Investments in the Utility – Part 2

In the last blog we asked a question – can we see underinvestment in infrastructure systems at the utility level.  Let’s first discuss what we might need to know.  These could be things like age of the system, materials used, economic activity trends, income, poverty rate, unemployment rate, utility size, reserves, utility rates, history of rate increases, etc.  Many are issues that are difficult to determine without significant work.  So maybe a simpler set of data.  So let’s think about things like:

• Trend in population – from the 2000 census and 2017 estimates
• Economic trend (% /yr) based on income and population data
• Water production – average daily flows reported by the utilities
• Water production trend (%/yr)
• Income trend – from the 2000 census and 2017 estimates
• Net plant assets from the 2016 CAFR for each utility
• Replacement value of assets – based on asset data
• Capital expenses each year, as derived from the CAFR and budget
• Rates/1000 gallons
• Amount of debt as ratio to operating expenses
• Net plant assets compared to estimated Replacement value

The replacement value is tricky.  The determination of investments that should be made in the utility system can be determined by reviewing the historical investments in the system.  This requires knowledge of year-by-year additions and retirements to the system by type and size of asset, which is rarely available in any utility organization. Net plant assets (depreciated value of investments) provides the value, but not the infrastructure.  However some rough data on plant capacity and pipelines often exists.  To wit, to create a replacement value, 40 utility systems were reviewed.  What was found was that 62% of their assets were piping.  Therefore to provide a measurement of the appropriate amount of investment the following assumptions were made:

• 60 percent of assets were pipe with a life averaging 80 years,
• the remaining assets being “plants” with an average life of 40 years
• Inflation prior was 3% back to 1980, and 5% prior (matching CPI averages)
• All demands are currently met and there are no growth needs.

Based on the assumptions noted above, the resulting for the appropriate amount of investment percentage was 45.6 percent to be current, with a minimum average of 1.75% percent spent annually.

So the next question was:  Does anyone meet these goals?  Figure 1 shows the results.  Only 3 exceeded the amount although two others were close.  More than half were less than the 45.6% which does not bode well for long-term protection of the community.  It should be noted that the three above 45.6% all had recent ongoing, large construction projects.

Figure 2 shows that 13% of the utilities had no capital investments during 2016, and 37% had invested less than the 1.75%.  Over 20% of the utilities had major capital projects going on and large percentages devoted to capital.  When comparing these two factors, there was limited correlation (see Figure 3), so the conclusion was that investments were made in large blocks as opposed to more pay-as-you-go methods.   To determine which communities, an analysis of the utility (population) versus net plant assets (NPA)/replacement value ratio.  Figure 4 shows a degree of correlation that smaller communities have invested less as a percentage compared to larger utilities.

So far the results are not good.  So the next question is why…..Part 3