Measuring & Mitigating Water revenue variability

Transcription

1 Measurng & Mtgatng Water revenue varablty understandng How Prcng Can advance Conservaton Wthout undermnng utltes revenue goals July 2014 Authored by Shad Eskaf, Jeff Hughes, Mary Tger, & Kate Bradshaw, Envronmental Fnance Center at the Unversty of North Carolna, Chapel Hll Sharlene Leurg, Ceres

2 Table of Contents 3 Executve Summary 4 Fndngs at a Glance 5 Introducton 6 Condtons & Characterstcs of Three Utltes Prcng & Rate Structure Consderatons Weather-Induced Usage Varaton Customer Base Characterstcs & Demand Profles 11 Assessng the Resdental Sales Revenue Varablty of Three Utltes Case Study Fndngs & Analyss Revenue Varablty Dffers Sgnfcantly Across Utltes Hgher Base Charges Reduce Revenue Rsk Hgh Base Charges Alone Do Not Sheld All Utltes from Revenue Varablty Prcng Structures Can Mtgate the Revenue Impact of Aggressve Conservaton Intatves Under Aggressve Conservaton Intatves, Prcng Interacts wth Customer Characterstcs n Influental Ways Weather Amplfes Inherent Rate-Induced Rsk Prcng Alone s Not a Predctor of Revenue Varablty Rsk Relyng More Heavly on Varable Rates as a Conservaton Strategy Can Lead to Sgnfcant Revenue Rsk 19 Alternatve Strateges for Addressng Revenue Varablty & Incentvzng Water Effcency Temporary Prcng Adjustments Can Provde an Immedate Relef to Rapd Demand Curtalment Customzed Reserve Funds Conservatve Projectons Combned wth Effcency Based Rebates/Dvdends Weather Dervatves Base Charges that Include Fnancal Incentves for Conservaton Practces 24 Concluson 25 Appendx Descrpton of the Utltes Resdental Rate Structures Used n Endnotes 2 Measurng & Mtgatng Water Revenue Varablty

3 Executve Summary As water utltes across North Amerca undertake captal campagns to fnance the replacement and expanson of ther systems, the need for confdent revenue projectons grows. Yet many water utltes are subject to factors that can affect revenue varablty, ncludng volatle weather patterns and a growng mperatve to conserve scarce water resources. As a result, t s more mportant than ever to antcpate how changng water use patterns and rates drve revenue rsk. Despte beng essental servce provders, water utltes experence unavodable varablty n ther revenue stream. Ths revenue varablty s drven by many factors: changng populaton, varyng customer demands, unpredctable weather patterns, and even rate structures. Whle t s unrealstc to expect utltes to eradcate revenue varablty, utltes can understand ts root causes and ncorporate t nto ther overall resource and fnance plannng. Utltes that are able to predct revenue fluctuatons are n a better poston to prepare for change wthout sacrfcng mportant polcy goals, such as the promoton of water conservaton. Predctng the ways that prcng structures mght affect customer water usage, and how that n turn may affect revenue, requres that utltes model prospectve rate structures usng ther own customer data. By dong so, utltes can fnd the rght balance of fxed and varable charges that wll create predctable revenue streams whle usng prcng as a tool to drve water conservaton. There s no unversal prcng structure that wll work for every utlty. But there are prcng tools that should be consdered by water utltes to advance the dual mperatves of provdng revenue stablty and deployng conservaton as a strategy for longterm cost of servce management and resource protecton. Ths report examnes real fnancal and water use data from three North Amercan water utltes to demonstrate how rate structures can mtgate or ntensfy revenue varablty. It also ntroduces alternatve fnancal and prcng strateges that can assst water utltes n stablzng revenue wthout compromsng the commtment to water conservaton. ExECuTvE Summary 3 Measurng & Mtgatng Water Revenue Varablty

4 Fndngs at a Glance Revenue Varablty s an Inherent Component of Operatng a Utlty Revenue Varablty Dffers Sgnfcantly Across Utltes Utltes Can Influence Ther Revenue Varablty Through Rate Structures There are Also Important Non-Prce Strateges that Can Mtgate Revenue Rsk It s mpossble to forecast exact revenues for a gven year, but understandng factors that drve revenue varablty allows a utlty to project revenue rsk exposure and prepare accordngly. Utltes have multple strateges for lvng wth revenue varablty and wth proper plannng can stll mantan a proactve rather than reactve response to varablty that does not requre sacrfcng polcy goals such as water conservaton. Defnton revenue varablty Based on prcng and local condtons, a utlty s total annual revenues from customer sales wll fall wthn a specfc range n a gven year. The extent of the range between the mnmum and maxmum potental revenues for a utlty s defned n ths paper as the utlty s revenue varablty. revenue varablty s unque for each utlty. revenues that have hgh varablty are more senstve to customer demands and are at a greater rsk of revenue drops when customers reduce ther water use. Prcng alone s not a complete predctor of revenue varablty. Weather varablty amplfes the nherent rate-nduced revenue rsk. Under aggressve conservaton ntatves, prcng nteracts wth customer characterstcs n nfluental ways. Based on ts ntal water use profle, a utlty s customer base has more or less potental to conserve. These dfferences can amplfy revenue varablty more than others. Because each utlty faces a unque operatng envronment, utltes should ndvdually model the potental effects of rate structures usng ther own customer and weather data. There are a number of free tools for undertakng ths modelng exercse, ncludng the Water Utlty Revenue Rsk Assessment Tool developed by the Envronmental Fnance Center at the Unversty of North Carolna, Chapel Hll. A Prcng structures can mtgate the revenue mpact of aggressve conservaton ntatves. It s possble to construct a prcng strategy that ncorporates fnancal ncentves for water effcency whle at the same tme provdng revenue stablty by assessng hgher fxed base charges aganst a customer s water use. Hgher base charges reduce revenue rsk (but may reduce the conservaton sgnal). Hgh base charges alone do not sheld all utltes from revenue varablty. Relyng more heavly on varable rates as a conservaton strategy can lead to sgnfcant revenue rsk. Temporary prcng adjustments such as drought surcharges can provde an mmedate relef to rapd demand curtalment. Mantanng reserves has become one of the most common revenue volatlty management strateges, but our analyss shows that specfc reserve needs vary across utlty envronments and should be customzed to meet local condtons. Mantanng reserves, combned wth fnancal plannng perods that are longer than a year, allow utltes to set rates that take nto consderaton unavodable annual demand swngs. Weather dervatves can provde external revenue hedgng optons as a strategy to deal wth revenue varablty and could sheld water utltes from havng to buld consderable weather reserve funds. A Avalable for download on the Water Research Foundaton s webste at FndnGS at a GlanCE 4 Measurng & Mtgatng Water Revenue Varablty

