From the Finance Department

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Utility Finance Executives Weigh In On Resilience, Affordability, Digital Transformation & More


Editor’s Note: Following the conclusion of our 2023 Water Finance Conference in Cleveland, our longtime contributor and colleague Greg Baird, a former water utility CFO and now principal consultant with Black & Veatch Management Consulting, approached us about developing a Q&A roundtable discussion for publication that would encapsulate the themes discussed by utility CFOs and other finance executives at the conference. Since we love hearing from CFOs and finance experts – and seeing how all things water finance are pretty much our forte – we were just fine with this idea. Greg developed the questions and below is the conversation that resulted.

Moderator:

Greg Baird, MPA, Principal Consultant, Black & Veatch Global Advisory, Rates and Regulatory, Management Consulting

  • Nicolette N. Bateson, CPA, Chief Financial Officer & Treasurer, Great Lakes Water Authority
  • Gregory Jenkins, II, Assistant Director, City of Raleigh Public Utilities/Raleigh Water
  • Sophia Skoda, Director of Finance, East Bay Municipal Utility District
Nicolette Bateson

Nicolette Bateson, Great Lakes Water Authority: In 2020, the Great Lakes Water Authority (GLWA) adopted a first-of-its kind regional Wastewater Master Plan (WWMP) created to proactively and adaptively manage the wastewater system that serves 2.8 million people and spans 15,000 miles of pipes across 79 communities in southeast Michigan. The plan is the result of unprecedented regional collaboration among 100 stakeholders, including GLWA’s member partners, watershed advocacy groups, regulatory agencies and others. The plan has embraced stormwater as a regional issue. An initial action item has been the launch of a Regional Operating Plan (ROP) where operators from GLWA and its members communities use real-time computer technology to see areas where, during intense rainfall and snow melts, there is too much flow in the system and move it to areas with more capacity, thereby reducing the risk of overflows and backups across the region, without expensive new infrastructure.

In Michigan, we also have a group that is focused on statewide public policy surrounding the creation of regional stormwater authorities and ways to secure sustainable funding.

Gregory Jenkins, II

Gregory Jenkins, II, Raleigh Public Utilities: Raleigh has had an impervious surface-based stormwater fee since 2004. The stormwater utility fund is an independent and separate enterprise fund from the water and sewer enterprise fund and is not interconnected. Impervious surface data is updated using new aerial photography at least every four years, and development permit tracking is used to update impervious surfaces for work that requires a city permit. The stormwater utility fund has been shown to be resilient and collection rates are high. Stormwater revenue has steadily increased over time from growth and regular rate increases as supported by city council.

The stormwater utility fee is used to fund a wide range of comprehensive stormwater programs and capital improvements projects to address flooding, water quality, public education and involvement, public safety and awareness, system maintenance and aging infrastructure issues.

Sophia Skoda

Sophia Skoda, East Bay Municipal Utility District: While EBMUD certainly has needs in aging infrastructure, we provide water and wastewater treatment service but not wastewater collection or stormwater. Our work on stormwater is really through our regional partnerships to address I/I that enters our system as part of our federal consent decree. For example, we provide inspection services connected with the sale of properties in our service area to ensure compliance with local ordinances which now essentially require that Private Sewer Laterals be intact upon sale of the property. We also manage modeling and reporting efforts on the effect of this regional work with the goal being to mitigate and eventually eliminate discharge of partially treated wastewater to the San Francisco Bay. We have also done some pilot work on directing ‘first flush’ stormwater flows to our facilities for treatment. Stormwater is a difficult issue in California because of the interpretation of Proposition 218 requiring an affirmative public vote to raise fees. Stormwater also suffers from the public not really understanding the severity of the issues – water and wastewater are much easier to understand.

Bateson: There are a few strategies that we are utilizing. First, given the significant increase in operating costs and capital costs, we are refocusing reserve targets based on daily cash as the key financial metric, rather than fixed amounts or percentages. This allows the reserve to adjust to budgetary needs. Second, we continue to strengthen the organization’s understanding of the 10-year plan through team member engagement in that plan. This has been especially effective when aligning to the financial plan and the capital improvement plan.

