Balance the Fund with ‘Customer Conversations’

Balance

Albuquerque Uses Customer Outreach to Gain Deeper Insights into Infrastructure Needs, Conservation and Rate Increases

By Frank Roth & Carol Malesky

As many utilities look to implement water conservation programs in order to address drought and water shortfalls, the challenge of maintaining a utility’s fund balances becomes more prevalent.

As an example, it is a testament to the Albuquerque Bernalillo County Water Utility Authority’s (Water Authority) water conservation program success that per capita consumption dropped from 252 gallons in the mid-1990s to just 127 gallons in 2015. However, a successful conservation program coupled with crumbling infrastructure wreaks havoc on a utility’s fund balances.

The Water Authority is ramping up its infrastructure renewal and asset management program to almost double its rehabilitation investment to its system by 2023. The utility’s capital financial plan was almost derailed in 2013 when water consumption dropped by nearly 3 billion gallons, causing a revenue shortfall of $9 million. The utility had to use its rate reserves and working capital funds to make up for the loss in revenue and implement rate increases.

With three years of consecutive rate increases proposed to recover from the shortfall, it was critical that the utility communicate the need for these increases to its ratepayers and governing board. The Water Authority implemented an outreach program to better communicate the need for rate increases in order to keep up with infrastructure needs but also maintain conservation. By communicating the need for rate revenue increases for infrastructure renewal and evaluating alternative rate structures in a transparent format, the Water Authority moved forward in its goals for stable revenue recovery while continuing its water conservation message.

To help its customers understand this challenge, the Water Authority decided to use its Customer Conversations outreach program, which consists of interactive public forums designed to obtain customer input. The meetings set out to educate and inform while also soliciting ideas and opinions from customers. In this case, the utility wanted to start a dialogue regarding its increasing infrastructure needs, as well as rate structure scenarios that would help deal with the conservation conundrum (relationship between revenue stability and conservation promotion).

Utility Staff

Utility staff spent several months developing and testing, with agency volunteers, the activities that would be used to facilitate engagement and feedback.

Before the first forum, utility staff spent several months developing and testing — with agency volunteers — the activities that would be used to facilitate engagement and feedback. The meetings focused on two main topics: 1) Provide customers with an overview of the Water Authority’s Asset Management Plan, which details the utility’s infrastructure renewal needs; and 2) Explain that the combination of infrastructure renewal needs and declining revenues related to decreased water use necessitates rate adjustments.

Topic 1 – Infrastructure Renewal Needs

In discussing infrastructure renewal needs with customers, the Water Authority hoped to discover whether customers’ perceptions of renewal needs matched with or differed from the utility’s infrastructure renewal priorities. The Water Authority found that customers were more concerned with investing in drinking water infrastructure (e.g., drinking water treatment plants), whereas the highest priority for the utility was rehabilitating aging wastewater treatment facilities. Figure 1 provides more details of the differences between the Water Authority’s rehabilitation spending priorities versus customer priorities.

After gaining an understanding of these perception gaps, customer participants also provided input on how the Water Authority should communicate its spending priorities to the general public. Many customers favored standard outreach efforts like bill inserts, public service announcements and newspaper inserts. The Water Authority used this customer input to develop its stakeholder communications, and was able to better educate the public on the need for infrastructure rehabilitation.

The utility wanted to start a dialogue regarding the its increasing infrastructure needs, as well as rate structure scenarios that would help deal with the conservation conundrum.

Topic 2 – The Need for Rate Adjustments

Once the topic of infrastructure spending priorities was well-understood by both the Water Authority and the customer participants, the second (and more difficult) topic was introduced: the impacts of planned and unplanned reductions in revenue, and the need for rate increases to fund infrastructure renewal activities. The Water Authority’s main objective was to obtain input from customers on rate structure alternatives. Videos and presentations were used to provide context and to frame four specific rate increase/rate structure options for discussion. Not only did customers voice support for rate increases for infrastructure spending; they also weighed in on which rate structure option should be employed.

