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. 

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