Third, focusing on affordability and keeping charges low in the past has provided some space as we face cost increases – particularly in the capital program. Fourth, engaging our vendors in focus groups and other structured conversations around cost increases and opportunities for new technology and project delivery.

Fifth, we formed an economic outlook taskforce that consists of internal and external experts in economics, construction, engineering, finance, and other areas. Quarterly, we update the forecast across commodities and personnel based on a baseline, optimistic, and pessimistic set of scenarios. That information then informs our short and long-term decisions. Sixth, our engineers are very engaged in cashflow forecasting. Our capital improvement plan has 168 projects, but generally 10-13 projects make up 90 percent of the spend for both the water and sewer system. We then focus on those projects to manage cashflow and investment decisions.

Jenkins, II: Raleigh Water has maintained a AAA rating from all three rating agencies since 2016 and has done so using financially solid policies. These policies include keeping 365 days of operating expenses in reserve and setting rates to have at least 2.0 times debt coverage. We have not been immune to the current economic climate and have seen capital and operating costs soar in the past two years. In response, we have had to reprioritize and delay specific capital improvements to stay with our financial metrics. We also had to increase our default (or starting point) rate increase from 3 percent per year to 4 percent per year.

Most of our capital projects originate from master planning documents, which provide engineering cost estimates for their recommended projects. As we get into the design process, the design engineers update these estimates as requirements are firmed up and more is known about the project’s specifics. Asset management costs are estimated using bid analysis from recent small-diameter main replacement work to calculate an average replacement cost per linear foot for water and sewer. Those costs are then applied to the footage in the identified projects to estimate the cost.

Skoda: We are refocusing on long-term financial resilience by having deep conversations starting with a recent retreat focus on long-term financial stability for our senior management team showing them via modeling the long-term impact of raising rates annually at unsustainable levels and the impact of being overly reliant on debt financing. This work will also be shared with our Board of Directors. We need to be resilient to both combat natural disasters and other unanticipated events. Already 25 percent of our SFR customers make less than $50,000 a year in household income in an area where cost of living is high.

While we have a customer assistance program, the dollars will only stretch so far. We need to plan, design, and implement in ways that allow us to do more, differently. Innovation will be key in these efforts. With regards to capital plans which are costly and only becoming more so, we are adopting a prioritization framework (based loosely on what is used by Hampton Roads Sanitation District) and are excited to engage in this effort to better manage our limited capital funds.

Bateson: I often say that decisions made decades ago impact today; decisions we make today impact future generations. So much of our budgets are long-term commitments. Preserving flexibility and focusing on affordability creates long-term financial resilience. Emphasizing the long-term view is critical to success in helping stakeholders to look beyond the next 1-3 years.

Bateson: Michigan is the place to watch on this topic! When GLWA was established, a unique opportunity occurred when a federal court order provided the ability to set aside one-half percent of revenue in a Water Residential Assistance Program (WRAP). The WRAP program has evolved since 2016 and now helps eligible households to keep their water/sewer bill to 3 percent of household income, provides arrearage assistance, plumbing repairs and replaces lead-based fixtures in the kitchen, bathroom and utility areas of the home. WRAP also helps to fund the Detroit Water & Sewerage Department’s Lifeline Plan that limits the monthly bill to $18, $43 or $56 depending on household income.

Recently, an affordability program was introduced (Michigan Senate Bill 549 and House Bill 5088) to create a low-income water residential affordability program. This program would be administered by the Michigan Department of Health and Human Services (MDHHS) to ensure that water bills for low-income households do not exceed 3 percent of that household’s income, with tiers developed for lower thresholds based on percentage of the federal poverty limit. Water providers can opt to use the program developed by DHHS or administer their own program.

A companion bill, (Michigan Senate Bill 550 and House Bill 5089) was introduced that would create a statewide Low-Income Water Affordability Fund. The primary funding source would be a $2/meter monthly funding factor on water bills. The fund is modeled after the Michigan Energy Assistance Program (MEAP), for which every electric utility customer pays a small monthly fee to ensure that low-income households can get help with their energy bills.