5 ntroducton Water utltes have an nherent, unavodable varablty n ther revenue stream. Changng populatons, varyng customer demands, unpredctable weather patterns, and rate structures all contrbute to revenue varablty. 1,2 In any gven year, a utlty s revenues from customer charges may be lower than orgnally projected because of a combnaton of these factors. Utltes unprepared for revenue varablty and the rsk of revenue losses may fnd themselves cash-strapped and unable to meet necessary nfrastructure mantenance, constructon, and other needs. 3 Utltes that are better able to predct and prepare for revenue fluctuatons are n a better poston to address t wthout sacrfcng mportant polcy goals, ncludng the promoton of water conservaton. 4,5 In order to llustrate revenue varablty and hghlght the role of prcng and other factors, three real North Amercan utltes wth dfferent prcng structures, demand patterns, and clmates are analyzed usng a recently developed Water Utlty Revenue Rsk Assessment Tool. B The results of the analyss are used to hghlght varatons n revenue varablty. Ths paper also outlnes several emergng prcng structures and strateges that can help mtgate revenue varablty wthout sacrfcng all conservaton prcng sgnals. The goal of ths paper s not to suggest that utltes can avod revenue varablty altogether, but to encourage utltes to understand t and plan for t by ncorporatng t nto ther overall resource and fnance plannng. Understandng revenue varablty s partcularly mportant for utltes n the process of modfyng ther rates sgnfcantly, embarkng on a major conservaton program, or n an area wth ncreasng weather varablty. B Developed by the Envronmental Fnance Center at the Unversty of North Carolna, Chapel Hll, and avalable for download on the Water Research Foundaton s webste at ntroducton 5 Measurng & Mtgatng Water Revenue Varablty

6 Condtons & Characterstcs of Three utltes Utlty revenues from resdental C water sales are drven by an array of local factors specfc to ndvdual utltes. Understandng revenue varablty and craftng a strategy to address t requres a detaled understandng of localzed condtons, prmarly the rate structure and prcng, customer demand profle, and local weather patterns. The Water Utlty Revenue Rsk Assessment Tool s desgned to use hstorc utlty nformaton to dsplay potental resdental revenue scenaros under varous demand and specfc changes, wthn the context of local condtons. The three utltes selected for analyses have dfferent customer characterstcs, weather condtons, and rate structures (see Table 1), leadng to the expectaton of dfferent revenue rsk profles. Although anonymzed, ths analyss uses real fnancal and use data from the three utltes. Table 1: Characterstcs of the Three Utltes Understandng revenue varablty and craftng a strategy to address t requres a detaled understandng of localzed condtons. utlty southeastern Coastal number of resdental accounts D 62, Weather: annual Precptaton & annual Mean temperature ºF nches (avg. 64% apr-sep) notes on resdental rate structure Hgh base charge & unform rates Mean resdental Water use n 2013 (gallons/month) Percent of blls Classfed as resdental n 2013 wth >25,000 gallons/month 4, % Mountan resort 2, ºF nches (avg. 47% apr-sep) Hghest base charge & low ncreasng block rates 14, % urban 227, ºF nches (avg. 75% apr-sep) low base charge & hgh ncreasng block rates 4, % C D The term resdental s used throughout the paper to refer to sngle famly resdental account data. The term account and customer are used nterchangeably. The authors reled on sngle famly resdental bllng data provded by two of the partcpatng utltes for ths analyss, and general resdental bllng data provded by the southeastern coastal utlty. The authors used bllng data provded by the utltes coded as resdental or sngle-famly resdental. Utlty categorzaton of customers was not qualty-proofed; t s therefore possble that a small number of non-resdental customers wth hgh water use are ncluded n the analyss. CondTonS & CHaraCTErSTCS of 3 utltes 6 Measurng & Mtgatng Water Revenue Varablty

7 southeastern Coastal The southeastern Unted States coastal utlty serves approxmately 62,000 resdental accounts and more than 5,800 commercal propertes. The utlty has a mx of suburban and urban customer base. Summer toursts drve ncreased summer water demand, whch s offset somewhat wth a szeable nflux of unversty students durng the academc year. There s also a large populaton of year-round resdents. Mountan resort The mountan resort utlty, located n the western Unted States, serves approxmately 6,500 customer accounts ncludng 2,360 sngle-famly resdental customers, makng t the smallest of the three utltes. Many of the customers of ths utlty only resde n the servce area for a few months of the year, resultng n a substantally large number of zero volume blls. Unlke n the other two utltes, there s a large percentage of resdental customers who use very large volumes of water (well over 100,000 gallons per month), skewng the utlty-wde average resdental water use to over 14,000 gallons per month, despte the large number of zero volume blls. By comparson, average resdental water use was 4,300 gallons per month n the southeastern coastal utlty and 4,700 gallons per month n the urban utlty. urban The urban utlty, located n western Canada, serves approxmately 227,000 resdental customer accounts, consderably more than the other two utltes. Ths urban populaton has the hghest populaton densty and s the least transent of the three utltes. The permanent populaton n the utlty s regon has grown dramatcally over the past several years. Prcng & rate structure Consderatons Rates and rate structures clearly play a major role n determnng a utlty s revenue generaton and varablty. Gven that utltes across the contnent employ a huge varety of rate structures, t s essental to consder prcng when modelng revenue varablty. Water utlty rate structures typcally consst of two components: a base (fxed) charge and a volumetrc (varable) charge. Base charges provde some revenue stablty for the water utlty because they do not change wth customers water use. Fxed charges are most typcally based on the sze of the servce lne, the customer type, or, n a few rare cases, characterstcs of the ndvdual customer (such as number of bathrooms or area of rrgated land). The larger the base charge, the more revenue stablty for the utlty snce a greater proporton of ts revenue does not fluctuate wth customer demands. However, large base charges reduce the prce ncentves for water use conservaton and effcency. Volumetrc charges are based on the amount of water a customer uses. Whle volumetrc rates ncentvze customer water use conservaton and effcency, they have the unntended consequence of conveyng to customers that a utlty s cost of provdng water s hghly dependent on volume consumed. For most utltes, ths s not the case, partcularly n the short- and medum-term. Consequently, whle volumetrc charges gve customers the prce ncentve to reduce water consumpton, they may also nfluence customer consumpton patterns so much that revenues fall below cost of operatng the utlty. CondTonS & CHaraCTErSTCS of 3 utltes 7 Measurng & Mtgatng Water Revenue Varablty

8 Typcally the majorty of a water utlty s revenue s generated through the volumetrc charges. However, analyss has shown that the percentage of utltes revenue generated from base charges vares consderably among utltes. 6 Volumetrc rates can be structured n many dfferent ways. 7 Each volumetrc rate structure desgn has ts own mplcatons on the utlty s revenue varablty. How dfferent rate structures affect revenue varablty s analyzed later n ths paper. Utltes set rates that are projected to generate suffcent revenue to meet all of ther operatonal and captal costs. The prcng structures used by the three utltes analyzed for ths report are sgnfcantly dfferent and descrbed n more detal n the Appendx. The base charge amount, volumetrc rates, and block szes (f applcable) combne to produce unque rate structures and conservaton prcng sgnals. The urban utlty provded the hghest conservaton prcng sgnals to ts resdental customers n 2013, whle the mountan resort provded the lowest, as shown n Table 2. Table 2: Conservaton Prce Sgnals of the Three Utltes Resdental Water Rates n 2013 utlty Monthly Water bll for 10,000 gallons/month ncrease n Monthly Water bll from 5,000-10,000 gallons/month Margnal Prce for the next 1,000 gallons above 10,000 gallons/month Margnal Prce as Percentage of Monthly Water bll at 10,000 gallons/month southeastern Coastal ** $47.11 ** 57% ** $3.42 ** 7.3% Mountan resort ** $47.15 * 30% * $2.20 * 4.7% urban *** $72.19 *** 91% *** $8.34 *** 11.6% Key: *** relatvely hgh conservaton prcng sgnal among the three utltes ** relatvely moderate conservaton prcng sgnal * relatvely low conservaton prcng sgnal among the three utltes Fgure 1 presents the dfference n prce sgnals for the three utltes by plottng the monthly resdental water charges for varous levels of consumpton n E Fgure 1: Monthly Resdental Water Charge by Consumpton Level n 2013 Resdental Monthly Water Bll $120 - $100 - $80 - $60 - $40 - $20 - southeastern Coastal Mountan resort urban Gallons / Month (Thousands) Dots ndcate the approxmate volumes at whch block rates ncrease. E The monthly water blls for the mountan resort utlty represent a weghted average charge across all resdental customers based on actual bllng records. The mountan resort utlty s rate structure s customzed for each customer and s descrbed n the Appendx. Furthermore, the rates and charges set by the Canadan urban utlty have been converted to US dollars n ths report. CondTonS & CHaraCTErSTCS of 3 utltes 8 Measurng & Mtgatng Water Revenue Varablty

