?Payback? is getting more from an investment than what you invested. Every last one of us intuitively makes payback estimations before investing our money, time, careers and everything else. Some people do some actual math. That is seldom required for most decisions. Whether we use math or just intuition, we all seek positive paybacks, meaning we want more out of our investments than what we put in.
Along with payback calculations, we must consider risk, too. Risk is the likelihood that we will not get back what we hope to get. It even includes the possibility that we will lose our original investment, too. While you cannot eliminate risk, you can manage it. You can learn these principles and the math behind them and then apply them to any investment. But for now, turn your focus to the water utilities and the management decisions you must make to turn your utility into a star performer.
To get the payback of excellent customer service from a utility, you and your ratepayers must collectively invest money, time, expertise and more. They invest the money. You invest everything else. What investment vehicle will give the utility the best payback?
No math is required to determine that investments made in sanitary conditions and practices will yield a valuable payback to your customers ? nobody will die. Your customers want? check that… your customers demand that you put their money into these kinds of investments.
Further down the priority list are investments aimed at assuring continuous, uninterrupted service. For individuals, this is mainly a convenience issue. For businesses dependent upon water and sewer service, this is their lifeblood. Cut off their water and they have to close for the day. That is a day they cannot generate revenue, so they can?t make money. Most will even lose money because they incur some costs even when they are shut down. Allow too many outages for too long and you will hear from these folks. Or, you won?t hear from them because they will have moved away.
Even further on down the priority list is water that tastes or smells bad, but that is otherwise perfectly healthy to drink. This is not an issue at all for a carwash, but it is for restaurants and individuals. The worse the water tastes or smells, the less your customers want to support the utility. That can make raising the money needed to achieve even the higher priorities difficult to accomplish.
Investing in Rate Analysis
All of these are great investment opportunities, but they are peanuts compared to rate analysis. That?s right, rate analysis. While the payback period ? the time it takes to get the original investment back ? is measured in years for most good investments, the payback period for rate analysis is measured in days, sometimes hours. For instance, here are some figures to consider:
For most systems serving 200 connections, they will get their $4,500 or so original investment in rate analyst fees back in a couple of weeks of the extra rate and fee revenues the analysis enables them to collect.
For systems serving 2,000 connections, they will get their $5,500 or so original investment back in a couple of days or so.
For systems serving 20,000 connections, they will get their $8,500 or so original investment back in perhaps a couple of hours, a day on the long side.
While this may sound like a commercial for the author?s firm, another firm that could deliver these results, even if its fees were ten times higher, would still be a good investment.
The bar chart in Figure 1 shows the five-year increase in revenues ($1,843,375) enjoyed by the last 11 clients (owning 19 utilities) of the author?s firm (not including some legal clients and some large cities that skew the return bar off the top of the page). The thin black line at the bottom of the yellow bar is the average investment ($7,396) that these clients had to make to get this extra revenue. In simple terms, they invested $7,396 and will get back $1,843,375 over the next five years, most of it during the first year.
The resulting average return on investment rate of 24,924 percent is, well, unbelievable. But the math does not lie: $1,843,375 / $7,396 = 24,924 percent.
Granted, if you are good at math and can deftly sort out rate setting issues, you might get half of this increase ?for free,? disregarding the costs of your time and risks, of course. But it?s not the first 50 percent of the extra revenues, or even the first 80 percent that make a utility financially strong. Almost all water utilities are getting that and most are not sustainable. It?s the last 20 percent that makes a superstar and that is the piece that almost all systems are missing right now. That is the piece that outside expertise can get you.
Strong revenues are wonderful, but it is equally important that rates be collected using a fair rate structure. Without doing some difficult math, you simply can?t arrive at such rates. Calculating such rates is not enough ? your ratepayers want proof that they are fair.
Find opportunities to make your utility strong. Invest first in those that will give you the best return on investment and go right down the list until returns tail off. Your ratepayers won?t thank you for higher rates, but they sure will thank you for the great service those rates enable you to deliver.
There is a famous negative saying about payback. But this positive one is the one you can really enjoy, ?Payback is sweet.? Enjoy some payback.
Carl Brown is president of GettingGreatRates.com and is a frequent contributor to UIM.
