limit outdoor irrigation No driveway hose-offs No car washing EXAMPLE: City of Los Angeles No residential sprinklers between 9am 4pm No car washing or hosing off driveway

15 Command and Control Criteria Easy to Implement Easy to Administer Easy to Understand Equity Priority of Use Equity Financial Contribution Equity Willingness to Pay Effective Outdoor Conservation Effective Indoor Conservation Nexus for Drought Pricing Freedom of Choice Command & Control

16 Historical Usage Allocation

17 Historical Usage Criteria Easy to Implement Easy to Administer Easy to Understand Equity Priority of Use Equity Financial Contribution Equity Willingness to Pay Effective Outdoor Conservation Effective Indoor Conservation Nexus for Drought Pricing Freedom of Choice Historical Usage

18 Efficiency Standards Establish efficiency standards for customers: Indoor water use Outdoor water use Does not penalize historical conservation Does not reward historical water abusers

19 Indoor Allotment Gallons per day Number of Residents

20 Outdoor Water Budget

21 Outdoor Water Budget

22 Water Budget Tiered Rate Rates P 3 P 2 P 1 Indoor Water Budget Outdoor Water Budget Excessive Use (Percentage of total water budget) Tier 1 Tier 2 Tier 3 Quantity

23 Who Should Cut Back?

24 Efficiency Standards Criteria Easy to Implement Easy to Administer Easy to Understand Equity Priority of Use Equity Financial Contribution Equity Willingness to Pay Effective Outdoor Conservation Effective Indoor Conservation Nexus for Drought Pricing Freedom of Choice Efficiency Standards

25 Outdoor Water Budget Allocate water in proportion to customers financial contribution to the system More water will be allocated to the largest meters

26 Financial Contribution Criteria Easy to Implement Easy to Administer Easy to Understand Equity Priority of Use Equity Financial Contribution Equity Willingness to Pay Effective Outdoor Conservation Effective Indoor Conservation Nexus for Drought Pricing Freedom of Choice Financial Contribution

27 Economic Efficiency Price water based on willingness to pay and the desired level of aggregate consumption Based on economic theory that resources can be allocated efficiently based on price Some water should be provided economically to provide for basic, sanitary needs P 2 P 1 Q 2 Q 1

28 Economic Efficiency Criteria Easy to Implement Easy to Administer Easy to Understand Equity Priority of Use Equity Financial Contribution Equity Willingness to Pay Effective Outdoor Conservation Effective Indoor Conservation Nexus for Drought Pricing Freedom of Choice Economic Efficiency

29 Criteria Evaluation Criteria Command & Control Historical Usage Efficiency Standards Financial Contribution Economic Efficiency Easy to Implement Easy to Administer Easy to Understand Equity Priority of Use Equity Financial Contribution Equity Willingness to Pay Effective Outdoor Conservation Effective Indoor Conservation Nexus for Drought Pricing Freedom of Choice

30 HOW MUCH WILL THIS COST US? Step 2

31 Drought Implications Water rationing Where will the expected cutback occur? Increase in operational costs How much additional staff do we need? Increase in water supply costs How is our water supply mix changing? Financial Implication Need for robust decision management tool Financial Planning Model

32 Financial Forecast Without a Drought

33 Financial Forecast Without a Drought

34 Financial Forecast Without a Drought

35 Financial Implication of a Drought

36 Financial Implication of a Drought

37 Financial Implication of a Drought

38 HOW SHOULD WE RECOVER THIS? Step 3

39 Rates or Penalties? Drought Rates Recovering the financial cost of having a drought Revenue generating mechanism There is a nexus between the cost of providing service and the associated rates Subject to legal avenue to adoption of rates Drought Penalties Utilizes price to enforce water rationing Non-revenue generating, strictly punitive A violation not based on cost of service Example: City of Santa Cruz excessive water use penalties applied to residential accounts 25 dollars per hcf above 10 units 50 dollars per hcf above 11 units

40 Drought Surcharge Options 1. Monthly Fixed Charge $15 flat charge for 3/4 in. meter 2. Uniform Commodity Charge $0.70 per ccf 3. Inclining Commodity Charge Tier 1 (0 to 9 ccf) no surcharge Tier 2 (10 to 18 ccf) has $1.50 per ccf Tier 3 (19 + ccf) has $2.50 per ccf

41 Monthly Fixed Charge Advantages Stable and guaranteed recovery of lost revenue Simple to understand and administer Disadvantages Not tied to use of water resources and does not provide incentive to reduce consumption patterns Assessing the same charge to all customers does not target highest users Increases affordability impacts

42 Uniform Commodity Charge Advantages Applying surcharge to all volumetric usage sends consistent conservation signal to all customers High-use customers generate greater share of revenue in conjunction with their use Disadvantages Moderate revenue volatility due to reliance on consumption that should be reduced Moderate affordability impacts Simple to understand and administer

43 Inclining Commodity Charge Advantages Targeted use Customers have the ability to control their bill Assist with affordability Disadvantages Potential increase in revenue volatility due to reliance on consumption in higher tiers Complex to understand and administer

44 Policy Overview of Drought Surcharge Objectives Monthly Fixed Charge Uniform Commodity Charge Inclining Commodity Charge Easy to understand and administer Stability and guaranteed recovery of revenue Ability to change the bill Targeted use / conservation Promotes affordability