9 Weather-nduced usage varaton Weather condtons, partcularly temperature and ranfall, can greatly affect a resdental customer s water use. 8,9 As temperatures rse, customers tend to use more water, and as precptaton ncreases, partcularly n the summertme, customers tend to use less. Addtonal weather factors can also play a role n affectng customer demands, such as the number of consecutve days wthout ranfall or exceptonally hgh temperatures. Customers may respond to these weather changes on ther own or may be forced to respond counterntutvely because of polces mplemented by ther utlty. For example, durng a drought perod, some customers may tend to use more water because of the hgher temperatures and lower precptaton, but the utlty may mplement a polcy restrctng outdoor water uses to force customers to decrease ther use. Generally, utltes project revenues assumng water use under normal weather condtons. As shown n Table 1, the southeastern coastal utlty experences the hghest annual average temperatures and total precptaton levels of the three utltes. Its regon experences a humd subtropcal clmate, where the wnters are mld and the summers are hot and humd. At the mountan resort, wnters are cold wth regular and sgnfcant snowfall (typcally 26 nches/month) startng n November, whle the summers are warm and dry. The hgh elevaton causes the communty to experence low humdty year round. Meanwhle, the urban utlty n Canada s n the coldest and drest area of the three utltes. Wnters are cold and dry, and 75% of the annual precptaton occurs n the late sprng and summer months. Customer base Characterstcs & Demand Profles Resdental end uses affect total volume demanded, whch affect utlty revenue varablty. Some utltes have more customers who average low volumes of water use year-round, wth no outdoor rrgaton or dscretonary use. In these utltes, the vast majorty of resdental water blls wll be for small, steady volumes. In other areas, some utlty customers have more seasonal demands for water, ncreasng the spread of resdental blls to nclude hgher volumes. In some other utltes, Fgure 2: Dstrbutons of Resdental Water Blls by Volume n 2013 Percent of Resdental Water Blls n % - 18% - 16% - 14% - 12% - 10% - 8% - 6% - 4% - 2% - southeastern Coastal (avg. 4,300 gallons/month) Mountan resort (avg. 14,500 gallons/month) urban (avg. 4,700 gallons/month) 0% - 0 1,000 Gallons / Month 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000 25,000 > 25,000 Average volume of all resdental water blls >25,00 gallons/month was 38,700 gallons/month at the southeastern coastal utlty, 73,100 gallons/month at the mountan resort, and 37,100 gallons/month at the urban utlty. CondTonS & CHaraCTErSTCS of 3 utltes 9 Measurng & Mtgatng Water Revenue Varablty

10 the customer base tself mght be seasonal, producng a hgh number of zero (or near-zero) use blls and an equal number of hgh volume blls. The mountan resort utlty s one example of such a utlty. Fgure 2 dsplays the dstrbuton of resdental water blls by volumes n The dfferences across the three utltes demonstrate the varaton n customer demand profles. Exstng demand dstrbuton combned wth water effcency technology uptake, weather, prcng, and conservaton polcy ntatves drve a utlty s revenue varablty. In theory, hghervolume-water users are subject to hgher use fluctuatons than lower volume users, smply because they have more dscretonary water use and more behavoral opportuntes to reduce ther consumpton. For example, hgher volume users may sgnfcantly reduce water use by changng out ther landscapng. On the other hand, some customers may have dffculty changng ther lfestyle to reduce consumpton, partcularly customers who are already low water users. A customer s change n water use also vares across ncome groups. For example, a lower ncome customer may reduce consumpton more sgnfcantly than a hgher ncome customer n reacton to a rate ncrease. Conversely, a hgher ncome customer may be able to nvest n hgh effcency technology. CondTonS & CHaraCTErSTCS of 3 utltes 10 Measurng & Mtgatng Water Revenue Varablty

11 assessng the resdental Sales revenue varablty of Three utltes The tool uses smplfyng assumptons, as well as detaled models bult from hundreds of thousands of real customer water records, to predct changes n customer demand patterns. The Water Utlty Revenue Rsk Assessment Tool was developed by the Envronmental Fnance Center at the Unversty of North Carolna, Chapel Hll (EFC) for the Water Research Foundaton (WRF). The tool s desgned to allow utltes to carry out a basc self-assessment of how much of ther resdental water sales revenue s at rsk should customers change ther demand patterns. The tool takes nto account prce elastcty effects when rates are changed, normal year-to-year fluctuatons n weather (temperature and precptaton only), and sudden and sgnfcant one-tme water use reductons. The tool uses smplfyng assumptons, as well as detaled models bult from hundreds of thousands of real customer water records, to predct changes n customer demand patterns. Many utltes have developed ther own analyss tools customzed to ther crcumstances, but for those that have not, ths model provdes a startng pont. The Allance for Water Effcency s workng on a smlar tool that wll be released later n 2014 and can be used to model non-resdental and resdental revenues. F The EFC and WRF revenue rsk tool s ntentonally desgned to be smple so that utltes themselves could use the tool to model ther resdental revenue varablty wth mnmal data nput. For ths paper, one utlty used the tool themselves and provded a copy of ther results. The other two utltes provded the data requred, and the Envronmental Fnance Center completed the modelng porton usng verson 1.1 of the tool. The model was used to assess the revenue varablty of the actual prcng structures used by the three utltes n 2013 and to test changes n the revenue varablty under dfferent (yet revenue neutral) prcng structures. Revenue-neutral prcng generated total expected revenues under a new rate structures dentcal to those collected under the actual 2013 rate structure, after accountng for prce elastcty effects. F The Allance for Water Effcency Sales Forecastng and Rate Model wll model the revenue and water use effects of rate structures under varous scenaros. Accessed through: resdental SalES revenue varablty 11 Measurng & Mtgatng Water Revenue Varablty