Figure 1

Figure 1 – Comparison of Water Authority’s spending priorities versus customers’ priorities (in millions of dollars).

Customer Outreach Outcomes

Overall, customers realized the need for rate increases to sustain levels of service and meet infrastructure renewal needs. Most supported a balanced approach between encouraging water conservation and attaining revenue sufficiency and rate stability. Moreover, many supported taking care of the infrastructure renewal needs now rather than burdening the next generation with significant rate increases.

Integrating Customer Input Into Rate Structure Study

The Water Authority conducts a water and wastewater cost-of-service rate study every two years. The purpose of the rate study is to provide the Water Authority with a review of its revenue requirements and the existing rate structure as well as provide alternative designs (scenarios) of water and wastewater rates for the governing board’s consideration. The scenarios must meet the Water Authority’s financial objectives while at the same time being equitable, defensible and promoting water conservation. The basic philosophy behind a cost-of-service methodology is that utilities should be self-sustaining enterprises that are adequately financed with rates that are based on sound engineering and economic principles.

The scenarios and resulting rates were reviewed by Water Authority staff and the Technical Customer Advisory Committee (TCAC). The TCAC conducted four meetings during which the pros and cons of each scenario were weighed while considering the impacts of the total water and sewer bill to all customers. TCAC members also attended the Customer Conversations meetings to listen and observe customer input during the structured activities. After the completion of the customer meetings, the TCAC reviewed the summary data to guide the development of the scenarios. In these meetings, 10 scenarios were developed, evaluated and then narrowed down further to three scenarios. These top three scenarios were fully developed and a comprehensive analysis was performed on each one.

With utilities gradually shifting more cost recovery to the customers’ fixed – or base – charge, it will allow for a more reliable revenue stream.

The TCAC voted to recommend a preferred scenario that moved revenue recovery more toward the monthly fixed charge in order to reduce dependence on consumption and to mitigate sales revenue volatility because of weather and other influences. The committee believed the preferred scenario also would achieve the objectives of promoting conservation and achieving rate stability and revenue sufficiency. The top three scenarios were presented to the governing board. At that meeting, the TCAC Chair explained the evaluation process and the recommendations for consideration in adopting adjustments to the rate structure. The governing board approved the TCAC’s preferred scenario which aligned the rate structure favored by Customer Conversations participants.

Based on AWWA Rate Surveys over the past 10 years, the water industry is beginning to see the transition from revenue mostly generated from volumetric charges to a more balanced approach much like what Water Authority customers desired during the Customer Conversations.

The Water Authority

The Water Authority’s main objective was to obtain input from customers on rate structure alternatives, and customers weighed in on which rate structure option should be employed.

With utilities gradually shifting more cost recovery to the customers’ fixed — or base — charge, it will allow for a more reliable revenue stream. Rate trends show that utilities in the western United States have seen more than 5 percent increases in the percentage of fixed-to-total charges. The trends also show that having the fixed revenue at adequate levels while implementing an inclining block rate structure will allow a utility to make progress in achieving both pricing objectives. Similarly, the Water Authority also aims to achieve the objectives in transitioning revenue recovery more from the fixed charge while maintaining its water conservation goals.

The Water Authority, like nearly every utility in the United States, is dealing with increasing infrastructure needs and regulatory mandates, increasing operating costs and declining revenues. Through the Customer Conversations, the utility has been able to educate its customers on these challenges and obtain input on what it thinks is the best direction for the utility in achieving its objectives. It is critical for utilities to communicate with customers about the value of water and wastewater services while maintaining conservation. With better communication, customers will have a better understanding of changes to their water and wastewater rates and relationships to the community’s objectives.


Frank RothFrank Roth is senior policy manager for the Albuquerque Bernalillo County Water Utility Authority where he works in policy development and evaluation, asset management and performance measurement and management.

Carol MaleskyCarol Malesky is a principal with Hawksley Consulting, now part of Stantec. She has been working with the Water Authority in Albuquerque for more than 12 years, assisting with cost-of-service based rate studies and rate structure reviews.

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