SUSTAINABILITY OF UTILITIES – PART 2

SUSTAINABILITY OF UTILITIES – PART 2

Let’s take a look at some scenarios. Let’s assume you are a utility that serves 20,000 people (8000 customers), with 60 miles of water pipe, 60 miles of sewer pipe, 17 lift stations, and a water and wastewater plant.  Replacing this infrastructure might be valued at $90 million for pipe, $35 million for treatment plants, water supply and pumping equipment (current day dollars).  Let’s also assume that their annual budget is $11 million and the typical demands are 3 MGD yielding a monthly bill of $115/mo (water and sewer).

Let’s make some general assumptions like that the pipe infrastructure might last 100 years, but clearly the treatment and mechanical parts would mot.  They would need ongoing maintenance and replacement.  50 years is probably too long, but let’s go with it.  If the overall costs increase at 3% per year and money is set aside for repair and replacement. The utility will see fairly steady rates if the customer base grows 2-3% per year.  Ten years out, the budget will be $16 million.  Now for the scenarios.

If the customer base has grown at 3% per year, the customers will increase to almost 27,000.  More of an issue is what happens if that increase in demand (from 3 to over 3.4 MGD) needs to come from a new water source and requires new capacity.  Many utilities will use impact fees to offset this cost to current customers so as not to adversely impact current customers too severely .That’s the current assumption.  The result looks like this at 10 and 20 years:

 

Component		Value today		10 years			20 years
Customers		20000	26878			36122
Accounts		8000	10751			14449
Water  Pipe	60 mi	$   45,000,000		$     98,509,418			$215,646,786
Sewer Pipe	60 mi	$   45,000,000		$     98,509,418			$215,646,786
Treatment Plants and Pumping	3 MGD	$   35,000,000		$     76,618,436			$167,725,278
Operations budget		$     9,000,000		$     16,255,001			$  29,358,340
Capital Budget		$     1,600,000		$       3,502,557			$    7,667,441
Debt		$        400,000		$         400,000			$      400,000
Monthly Amount		$              115		$                156			$             216
Increase per year				5%		5%
Assume 1% of pipe Replacement Costs +2% Plant
Assume operating budget inc 3%/yr but construction increases 5%/yr

 

But what if the new treatment and supply are 50% more costly and impact fees assume the lower investment (typical)?  The cost for the budget and for the infrastructure replacement increases (with the delta from debt).  Cost are 50% higher:

 

Component		Value today	10 years	20 years
Customers		20000	26878	36122
Accounts		8000	10751	14449
Water  Pipe	60 mi	$   45,000,000	$     98,509,418	$215,646,786
Sewer Pipe	60 mi	$   45,000,000	$     98,509,418	$215,646,786
Treatment Plants and Pumping	3 MGD	$   35,000,000	$     92,289,117	$202,029,937
Operations budget		$     9,000,000	$     23,731,487	$  42,861,706
Capital Budget		$     1,600,000	$       3,815,971	$    8,353,534
Debt		$        400,000	$       1,325,000	$    2,825,000
Monthly Amount		$              115	$                224	$             312
Increase per year			8%	7%

 

The normal assumptions are that growth will continue, but what if it does not?

 

What can be gleaned as a result of a non-growth or net decrease scenario?  How does sustainability get affected?  Let’s look at the no growth scenario.  In this light, rates will need to increase at least 5% per year to insure that the utility remains rate neutral.  If there is significant deferred maintenance, which is typical of may utilities, that cost will be added to the bill.  There are examples of utilities in Florida who finally caught up with deferred obligations which doubled their customers’ bill.  This scenario is doable, but the only real assumption changes that can be made are related to the lack of growth.  Deferring maintenance will once exacerbate the problem as there is not guarantee that growth will return.  Rate neutrality becomes a public relations issue, but not insurmountable.

 

Component		Value today	10 years		20 years
Customers		20000		20000		20000
Accounts		8000		8000		8000
Water  Pipe	60 mi	$   45,000,000		$     73,300,258		$119,398,397
Sewer Pipe	60 mi	$   45,000,000		$     73,300,258		$119,398,397
Treatment Plants and Pumping	3 MGD	$   35,000,000		$     57,011,312		$  92,865,420
Operations budget		$     9,000,000		$     12,095,247		$  16,255,001
Capital Budget		$     1,600,000		$       2,606,231		$    4,245,276
Debt		$        400,000		$         400,000		$      400,000
Monthly Amount		$              115		$                157		$             218
Increase per year				5%		5%

Now let’s look at the decline issue.  If the population decreases by 25% over the ten year horizon, what does this say?  The costs will remain relatively constant, but the number of customers and demands for water will drive the rates up significantly. In ten years the rates could double in a community that is likely economically disadvantaged.  The higher rates may begin to discourage economic development, rate neutrality exacerbate the problem and may increase in costs for regulatory or deferred maintenance obligation becomes a significant issue:

 

Component		Value today			10 years			20 years
Customers		20000	16341				13352
Accounts		8000	6537				5341
Water  Pipe	60 mi	$   45,000,000		$     73,300,258				$119,398,397
Sewer Pipe	60 mi	$   45,000,000		$     73,300,258				$119,398,397
Treatment Plants and Pumping	3 MGD	$   35,000,000		$     57,011,312				$  92,865,420
Operations budget		$     9,000,000		$     12,095,247				$  16,255,001
Capital Budget		$     1,600,000		$       2,606,231				$    4,245,276
Debt		$        400,000		$         400,000				$      400,000
Monthly Amount		$              115		$                193				$             326
				7%		7%
Assume 1% of pipe Replacement Costs +2% Plant
Assume operating budget inc 3%/yr but construction increases 5%/yr

 What can we glean from this?  Interestingly the failure to accumulate costs for growth, and the declining rate base end up with similar monthly costs.  Only by the no growth and collecting appropriate impact fees will costs be controlled, and even in that case, costs will double every 20 years or less.  The reality is that the failure to follow proper revenue collection protocols will severely limit the utility in future years.  High capital costs impact rates significantly.  Leaving it to some future commissioner to raise the rates is unfair to both the future decision-makers and customers.  It does not make you a leader either.