12 Case study fndngs & analyss Based on the prcng models and actual resdental customer bllng records of the three utltes n 2013, the total resdental water revenue estmates were calculated to be approxmately: $19,787,000 for the southeastern coastal utlty $1,777,000 for the mountan resort $98,964,000 for the urban utlty These estmates were consdered the pont of reference for analyss to analyze the compostons of revenues from fxed and varable charges, fluctuatons of total revenues due to changng customer demands and prcng, and dfferences n prcng structures. The relatonshp between resdental customer demands and weather factors were unquely determned for each utlty wthn the model usng hstorc local weather and resdental demand data. Key fndngs from ths analyss are summarzed below. revenue varablty Dffers sgnfcantly across utltes Based on current prcng, demand profles, and weather patterns, the three utltes are exposed to varyng degrees of revenue varablty. Fgure 3 dsplays the potental defct n total resdental revenues from 2013 levels f local condtons, such as a drought, caused a sudden and sgnfcant water conservaton effort and a 15% reducton n average resdental water use. The tool takes nto account that durng a perod of ntense water conservaton, hgh use customers reduce ther demands more sgnfcantly than low use customers, typcally more than the net reducton n average water use. Fgure 3: Revenue Varablty Due to One-Tme Sgnfcant Declnes n Resdental Demands 0% - Southeastern Coastal Utlty Mountan Resort Utlty Urban Utlty Approxmate Reducton to Total Resdental Water Revenues f Customers Reduced Average Demand by 15% -5% - -10% - -15% - -20% - -25% - -30% - The model estmates that the mountan resort would have lost 24.0% ($426,000) of ts total resdental water revenues, compared to 7.6% ($1,513,000) and 12.7% ($12,522,000) lost by the southeastern coastal and urban utltes, respectvely. The mountan resort utlty experenced the greatest revenue losses when there was a sgnfcant declne n average water use due n large part to the large proporton of resdental customers wth very hgh-water use demands, that wll lkely decrease much more sgnfcantly than the rest of the servce populaton. resdental SalES revenue varablty 12 Measurng & Mtgatng Water Revenue Varablty

13 Because revenue varablty can vary wdely from utlty to utlty, there s no sngle rule of thumb that a utlty can use n ts plannng purposes. Just as mportant, ths result also means that utltes should not rely on other utltes assessment of revenue varablty to nform ther own plans. Each utlty should conduct ts own self-assessment to determne ts unque revenue varablty based on ts prcng, customer demand profle, local weather patterns, and condtons. The Water Utlty Revenue Rsk Assessment Tool can help utltes wth ths task by modelng the rsk of revenue losses for one year under dfferent scenaros. Utltes can take ths analyss further and consder longer-term trends that may affect demand and revenues. For example, clmate change models may predct that a utlty s servce area wll experence hgher levels of ranfall, whch wll further curtal resdental water use. Because revenue varablty can vary wdely from utlty to utlty, there s no sngle rule of thumb that a utlty can use n ts plannng purposes. utltes should not rely on other utltes assessment of revenue varablty to nform ther own plans. Hgher base Charges reduce revenue rsk The base charge plays a vtal role n nfluencng a utlty s revenue varablty and s one of the most mportant factors that the utlty can drectly control and adjust to affect ts revenue varablty. Overall, the southeastern coastal utlty has the lowest revenue varablty. A major contrbutor to ths stablty s the hgh percentage of total revenue generated from base charges (47%), as shown n Fgure 4. Approxmate Reducton to Total Resdental Water Revenues f Customers Reduced Average Demand by 15% Fgure 4: Proportons of Fxed and Varable Revenues across the Three Utltes n % - 75% - 50% - 25% - 0% - Varable 53% Fxed 47% Southeastern Coastal Utlty ($19,787,000 Total Revenue) Varable 60% Fxed 40% Fxed 18% Mountan Resort Utlty ($1,777,000 Total Revenue) Varable 82% Urban Utlty ($98,964,000 Total Revenue) Fxed revenues are revenues from base charges. Varable revenues are revenues from volumetrc rates. On the other hand, both the urban utlty has a much lower percentage of fxed revenue (18%), thus ncreasng ts exposure to revenue varablty. The southeastern coastal utlty s revenues are the most reslent aganst sgnfcant declnes n customer demands, as shown n Fgure 3. Utltes can lower ther revenue varablty by rasng ther base charges, however the methods used to determne base charges by most utltes do not ncorporate fnancal ncentves for effcency. If conservaton s a core utlty objectve, a utlty wshng to ncrease base charges may want to consder changng the way base charges are calculated as descrbed n the next secton. resdental SalES revenue varablty 13 Measurng & Mtgatng Water Revenue Varablty

14 Hgh base Charges alone Do not sheld all utltes from revenue varablty Although hgher base charges wll typcally translate to greater revenue stablty, hgh base charges alone are not be enough to guarantee revenue stablty. As shown n Fgure 5, the mountan resort utlty had the hghest base charge among the three utltes. It charged a weghted average $25.15 per month n base charges to resdental customers, whch was nearly twce as much as what the southeastern coastal utlty charged ($12.91 per month). Yet, the proporton of revenues generated from the base charges, and thus revenue stablty, was actually lower for the mountan resort utlty than for ts southeastern coastal counterpart (40% compared to 47%, respectvely). Furthermore, the mountan resort utlty s hgh base charge dd not prevent t from havng the greatest revenue varablty durng perods of sgnfcant customer conservaton, as shown n Fgure 3. The reason behnd ths pecular result s the large number of very hgh volume blls at the mountan resort utlty. As shown n Fgure 2, the mountan resort has, by far, the greatest proporton of blls that were for volumes greater than 25,000 gallons per month. Durng perods of sgnfcant conservaton, these hgh-use customers wll more sgnfcantly lower ther demand, reducng total revenues by a dsproportonately hgh amount, despte the hgh base charges that are unaffected by demand reducton. Fgure 5: Monthly Water Base Charge & the Proporton of Annual Revenues Derved from Base Charges n the Three Utltes n 2013 $30 - Monthly Water Base Charge 50% - Proporton of Calculated Total Annual Resdental Revenues Derved from the Base Charges $25 - $20 - $ % - 30% - 47% 40% $15 - $10 - $5 - $12.91 $ % - 10% - 18% $0 - Southeastern Coastal Utlty Mountan Resort Utlty Urban Utlty 0% - Southeastern Coastal Utlty Mountan Resort Utlty Urban Utlty Utltes must examne the dstrbuton of customer water use for ther ndvdual utlty and carefully consder how to desgn and prce ther entre rate structure n order to mnmze revenue varablty, and not focus exclusvely on a hgh base charge. Prcng structures Can Mtgate the revenue mpact of aggressve Conservaton ntatves As shown n Fgure 3, the potental revenue losses resultng from aggressve conservaton ntatves vares sgnfcantly among the utltes. A 15% reducton n average resdental water use would have resulted n an 8% loss to total resdental revenue for the southeastern coastal utlty, a 13% loss for the urban utlty, and a 24% loss for the mountan resort utlty. The dfferences are caused by varatons n prcng and demand dstrbutons. The smple fact that resdental SalES revenue varablty 14 Measurng & Mtgatng Water Revenue Varablty

15 the southeastern coastal utlty s revenues would only decrease by around 8% for a 15% reducton n average resdental water use (modeled based on customer demand response to aggressve conservaton ntatves) demonstrates that utltes can desgn rate structures that provde a moderate conservaton prcng sgnal (see Table 2) and stll mantan relatve revenue stablty. The water resource and conservaton planners at the southeastern coastal utlty are n a good poston to pursue aggressve conservaton ntatves and not cause the fnance drector as much worry about catastrophc revenue losses as a result. under aggressve Conservaton ntatves, Prcng nteracts wth Customer Characterstcs n nfluental Ways Because of the hgh base charge and low volumetrc rates charged by the mountan resort utlty, the fxed charge porton of a water bll at typcal resdental water consumpton levels (under 25,000 gallons/month) are hgher than at the other two utltes. Therefore, of the three rate structures, the mountan resort utlty s rate structure would be expected to produce the most stable revenues under dentcal demand, weather, and customer characterstcs condtons when compared to the other utlty s rate structures. However, as noted already, the mountan resort utlty s revenues are the most varable of the three utltes when demand declnes sgnfcantly hghlghtng how crtcal the utlty-specfc customer demand profle s n determnng the revenue varablty for the utlty. In order to show the mpact of customer base on demand, the same rate structure desgn was appled and modeled on each of the three utltes customer bases. The ncreasng block rate structure of the mountan resort utlty (the most fxed charge-relant rate structure) was modeled for both the southeastern coastal utlty and the urban utlty n such a way that the balance between fxed and varable charges are dentcal to the mountan resort utlty s rate structure. In order to mantan relatvty, the rates are set to ensure that the total revenues produced for the southeastern coastal and urban utltes wth the demonstrated rates are equal to those generated from ther respectve rate structures n In other words, the mountan resort utlty s rate structure was mmcked for the other two utltes, but prces were adjusted to ensure revenue-neutralty. The potental revenue losses that result from 15%reductons n average resdental water use are shown n Fgure 6. For both the southeastern coastal and urban utltes, the modeled rate structure produces hghly stable revenues, potentally losng only 4.5% of resdental water revenues for a 15% conservaton effort. The potental revenue losses are smlar n the two utltes because ther customer demand patterns are smlar (see Fgure 2). By contrast, the mountan resort utlty could stand to lose 24% of revenues for a 15% conservaton effort, a drect result of the hgh proporton of hgh-water-usng customers. Ths hghlghts how prcng and customer characterstcs nteract n nfluental ways to affect revenue varablty. resdental SalES revenue varablty 15 Measurng & Mtgatng Water Revenue Varablty

16 Fgure 6: Revenue Varablty Due to One-Tme Sgnfcant Declnes n Resdental Demands n the Three Utltes under the Same Rate Structure Desgn 0% - Southeastern Coastal Utlty wth More Fxed Prcng Smlar to the Mountan Resort s Rate Structure* Mountan Resort Utlty wth Exstng Rate Structure Urban Utlty wth More Fxed Prcng Smlar to the Mountan Resort s Rate Structure* Approxmate Reducton to Total Resdental Water Revenues f Customers Reduced Average Demand by 15% -5% - -10% - -15% - -20% - -25% - -30% - * Modeled to mmc the balance of fxed and varable rates used by the mountan resort utlty (produces relatvely stable revenues n normal weather condtons), but prced to be revenue-neutral, generatng the same total revenues from the southeastern coastal and urban s customers as the exstng rate structure, after accountng for prce elastcty effects. Weather amplfes nherent rate-nduced rsk Utltes n locatons that have hghly varable weather patterns and demand fluctuatons have more fnancal ncentve to consder revenue varablty under dfferent rate structure desgns. For example, f the southeastern coastal utlty had used an ncreasng block rate structure wth a low base charge and hgh volumetrc rates (smlar to the urban utlty s rate structure), ther revenue varablty would have been further exacerbated by ther normal weather fluctuatons than under ther hgh base charge and moderate unform rate structure, as shown n Fgure 7. G Although ths Fgure 7: Range of Resdental Water Revenues n the Southeastern Coastal Utlty under Normal Weather Condtons wth the Exstng Unform Rate Structure and a Hghly-Varable Increasng Block Rate Structure $21,500,000 - Southeastern Coastal Utlty wth Exstng Unform Rate Structure (range of expected revenues under full range of normal weather condtons & exstng unform rate structure) Southeastern Coastal Utlty wth an Increasng Block Rate Structure Smlar to the Urban Utlty* (range of expected revenues under full range of normal weather condtons & modled ncreasng block rates) Total Resdental Water Revenues $21,000,000 - $20,500,000 - $20,000,000 - $19,500,000 - $19,000,000 - Expected annual revenue wth no Weather Changes $18,500,000 - * Modeled to mmc the ncreasng block rates and the balance of fxed and varable rates used by the urban utlty, but prced to be revenue-neutral, generatng the same total revenues from the southeastern coastal utlty s customers as the exstng unform rate structure under actual weather patterns of 2013, after accountng for prce elastcty effects. G Normal ranges are defned as the range of temperatures and precptatons that occurred between 2000 and resdental SalES revenue varablty 16 Measurng & Mtgatng Water Revenue Varablty

17 s a smplfcaton and does not take nto consderaton greater clmate change-nduced weather varablty, t shows that local weather amplfes nherent rate-nduced rsk. Utltes, obvously, do not have control over weather, but they do have a choce of what rate structure desgn to use. The results n Fgure 7 show that t would be a mstake for a utlty to assume that by copyng another utlty s rate model, they would be able to replcate the other utlty s revenue profle. Prcng alone s not a Predctor of revenue varablty rsk The results above show that t would be a mstake for a utlty to assume that by copyng another utlty s rate model, they would be able to replcate the other utlty s revenue profle. Ths fndng s not just applcable to rate structures, but also rate levels. For example, although the mountan resort utlty has much lower volumetrc rates, both the mountan resort and urban utltes use ncreasng block rate structures. Under the exstng rate structures, the mountan resort utlty generates 40% of ts resdental revenues from base charges, compared to the 18% that the urban utlty generates. If the mountan resort altered ts rate levels by lowerng ts base charge and ncreasng ts volumetrc rates, to mmc the balance of fxed and varable charges that the urban utlty employs n ts rate structure, the mountan resort utlty would only generate approxmately 7% of ts resdental revenues from the base charges (see Fgure 8). Ths would make the mountan resort utlty s revenues much more varable than the urban utlty s revenues, even under the same rate structure model and levels (when adjusted for revenue-neutralty). Ths fndng further hghlghts the nteracton between prce and customer base snce the large number of zero blls for the mountan resort utlty amplfes the revenue losses assocated wth reducng base charges for that utlty. Those customers only provde revenue through ther base charge. Fgure 8: Water Resdental Revenues for the Mountan Resort Utlty under ts Exstng Increasng Block Rate Structure and a More Varable Increasng Block Rate Structure $1,800,000 - Total Resdental Revenues from Water Blls $1,600,000 - $1,400,000 - $1,200,000 - $1,000,000 - $800,000 - $600,000 - $400,000 - $200,000 - $0 - Varable $1,065,000 60% Fxed $712,000 40% Mountan Resort Utlty wth Exstng Rate Structure Varable $1,654,000 93% Fxed, $123,000, 7% Mountan Resort Utlty wth More Varable Rates Smlar to the Urban Utlty s Rte Structure * Modeled to mmc the balance of fxed and varable rates used by the urban utlty, but prced to be revenue-neutral, generatng the same total revenues from the mountan resort s customers as the exstng rate structure, after accountng for prce elastcty effects. By comparson, the urban utlty generates 18% of ts revenues from ts base (fxed) charges. relyng More Heavly on varable rates as a Conservaton strategy Can lead to sgnfcant revenue rsk Promotng water use conservaton s an mportant objectve for many utltes attemptng to control demand and water resources. Utltes often use prcng as a mechansm to promote conservaton by provdng customers wth strong fnancal ncentves to mantan low water use and/or avod hgh water use. Table 2 compares resdental conservaton prce sgnal metrcs between the three utltes. The mountan resort utlty provdes the lowest conservaton prce sgnals to ts customers. resdental SalES revenue varablty 17 Measurng & Mtgatng Water Revenue Varablty

