Mary Tiger is the Chief Operating Officer of the Environmental Finance Center at University of North Carolina at Chapel Hill.
The water industry, just like any other, suffers from a variety of financial constraints and challenges. Over the last decade the water industry has endured myriad challenges that impact the most common business models, including a decrease in water demand, economic recession, increasing need for infrastructure replacement, growing stakeholder involvement and concerns, and extreme weather impacts. And while these issues are a concern for many, there is no universal list that encompasses the suite of financial issues each utility faces, and subsequently, there is no single “silver bullet” strategy for revenue resiliency. There are, however, many lessons that can be learned in assessing how well a water utility’s business model has endured over the last decades and in investigating how those in the industry (and beyond) are thriving despite hardship. And that is just what the Environmental Finance Center, in partnership with Raftelis Financial Consultants, has been doing on behalf of the Water Research Foundation.
We’ve provided glimpses into our exploration of this topic since our first Environmental Finance blog post on May 15, 2012: Water Utility Revenue Stability and Conservation Rates in the Triangle of North Carolina. But now a more complete look at revenue resiliency and the water business model is summarized in our recently published report: Defining A Resilient Business Model for Water Utilities. In its entirety, this report examines the ability of water utilities to thrive in the presence of fiscal stresses that threaten to temporarily or systematically move an organization or industry out of fiscal equilibrium. It is, perhaps, most easily digested as a series of vignettes organized under three major titles:
- Trends in Financial Performance
- Pricing Trends and Financial Resilience
- Service Area Size and Diversity
- Water Use and Weather
- Economic Conditions
- Capacity Utilization
- Economic Regulation and Governance
- Financial Management Strategies
- Credit Rating Agencies
- Demand Projections
- Alternative Rate Designs
- Rate Stabilization Reserves
- Rethinking Utility Services
- Financial Performance Targets
- Customer Affordability/Assistance Programs
- Rate Adjustment Approaches
The report is complemented by two Excel-based tools for water utilities to use in exploring the revenue resiliency of their own business model.
The Water Utility Revenue Risk Assessment Tool allows utilities and technical assistance providers to quickly determine the proportion of residential revenues from water sales that may be at risk of loss when residential customers change demand patterns. When residential customers reduce demand, utilities collect less revenue from customer sales than anticipated. This tool helps utilities determine how much of their revenues are realistically at risk of loss if their customers lower their consumption.
The Water Utility Customer Assistance Program Cost Estimation Tool helps water utilities estimate the costs of implementing a customer assistance program.
This research reinforces the growing sentiment among many in the industry that the general water utility business and pricing model is not as robust and resilient as once thought. Most water utilities rely on the sale of one essential product, and historically, many utilities have raised sufficient and predictable revenue through small rate modifications. While this approach has never been foolproof, the analyses throughout this report offer additional evidence that the last five years has been a particularly trying time for this business model and recommends that water utilities should:
- Understand their business risk for disruptive revenue fluctuations
- Adopt basic policies and performance targets to drive financial decisions
- Re-examine sales projection methodologies
- Consider the repercussions of the message that customers are buying gallons of water when the cost side of the business model suggests they are buying access to water
- Consider new pricing models
To read the full report and access the accompanying tools and webcasts, visit the Water Research Foundation website.
— Envr. Finance Center (@EFCatUNC) February 11, 2014