Jenkins, II: Raleigh Water has had an assistance program since 2017. The program has two components: the city-funded portion and the customer donation portion. The city-funded portion can only be used by customers within the jurisdiction of Raleigh. Any customer can use the customer donation portion in the service area. The service area includes six merger communities. The pressure on both programs is the need exceeds the funding of the programs. Recently, we were able to redirect rental income from space on our water tanks to the programs to increase the funding. We are also exploring other non-utility-generated income that could be redirected. The most significant barrier we face is that state statute doesn’t allow any utility-generated revenue to offset a group or subset’s utility bill. Funding for assistance programs requires an active campaign soliciting funding from customers, businesses and creative partnerships.

Skoda: Yes, there is absolutely increasing pressure to focus on customers who have limited ability to pay. Our rates have risen faster than inflation in recent years while the non-rate revenue available to support our programs have not grown as fast. Currently, our program only provides relief to residents of single-family dwellings. We know that many people in need live in landlord-owned, multi-family dwellings and we have not yet determined an efficient way to deal with this issue. Currently, the program provides the same level of support to any eligible customer. We are looking at a graduated approach by income level that would still be easy to administer but which would help us stretch
our funds.

We have recently hired our first customer assistance program (CAP) administrator to assist in best managing our goals for this assistance. We believe a strong CAP program is part of our strategy to continue support for the extensive capital program we have underway. Another interesting barrier is that some of those eligible don’t wish to avail themselves of the assistance out of pride. This is an interesting issue. We are limited to providing our services on a cost-of-service basis by state law, and so providing a life-line level of service at a lower cost is not a viable alternative. An overarching issue is how you define affordable. That definition is not really established.

Bateson: Transformation occurs throughout GLWA – and it is hard to envision any transformation that does not include electrification or digital elements. Transformation is about being more effective at what we do – which results in operational and cost efficiency. Business system digital transformation encompasses digitizing system wide records, going cloud first in software solutions, mobile technology for field personnel as we roll out a new enterprise asset management system, and advancing internal capacity and resources for data analytics modeling. Thinking about communications, we recently received an award for disability access for our website.

Operational system digital transformation occurs internally and regionally. As a regional water provider, at no cost, our member partners receive water system monitoring software service to ensure water quality.

We have also invested in technology that allows us to better understand areas of stress in our pipes so that we can more cost effectively perform strategic replacement of sections of pipe rather than a large-scale replacement effort.

As it relates to fleet, 10 of our 300 vehicles are electric and are being tested to evaluate how they handle the environment. Some of our facilities now have charging stations.

Jenkins, II: Raleigh Water is embracing the transformation to the digital world. While we embrace it, we have also created a framework for evaluating opportunities when they arise. These opportunities impact our utility rate model, so we must be mindful when selecting them. The guiding principle is the overall customer experience. Leveraging the digital transformation is allowing us to prepare for our future “techy” customers. Future interactions will be completely different and unique than they are today. Also, governments are exploring 311 centers and outsourcing services. Transforming the utility into a digital utility gives the flexibility to meet whatever the future holds.

Skoda: Innovation will have to be a part of how we address the capital ‘debt’ we face. On fleet electrification, we don’t think that this will be a cost or operational savings. Charging stations for construction vehicles with limited battery life are still a complex issue and, we imagine, will continue to be for some time to come. Further, the issue of how emergency response will be dealt with when it comes to charging will be another issue. When it comes to digital transformation, the game changer we see will be AI. The possibility of AI to cost effectively assist with our work is staggering. Other digital transformation work involving software and hardware might gain us 1 to 5 percent in terms of efficiencies, but we believe the low hanging fruit is gone.


Water Finance & Management extends a special thank you to our finance experts for their time and participation in this roundtable.

The 2024 Water Finance Conference will be held Aug. 6-7, at The Water Tower Global Innovation Hub in Buford, Georgia. Founded in 2015, the Water Finance Conference is a two-day educational seminar exclusively for executive-level utility professionals involved in financial decision making, including directors, general managers, chief executive officers, chief financial officers and city finance managers. Learn more at waterfinanceconference.com.

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