18 Utltes attemptng to further ncentvze water use conservaton often rase volumetrc rates and/or adjust the rate structure n an effort to ncrease the proporton of each customer s bll nfluenced by consumpton. Customers are further ncentvzed to reduce water use because t wll result n greater savngs for them. However, relyng solely on volumetrc rate ncreases to ncrease conservaton efforts can also ncrease revenue rsk exposure. If the mountan resort utlty lowered ts base charges and rased ts ncreasng block rates to mmc the balance of fxed and varable charges that the urban utlty (the utlty wth the strongest conservaton prce sgnals) uses, the resdental revenues would be much more varable than those of the urban utlty s, as shown n Fgure 9. By rasng volumetrc rates, the mountan resort utlty would place 30% of ts resdental revenues at rsk of loss f customers reduced average consumpton by 15%, up from 24% potental losses. To rase volumetrc rates n order to ncentvze conservaton, the mountan resort utlty would be exposng a sgnfcant porton of ts revenues to loss. Fgure 9: Revenue Varablty Due to One-Tme Sgnfcant Declnes n Resdental Demands n the Mountan Resort under Dfferent Increasng Block Rate Structures 0% - Mountan Resort Utlty wth Exstng Rate Structure Mountan Resort Utlty wth More Varable Rates Smlar to the Urban Utlty Rate Structure* Urban Utlty wth Exstng Rate Structure Approxmate Reducton to Total Resdental Water Revenues f Customers Reduced Average Demand by 15% -5% - -10% - -15% - -20% - -25% - -30% - -35% - * Modeled to mmc the balance of fxed and varable rates used by the urban utlty, but prced to be revenue-neutral, generatng the same total revenues from the mountan resort s customers as the exstng rate structure, after accountng for prce elastcty effects. resdental SalES revenue varablty 18 Measurng & Mtgatng Water Revenue Varablty

19 alternatve Strateges for addressng revenue varablty & ncentvzng Water Effcency Many utltes across the country cannot afford to entrely sacrfce customer conservaton fnancal ncentves n search of revenue stablty. Fortunately, there are several establshed approaches that can protect utltes from the mpacts of revenue swngs even under the most aggressve prcng conservaton prcng strateges. Many utltes across the country cannot afford to entrely sacrfce customer conservaton fnancal ncentves n search of revenue stablty. Fortunately, there are several establshed approaches that can protect utltes from the mpacts of revenue swngs even under the most aggressve prcng conservaton prcng strateges. There are also several emergng prcng strateges that ncorporate fnancal ncentves for effcency whle at the same tme provdng relatvely stable revenue streams. Bref descrptons of these strateges n the context of the three utltes are presented below. temporary Prcng adjustments Can Provde an mmedate relef to rapd Demand Curtalment Utltes across the country are consderng and/or adoptng temporary prcng modfcatons n response to water shortages, such as drought surcharges. 10 These drought prcng structures typcally nvolve a relatvely sudden sharp ncrease n prce lnked to water supply condtons and/or other drought polces. The prce change has the dual mpact of generatng supplemental revenue to replace revenue lost to mandatory sales restrctons and sendng a stronger prcng sgnal to further curtal use. None of the three utltes analyzed have nsttuted these rates structures for an extended tme, and they were not modeled for ths study. Nonetheless, they may represent an opton for utltes that are partcularly susceptble to drought condtons and have exstng rates wth hgh revenue rsk exposure. Of the utltes studed, the mountan resort utlty would seem to beneft the most from ths strategy wth ther exposure to revenue loss for rapd volume curtalments. Interestngly, sgnfcant extended perods of unseasonably wet weather can lead to smlar revenue drops, yet we are not aware of any utltes that have ndexed temporary ran surcharges to kck n after perods of excessve precptaton. Customzed reserve funds Utltes can use reserves strategcally to hedge aganst a varety of utlty fnancal rsks, ncludng protecton aganst revenue loss due to declnes n sales (revenue stablty reserves), unforeseen equpment/faclty problems (operaton and mantenance reserves), and poltcal rsk assocated wth bumpy annual prce ncreases (rate stablzaton/smoothng reserves). 11 alternatve STraTEGES 19 Measurng & Mtgatng Water Revenue Varablty

20 By usng a strategc reserve, a utlty wth hgh revenue varablty does not have to forsake ts aggressve conservaton prcng strategy, but t does have to plan ahead. As rsks ncrease and become more complcated to model, utltes are faced wth dffcult decsons about how much to hold n reserves. Reserves can be effectve at mtgatng the mpacts of temporary declnes n sales. But, as ths analyss shows, the level needed n reserves to address revenue rsk vares consderably based on utlty condtons. In other words, settng reserve targets, at least for the purpose of mtgatng revenue rsk, at unform rule of thumb percentages may lead to over or under savng. Table 3 shows the modeled cumulatve revenue exposure for each of the three utltes over tme. H Each year s revenue loss bulds on the last. Usng ths type of analyss, a utlty can better antcpate f ts reserves should be or are enough to cover normal fluctuatons n demand or more extreme water demand curtalments. By usng a strategc reserve, a utlty wth hgh revenue varablty does not have to forsake ts aggressve conservaton prcng strategy, but t does have to plan ahead. Table 3: Cumulatve Three-Year Revenue Exposure at the Utltes Due to Aggressve Conservaton Reducng Average Resdental Demand by 15% Each Year utlty Modeled revenue rsk for 1 year Modeled revenue rsk for 2 years Modeled revenue rsk for 3 years southeastern Coastal $1,513,000 $2,666,000 $3,548,000 Mountan resort $426,000 $604,000 $702,000 urban $12,522,000 $22,285,000 $29,739,000 Conservatve Projectons Combned wth effcency based rebates/dvdends One of the drawbacks of relyng heavly on reserves s that t can lead to holdng relatvely large amounts of captal relatvely dormant for extended perods of tme. Reserves are extremely useful f a utlty bases revenue projectons on a normal year rather than a worst case (n terms of water sales) scenaro snce there wll nevtably be below normal years. Conversely, a utlty could make ts rate calculatons assumng a worst case year (e.g. 15% reducton to average resdental water use), generatng sgnfcant surplus most years under normal crcumstances. Ths approach would lead to hgher prces than a less conservatve approach, but nstead of holdng on to the revenues lkely to occur n most years, a utlty could adopt a dvdend model that returns some of the funds to the customers. Ths approach s as much about changng the relatonshp a utlty has wth ther customers as t s about revenue stablty. The Water Research Foundaton Report outlnes a verson of ths busness model that returns funds to customers that exhbt a specfc conservaton behavor durng the year and s called the WaterWse Dvdend model. Ths approach s as much about changng the relatonshp a utlty has wth ther customers as t s about revenue stablty. The customer s treated as a more actve partcpant n the busness, makng them more responsble for nsurng suffcent revenues, but also provdng them wth an opportunty to share the benefts of conservatve fnancal plannng. As wth the emergng prcng models ntroduced later n the report, more research s needed to understand how customers would react both n terms of water use and n ther vews of ther utlty. What s clear s that the current aggressve conservaton prcng that does not take nto consderaton the possblty of extended perods of low sales leave many customers feelng penalzed for conservaton rather than rewarded. H Assumes no changes to rates or number of accounts over a three year perod but that the resdental customers curtal demand sgnfcantly each year resultng n a declne of 15% to average water use each subsequent year alternatve STraTEGES 20 Measurng & Mtgatng Water Revenue Varablty