45 HOW WILL THIS AFFECT MY CUSTOMERS? Step 4

46 Single-Family Usage Impacts

47 Single-Family Bill Impacts

48 CASE STUDY CITY OF SANTA CRUZ

49 Case Study: City of Santa Cruz Average residential water use is 8 hcf One main source of water supply: surface water Currently in a Stage 3 Drought: 25% cut back in summer water use Maintaining credit rating is critical as the City plans to issue debt Under drought conditions, it is projected that the City would not meet its coverage ratio City has a rate stabilization fund that can increase the coverage ratio, but not sufficient

50 Case Study: City of Santa Cruz Multi-Stage Drought Rates w/o Utilization of Rate Stabilization Fund Meter Size Stage 1 5% Stage 2 15% Stage 3 25% Stage 4 35% Stage 5 50% cutback cutback cutback cutback cutback 5/8-in $2.45 $6.12 $9.79 $13.46 $ /4-in $2.45 $6.12 $9.79 $13.46 $ in $6.13 $15.30 $24.48 $33.65 $ /2-in $12.25 $30.60 $48.95 $67.30 $ in $19.60 $48.96 $78.32 $ $ in $36.75 $91.80 $ $ $ in $61.25 $ $ $ $ in $ $ $ $ $ in $ $ $1, $1, $2, in $ $ $1, $1, $2,605.70

51 Maintaining Financial Stability During Droughts: One Water ACWD Background Agency s Perspective 2014: A Perfect (non) Storm? The Importance of Addressing Water Supply AND Public Perception

52 Alameda County Water District San Francisco Oakland C Union City San Jose Location Map San Francisco Bay Newark Fremont

53 Alameda County Water District Founded in 1914 Special District Form of Local Government Elected Board: 5 Directors Personnel: 230 Authorized Positions FY 2014/15 Budget ~$86M Operating Expenses ~$36M Capital Expenditures AAA S&P Rating

54 Water Supplies - Typical 40% 20% 40% Alameda Creek Watershed Runoff State Water Project San Francisco PUC

55 ACWD Customer Profile Institutional 7% Residential 70% Business 14% Industrial 9% Business 14.1% ( 6,000 AF) Industrial 8.8% ( 4,000 AF) Residential 70.4% ( 31,000 AF) Institutional 6.7% ( 3,000 AF)

56 Water Supply Conditions March 2014: Snowpack: 25% of normal (tied with 1977 as worst year on record) State Water Project: 0% allocation (later increased to 5%) Local Water: Runoff from the Alameda Creek watershed, which recharges the groundwater basin, was about 1/3rd of normal. San Francisco Public Utilities Commission: Requested suburban customers to reduce water use by 10%.

57 2014: ACWD s Water Demand Reduction Strategy 20% Overall Water Use Reduction Targets 10% Indoor Use 40% Outdoor Use Adopt a Water Shortage Emergency Ordinance Behavior-Based Approach Emphasize Outdoor Water Use Reductions Don t penalize efficient water users Increase Public Outreach WaterSmart Report Water Waste Enhance Conservation and Water Waste Programs Conservation Price Signal Drought Surcharge

58 ACWD Customer Response

59 A Water Supply Emergency has Increased costs Financial Impacts Enhanced conservation programs and public outreach Acquire dry year water supplies Sharply reduced revenue Over 70% of water revenue is from commodity sales ACWD customers have reduced overall water use by 20% (June 2015 at 36%!)

60 What has ACWD done to Remain Financially Stable? Leveraged Reserves ($20M Rate Stabilization Reserve) Reduced Expenses (Kept several vacant positions open) Deferred Capital Projects Reducing Capital Improvement Program expenditures by $20M over next several years Issued Revenue Bonds Leveraging historically low interest rates and ACWD s excellent AAA Standard and Poor s credit rating to finance critically needed capital improvement projects Implemented drought surcharges and increased service (non-commodity) charges

61 2014: Implemented Drought Surcharges Adopted July 17, 2014 Tiered rates for single family residences Uniform rates for multi-family, commercial, industrial, institutional customers 2015: Increased service charges ~30% Increased bimonthly service charge $9.59 to $41.54 for most residential customers

62 What Happens When You re First? More Outreach Required Both before and after actions with staff...with large and politically sensitive water users (e.g., Cities, School Districts, etc.) Customer-direct mailings Increased Media Interest Press Releases actually work Numerous requests for interviews More Customer Inquiries Water use questions Available conservation programs Clarification on water use restrictions and prohibitions

63 What Happens When You re First? Skepticism and Criticism? It s a difficult message for people to accept (Use less and pay more)! Receiving numerous Public Record Act requests Heightened concerns about increasing water rates in general Question the intent of a drought surcharge Employee compensation and benefits

64 What is ACWD Doing to Keep Water Rates Reasonable? Issuing Revenue Bonds Leveraging historically low interest rates and ACWD s excellent AAA Standard and Poor s credit rating to finance critically needed capital improvement projects Future of ACWD Program Develop Non-Water Revenue Streams Aggressively Pursue Grant Opportunities Proposition 84 (Bay Area Integrated Regional Water Mgm t Plan) Proposition 1 (State Water Bond) Continued focus on productivity and efficiency Reduced staffing

65 Q&A

66 Thank You Comments or questions, please contact: For more information visit: