This series tackles the prevailing dilemmas happening in utility boardrooms across the United States, now covering the question: How to maintain revenue resilience while meeting customer needs?
Back in 2014, I wrote an article called Adapting to Change: Water Utility Finance in the Early 21st Century. At that time, we were seeing medium-term impacts to utility finance from the Great Recession, as well as deep-cutting regional impacts from the 2006-2008 southeast drought. This era in utility finance spurred a line of water rates design called revenue resilience, in large part developed by my colleagues at UNC Environmental Finance Center. The current water finance crisis, spurred by COVID-19, reminds me that these design guidelines are as important now as ever.
The revenue resilience framework pushed back against conservation-only rates structure designs and promoted the importance of financial resilience in water rate design. It remains true that “the strongest financial solutions will be those that increase utilities’ capacity to adapt to change. The optimal strategy for each utility to meet challenges successfully is to minimize risks associated with external changes and to increase internal financial resilience.” As Figure 1 shows, utilities should move to the lower right-hand quadrant to achieve both low risk and high resilience, even to times of economic shock such as 2020.
The major credit rating agencies provide guidance on how they evaluate utility credit-worthiness and criteria for stronger, mid-range and weaker financial profiles. In addition to hitting variations of key debt service coverage ratios, Fitch Ratings and Standard & Poor’s place high value on utilities whose day-to-day operations are relatively free from political interference and utilities that display rate flexibility; i.e. they are willing and able to increase rates as necessary to cover costs. Fitch Ratings favorably views a utility whose fixed portion (base charge) of the water and wastewater bill makes up more than 30% of the total bill. I would argue that during COVID-19, credit rating agencies will not be looking at the rate structures per se, but in how utility boards and leadership respond to the crisis with prudent fiscal measures, including cost-cutting, payment programs and rate increases.
What about customer nonpayment and delinquency?
The COVID-19 crisis is unprecedented for the importance placed on water for essential hygiene, as well as the speed at which over 20 million people lost their jobs. In response, water utilities are updating programming and policy for handling delinquent accounts. State-wide moratoria on water shutoffs, such as North Carolina Governor Cooper’s Executive Order 124 and California’s Governor Newsom’s Executive Order N-42-20, have turned-long standing utility nonpayment protocols on their heads. As a consequence of this timely and necessary compassion, utility leaders face an estimated $4.92 billion in annualized losses due to customer delinquencies (see full article here: The Financial Impact of the COVID-19 Crisis on U.S. Drinking Water Utilities).
How do you assist customers while also adhering to the revenue resilience framework?
Quickly develop flexible customer payment arrangement for customers – Consider a program to arrange payment plans with delinquent customers, and allow them to defer the start of their payment plan until September 2020 or beyond. Customers who agree to a payment plan will receive full water service until September 2020, and will continue to receive full service at that point, as long as they adhere to their payment plan.
Flow restrictor devices – A number of utilities across the US are using a novel way to address shutoffs related to nonpayments. Instead of turning off water completely for nonpayment, a restrictor plate is inserted at the water meter, or a meter with reduced flow capabilities is installed. The reduced flow meter provides minimal water to the customer; enough for washing hands, cooking, and drinking. Accelerated by the COVID-19 issues of early 2020, these flow restrictor devices offer an important way to balance the need for basic hygiene in homes, with utilities’ right to shutoff water for nonpayment.
Royalties from the service line insurance program – Many utilities that allow a third-party insurance company to operate a service line insurance program receive royalties from the third-party company. The utility supplies things like its logo to the third-party company, thereby providing the trust and credibility that the customer has in the utility to this outside party. Further, customers may subscribe partly out of an assumption that the utility has vetted this company and so there is more confidence on the consumer side. This is the case used to justify royalty payments to the utility. These funds also represent a discrete pot of funds that are less controversial than rate revenue in applying to customer assistance programs.
Increase advertising for opt-in donations – Consider adding a note on bills including the statement “Please consider making a tax-deductible donation to our customer assistance program. This program provides utility assistance to low-income families and seniors in crisis.” Include a form where customers can indicate how much and how frequently they want to donate to your utility’s program. In this way, those with jobs or a higher income can lend a hand to their community-members voluntarily.
Cell tower lease revenue – In some communities, cell phone companies are interested in leasing space on water towers. The revenue from this leasing also represents a discrete pot of funds that are less controversial than rate revenue.
Reduce nonrevenue water – Nonrevenue water rates range from 3-30% across North America’s cities and towns. Reducing system leakage, both water and revenue, is a way to make systems more efficient for ratepayers. Low hanging fruit for locating and resolving high-value nonrevenue issues includes identifying and replacing large commercial meters with high apparent loss levels and proactively managing probability of failure on large pipes.
The only constant in this crisis thus far has been change. Water utilities that can quickly and soundly adapt their rates, costs and customer programming will best weather the COVID-19 financial storm. Write to me with comments or to discuss water finance and technology, Christine.Boyle@xyleminc.com.