21 Weather Dervatves As ths analyss showed, revenue swngs can be excessve for some utltes; not all utltes wll be able or wllng to mantan the reserves to cover perods of below-expected revenues. There are many examples of weather-nduced revenue volatlty n other sectors ncludng agrculture, toursm, and constructon. Some of these sectors have developed external hedgng mechansms nvolvng nsurance and other rsk sharng nstruments. The Allance for Water Effcency and other organzatons have begun explorng these nstruments. 12 There may eventually be an addtonal tool for utltes to use and avod relyng solely on rates to mtgate varablty. Meter sze alone s lkely a poor ndcator of the peakng cost burden of ndvdual customers. base Charges that nclude fnancal ncentves for Conservaton Practces Base charges are commonly set based on servce lne or meter sze under the assumpton that ths s an accurate method of predctng a customer s potental cost burden on the water system. Snce most customers use the smallest meter sze, they have no ncentve to reduce ther base charge. Our past analyses show that peak monthly usage, vares consderably for resdental accounts wth the same meter sze and that meter sze alone s lkely a poor ndcator of the peakng cost burden of ndvdual customers. 13 Some customers wth a 5/8 water meter may peak at over 100,000 gallons n a sngle month, whle other customers never exceed 2,000 gallons/month. If peak monthly use was used to set the base charge tself, such that each customer was charged a unque base charge calculated from hs/her hghest month of water use, then customers would have a prce ncentve to reduce ther peak water use, as well as the monthly bll. For admnstratve ease and to mantan revenue stablty, the re-calculaton of base charges for all customers could occur nfrequently enough to avod rapd changes to the revenue stream to the utlty yet frequently enough to allow customers to see the nexus between ther water use behavor and ther water blls. Ths type of alternatve rate model, ttled PeakSet Base, was descrbed and analyzed among other nnovatve alternatve rate models n a recent Water Research Foundaton report. 14 Fgure 10 compares charges for a low seasonal water user to that of a hgh seasonal water user under the southeastern coastal utlty s unform rate structure and an example PeakSet Base rate structure. Consder the mountan resort utlty whch has relatvely conservaton prce sgnals and 40% of current revenues comng from base charges. As Fgures 8 and 9 show, relyng on a shft to a more aggressve ncreasng block rate structure such as used by the urban utlty results n much more revenue varablty. Adoptng a PeakSet Base rate structure could allow the utlty to collect the same fxed revenues from ther customers, but could vary the base charge based on peak usage. Each year, the utlty would recalculate base rates usng ts customers hstorcal monthly peaks, such that the total amount of base charge revenue would reman constant and predctable for the utlty. Under ths model, customers would have an ncreased ncentve to reduce ther peak knowng that t would mpact ther entre subsequent year s bll. Alternatvely, the southeastern coastal utlty already s relatvely revenue reslent, but ts conservaton prce sgnals are moderate (as shown n Table 2). Because ths utlty serves a coastal communty wth a somewhat seasonal customer base and peak demand s one of the major drvers of overall system capacty and expenses, I the utlty may be nterested n promotng conservaton that targets and lowers peak demands. A PeakSet Base rate structure would send a strong prce ncentve to the customers to reduce peak demands wthout forsakng ts revenue reslency. I Alongsde fre protecton needs and regulatory requrements that drve treatment technques alternatve STraTEGES 21 Measurng & Mtgatng Water Revenue Varablty

22 Fgure 10: Comparson of Monthly Water Blls for Two Types of Customers Under a Unform Rate Structure & a PeakSet Base Rate Structure Resdental Customer wth Low Seasonal Water Use Resdental Customer wth Hgh Seasonal Water Use Year 1 Year 2 Year 1 Year 2 Monthly Water Use Varable Fxed Varable Fxed Monthly Water Blls Under Southeastern Coastal Unform Rate Structure Varable Varable Fxed Fxed Monthly Water Blls Under a PeakSet Base Rate Structure Fxed Charge = Customer s Hstorc Peak Volume (X) tmes a PeakSet Base Rate. alternatve STraTEGES 22 Measurng & Mtgatng Water Revenue Varablty

23 The Water Research Foundaton Report 15 explans another rate structure that grants utltes more lattude n ncreasng fxed revenue n a manner more closely lnked to consumpton than meter sze. The rate structure enttled CustomerSelect gves ndvdual customers the choce to select an allotment of use that meets ther partcular water use needs. Customers are charged a fxed amount for all water use under that water use allotment. If they go over ther plan s allotment n a gven month, the utlty charges a puntve overage fee n the form of a very hgh unform volumetrc rate. Fgure 11 dsplays an example of what resdental water customer blls would look lke f the utlty offered four plans. A customer that almost always uses less than 5,000 gallons per month mght choose Plan 2, and wll try to avod exceedng 5,000 gallons n order to avod payng the overage charge beyond that pont. A customer that almost always uses 6-7,000 gallons per month mght fnd t fnancally worthy to nvest n hgh effcency technology or adjust behavor so that he/she could ft nto Plan 2. Ths model allows a utlty to collect much more revenue from a customer s fxed charge and ncentvzes customers to choose the lowest plan they can realstcally lve wthn. Fgure 11: Monthly Resdental Water Charge by Plan & Consumpton Level n an Example of a CustomerSelect Rate Structure Resdental Monthly Water Bll $250 - $200 - $150 - $100 - $50 - Plan 1 Plan 2 Plan 3 Plan Gallons / Month (Thousands) alternatve STraTEGES 23 Measurng & Mtgatng Water Revenue Varablty

24 Concluson By understandng relatve revenue rsk, utltes can plan accordngly to mtgate that rsk through prcng and/or non-prcng measures. For decades, utlty practtoners have been challenged to fnd solutons to the so-called conservaton conundrum, lvng wth the fact that many utltes have long term benefts from reducng water demands but short term revenue dsncentves. Ths analyss shows that ths conservaton conundrum s real but to dfferent degrees for dfferent utltes. By understandng relatve revenue rsk, utltes can plan accordngly to mtgate that rsk through prcng and/or non-prcng measures. Although the analyss renforces the adage that all predctons are lkely to be wrong, that does not mean utltes should not project revenues. Projectng sales, and n turn revenues, as a lkely range rather than as a sngle pont can help a utlty adopt mtgatng approaches n-lne wth strategc drecton. 24 Measurng & Mtgatng Water Revenue Varablty

