Public Financing Considerations for AMI

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| By David J. Clamage

Advanced metering infrastructure (AMI) is a popular topic today. Infrastructure in general is equally popular as we look for ways to repair and improve the aging and ailing systems that power American life. In November 2021, just in time for Thanksgiving, H.R.3684 – the Infrastructure Investment and Jobs Act – was signed, providing $550 billion in new spending including about $50 billion over five years for drinking water and wastewater spending at the U.S. Environmental Protection Agency (EPA). The bill mentioned “water” no fewer than 785 times in 1,039 pages of text. Less than a year later, in August 2022, the Inflation Reduction Act was also signed into law and mentions “water” 35 times.

For utility systems, whether you’re working to solve the problems of non-revenue water – at some 40% according to the World Bank for all developed countries – improve the efficiency and accuracy of your meter reading efforts, encourage conservation, or, all of these things and more, AMI can be an effective solution. The key is finding the funds to make it affordable. For most public water departments there are really only a few common choices.

Tax-Exempt Bond Financing

Bonds are a low-cost tool if you and your constituents have the foresight and political will to implement taxes and fees sufficient to issue bonds to include AMI. Blended with other projects, this can result in costs today of less than 3%, with my hometown of Denver having 20-year water bonds trading as of Oct. 3, 2023 at 4.34%. Bonds are typically issued in large amounts and do need voter approval, so planning ahead is your key to success.

In the specific context of AMI, bonds are not generally tailored to the impact a metering solution has to your cash flow, e.g., matching your savings or recovery of revenue with repayment. They are sort of “one big bucket” with one line of repayment. For larger customers with AMI as a part of their capital plan, we see bonds as a key solution to their funding of metering projects.

Tax Exempt Lease Purchase

Tax Exempt Lease Purchase is second to bonds in concerning low cost, as they are also tax-exempt for the lender, allowing them to provide a lower cost of funds with both the asset and lease or loan approved in all 50 states. Due to the requirements for non-appropriation and having no specific voter approval, these instruments are higher in cost to bonds by as much as 100 to 200 basis points.

They are also highly flexible in that you can issue them at any time, in relatively small amounts, and match the repayment to your generation of savings and revenue – often resulting in a revenue neutral impact to your budget. For standalone projects of less than $5 million, this is overwhelmingly the most common tool in the market today due to pre-existing state statutes enabling this form of finance where you’re not reinventing the wheel.

“As-a-Service” Models

As-a-Service (AAS) models are growing in popularity for both good and not so good reasons. First, they are the flavor of the day for the investment community, and while that’s not bad in and of itself, it’s important you understand you are borrowing money at a taxable interest rate. Your investor is a taxable entity, and the investors are attracted to this market knowing that few things are more essential to your community than water – assuring them of very high priority in repayment. Remember, in the AAS model, the investor is the owner of the asset.

Second, it can often help you de-risk implementation of your project where a well-informed investor in partnership with an established AMI provider allows your AAS contract to be repaid only in the event of performance. Focusing on service level agreements (SLAs) and the reliability of your technology provider become key to a successful project.

Third is focus on the details of your contract: How is system performance measured and by whom? How are equipment failures addressed in normal wear and tear, at the end of term, or even mid-term? Are there mechanisms for you to take ownership of the system? And how do you address growth of your system needs or even contraction of your meter count?

Remember, in the AAS model, the investor is the owner of the asset.

We are seeing the AAS model grow in popularity for larger systems due to the complexity of the contracting models, as that typically drives investors to the scale of ever larger projects. It is that de-risk and out-source path that typically drives this decision.

A cautionary note here is the accounting treatment you will face under Government Accounting Standards Board (GASB) and related guidelines. A general rule of thumb is any non-cancellable payment longer than 12 months will be on your balance sheet and we encourage you to visit with your auditor, legal counsel, bond trustee and other advisors to ensure you get what you bargain for. Also note that few states, if any, have statutes that specifically define and enable AAS models.

The economy today is highly challenging with considerable uncertainty. This writer believes interest rates will continue to rise through 2023 and perhaps even into 2024 as that is the only tool available to the government – any government – to stem inflation. If you’re reading this in Argentina, the 10-year Treasury rate is 49.7% with an inflation rate of 98%, so you can see our path ahead is complicated but clear. There is capital available today for AMI and the related systems, and equipment you use and careful shopping will make your next project affordable and productive for your community.

David J. Clamage is the founder and managing director of Saulsbury Hill Financial, LLC, a provider of tax-exempt lease purchase financing, based in Denver. Colorado. Clamage is also a consultant to Generate Capital, PBC.

The rates, terms and other conditions expressed here not an indication of the approval of any transaction with said approval subject to our normal conditions for approval; appropriate and acceptable documentation; and, rates are subject to movements in financial market conditions. The information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934 and the municipal advisor rules of the SEC or MSRB.

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