With limited operational, maintenance and capital improvement funds, municipal water/wastewater utilities must be more mindful than ever about how and when they spend ratepayer money. After all, a utility is a business — and like any business, it must understand the sensitivity between cost drivers (funds necessary to operate and implement system improvements) and revenue drivers (the rates customers pay for ongoing service). Furthermore, as regulated entities, utilities must factor ratepayer affordability into their strategies for complying with federal mandates.
The business problem is developing a capital planning strategy that aligns a utility’s financial capability with regulatory compliance and reliable levels of service. At Bonton Associates, it’s a challenge we’re eager to help public utilities tackle — and a recent Environmental Protection Agency proposal seeks to lend additional guidance.
The U.S. EPA’s proposed Financial Capability Assessment (FCA) guidance (announced September 15, 2020) provides new frameworks for assessing the financial capability of a utility to implement water pollution controls compliant with the Clean Water Act.
The EPA mandates that utilities identify and implement water pollution controls via consent decrees that specify completion deadlines and stipulated penalties for noncompliance. The new frameworks included in the proposed FCA guidance allow municipalities to present more nuanced data about their community and its socioeconomic conditions and future economic prospects.
For example, existing guidance defines “affordable” as sewer service costs below 2% of median household income (MHI). Assessing affordability through this limited framework distorts the impact that sewer rates have at the extremities of a community’s income distribution. This can be a serious concern for lower income users who could realize a burden much higher than 2% of their household income. By contrast, the proposed guidance offers flexibility in defining affordability by considering additional economic indicators, such as poverty prevalence or the impact of sewer rates at the lowest quintile of a community’s income distribution. If communities can make a compelling case for affordability, they may be able to extend the consent decree term or modify its requirements, so that rate adjustments necessary to fund capital investments don’t overburden the community’s most vulnerable ratepayers.
Bonton Associates supports wastewater utilities in assessing their ability to generate additional revenues to pay for water pollution control measures — then we go deeper by balancing a community’s ability to invest in its wastewater infrastructure with the right capital planning strategy that aligns with regulatory mandates while ensuring reliable service for customers and long-term financially stability for the utility. Using pipeline condition data, geospatial asset inventories, and regression-based analytical approaches, we’re able to provide deeper insight into the condition of existing wastewater infrastructure at the system level. With this more complete view, we’re able to fully consider the likelihood and consequence of system failures and make better business decisions from a system-wide perspective. This data-based approach helps utilities make smarter decisions about maintenance and capital expenditures, all with the goal of maximizing useful life. We believe that’s a win for everyone!
To learn more about how Bonton Associates helps demystify the business of water and wastewater, follow us on LinkedIn, Twitter (@BontonLLC) or get in touch with us today.