25 appendx Descrpton of the utltes resdental rate structures used n 2013 The southeastern coastal utlty had a unform rate structure wth a $12.91 monthly base charge and a $3.42 per 1,000 gallons varable charge. The mountan resort utlty had an ncreasng block rate structure wth block szes and rates customzed to each customer s equvalent capacty unt (ECU). ECUs are calculated for each customer and are based on the housng characterstcs, maxmum number and type of water fxtures, maxmum rrgated area, certan cookng facltes, or other water demand factors. The weghted average rates n 2013, based on actual sngle-famly customer water blls, ncluded a monthly fxed base charge of $25.15 and varable block rates of approxmately $2.20 per 1,000 gallons for block 1, $2.73 per 1,000 gallons for block 2, $3.72 per 1,000 gallons for block 3, and $5.37 per 1,000 gallons for block 4. The monthly base charge s calculated for each customer based on ther bllng area wthn the utlty and ther ECU. The weghted average monthly base charge among all resdental customers n 2013 was $ For the varable charge, the utlty uses equvalent capacty unts to determne the specfc water volume ranges for each block, addng on an ECU-based volumetrc rate based on the number of pumpng statons used to delver water to the customer. The urban utlty had an ncreasng block rate structure wth a $6.36 monthly base charge and an ncreasng block rate structure. The block rates and szes were $6.04 per 1,000 gallons from 0 to 2,642 gallons per month, $6.60 per 1,000 gallons from 2,642 gallons to 9,246 gallons per month, and $8.34 per 1,000 gallons for more than 9,246 gallons per month. These rates are reported n US dollars, calculated at the 2013 yearly average exchange rate of 1 Canadan dollar to $0.971 US dollars. The margnal rates for resdental water blls for all three utltes are compared n Fgure 12. Fgure 12: The Resdental Water Margnal Prce for the Next 1,000 Gallons at Dfferent Consumpton Levels n 2013 Water Margnal Prce (Dollars per 1,000 Gallons) $9 - $8 - $7 - $6 - $5 - $4 - $3 - $2 - $1 - $0-0 1,000 Gallons / Month southeastern Coastal Mountan resort urban 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000 25,000 Rates for the Mountan Resort Utlty reflect the weghted average rates charged to all resdental customers. appendx 25 Measurng & Mtgatng Water Revenue Varablty

26 The monthly water bll, ncludng the base charge and volumetrc charges, at varous levels of consumpton for each utlty s dsplayed n the report n Fgure 1. The balance between the fxed and varable charges at those consumpton ponts s dsplayed n Fgure 13. Ths fgure demonstrates that, based on prcng levels alone, the resdental rate structure of the mountan resort utlty depended more heavly on the base charges than the other two utltes rate structures. Conversely, the urban utlty s rate structure depends more heavly on the volumetrc charges than the other two utltes rate structures. Thus, the urban utlty s rate structure can be descrbed as the most varable compared to the other two, and the mountan resort s rate structure can be descrbed as the most fxed. Fgure 13: The Balance between the Fxed & Varable Charges n the Resdental Water Prces at Dfferent Consumpton Levels Percentage of the Monthly Water Bll that s from the Base Charge 100% - 90% - 80% - 70% - 60% - 50% - 40% - 30% - 20% - 10% - 0% - 0 1,000 Gallons / Month southeastern Coastal Mountan resort urban 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000 25,000 appendx 26 Measurng & Mtgatng Water Revenue Varablty

27 Endnotes 1 Hughes, Jeff, Peffer Brandt, Mary Tger & Shad Eskaf. Defnng a Reslent Busness Model for the Water Industry. Water Research Foundaton Report #4366. January Avalable onlne at: 2 Hughes, Jeff & Sharlene Leurg. Assessng Water System Revenue Rsk: Consderatons for Market Analyss. A Ceres and EFC Whtepaper. August Avalable onlne at: 3 Haskns, Scott, Jeff Hughes, & Mary Tger. Rates and Revenues: Water Utlty Leadershp Forum on Challenges of Meetng Revenue Gaps. Water Research Foundaton Report #4405. August Avalable onlne at: 4 Boyle, Chrstne, Shad Eskaf, Mary Tger, & Jeff Hughes. Mnng Water Bllng Data to Inform Polcy and Communcaton Strateges. Journal AWWA, Volume 103, Number 11. Pages November Allance for Water Effcency. Declnng Water Sales and Utlty Revenues: A Framework for Understandng and Adaptng. Report from Natonal Water Rates Summt. August Avalable onlne at: 6 Hughes, Jeff, Peffer Brandt, Mary Tger & Shad Eskaf. Defnng a Reslent Busness Model for the Water Industry. Water Research Foundaton Report #4366. January Avalable onlne at: 7 Tger, Mary, Jeff Hughes, & Shad Eskaf. Desgnng Water Rate Structures for Conservaton & Revenue Stablty. February A Serra Club and EFC Whte Paper. Avalable onlne at: 0Fnal0.pdf 8 Rockaway, Thomas, Paul Coomes, Joshua Rvard, & Barry Kornsten. Resdental Water Use Trends n North Amerca. Journal AWWA, Volume 103, Number 2. Pages February Mayer, Paul, W. DeOreo, E. Optz, J. Kefer, W. Davs, B. Dzegelewsk, & J. Nelson. Resdental End Uses of Water. AwwaRF and AWWA, Denver Tger, Mary Wyatt. Gaugng the Understandng and Support of a Drought Surcharge n Mecklenburg County. A UNC Masters of Publc Admnstraton Capstone Research Paper. May Avalable onlne at: 11 Ibd. 12 Allance for Water Effcency. Buldng Better Rates n an Uncertan World: A Handbook for Balancng Revenue Management, Resource Effcency and Fscal Sustanablty. Allance for Water Effcency Handbook. Pendng 2014 Publcaton. Accessed through: 13 Boyle, Chrstne, Mary Tger, Shad Eskaf, Ma Ngo & Casey Wchman. Shftng Baselnes n Water Utlty Management: Usng Customer-Level Analyss to Understand the Interplay Between Utlty Polcy, Prcng, and Household Demand. An EFC Whte Paper. Avalable onlne at: 14 Hughes, Jeff, Peffer Brandt, Mary Tger & Shad Eskaf. Defnng a Reslent Busness Model for the Water Industry. Water Research Foundaton Report #4366. January Avalable onlne at: 15 Ibd. 27 Measurng & Mtgatng Water Revenue Varablty

28 ABOUT CERES Ceres s a nonproft organzaton moblzng busness and nvestor leadershp on clmate change, water scarcty and other sustanablty challenges. Ceres drects the Investor Network on Clmate Rsk, a network of over 100 nsttutonal nvestors wth collectve assets totalng more than $13 trllon. For more nformaton, vst or follow Ceres on ABOUT UNC ENVIRONMENTAL FINANCE CENTER The Envronmental Fnance Center (EFC)at the Unversty of North Carolna, Chapel Hll s part of a network of unversty-based centers that work on a range of envronmental ssues, ncludng water resources, sold waste management, clean energy, and land conservaton. The EFC at UNC partners wth organzatons across the Unted States to assst communtes, provde tranng and polcy analyss servces, and dssemnate tools and research on a varety of envronmental fnance and polcy topcs. The EFC s dedcated to enhancng the ablty of governments to provde envronmental programs and servces n far, effectve, and fnancally sustanable ways. For more nformaton, vst efc.sog.unc.edu or follow EFC at UNC on ACkNOWLEDGEMENTS Ths report was made possble wth the support of The S. D. Bechtel, Jr. Foundaton, the Turner Foundaton, Inc., and The Walton Famly Foundaton. The authors would also lke to thank the three utltes that provded data and revewed ths report. Report desgn by Patrca Robnson Desgn. Report Photography: Shutterstock.com and Thnkstock.com Ceres and Envronmental Fnance Center at the Unversty of North Carolna at Chapel Hll. FOR MORE INFORMATION, CONTACT: Sharlene Leurg 99 Chauncy Street Boston MA T: F: