COVID-19-related Revenue Risks Keeping Utility CFO’s Up at Night

By Christine E Boyle, PhD

Similar to other sectors, water and wastewater utilities’ financial worlds under COVID-19 are shifting under their feet, and at a rapid pace.  Rapidly changing water demand, shelter in place orders, and moratoriums on water shutoffs, are but a few of the shifts that have taken place over the past 3 weeks.  Webinars by AWWA  and UNC School of Government have supplied critical information about legal and communication aspects of COVID-19 response (April 6, 2020), and preparing for the financial aspects of COVID 19 (March 23, 2020).

This short blog will be one of a series of blogs related to assessing and planning for financial and revenue implications of COVID-19. We will cover responses for both short-term emergency period and the medium-term, through 2021, as the economic and social impacts continue to unravel.

I work with utility CFO’s across the United States and globally.  This blog answers a set of questions I am fielding around the COVID-19 crisis: 1) What are the most critical revenue risks my utility faces? And 2) What can we do to prepare and mitigate these risks?

I suggest an assessment of the magnitude of revenue risk for your utility in these core areas:

1)     C&I water demand: Short-term and medium-term;

2)     Residential water demand: Short-term and medium-term;

3)     Nonpayment Risk, post shutoff moratorium: Short-term and medium-term;

4)     Customer Assistance Program (C.A.P.) funding; Assessment of C.A.P. sufficiency post shutoff moratorium;

5)     Sensitivity of rate structure to an economic downturn.

Steps to prepare and mitigate these risks include:

Assessing C&I and Residential Water Demand Shifts, Short-term and Medium-term

Use the latest economic data from the Bureau of Labor Statistics (BLS) to update your water demand forecasts and models.  State employment and unemployment data from BLS will be released on April 17, 2020 (https://www.bls.gov/sae/). Experience from the 2008-09 economic recession taught us that water demand is impacted by economic recessions and that households become more sensitive to price increases during economic downturns (Study by USBR). The take away message is that increasing rates during a recession will not lead to a linear increase in revenue.

A quote from the AWWA 2012 State of the Water Industry report reminds us of factors to be aware of in a recession,

“Water revenues sag as consumers cut back on water use, businesses shut down, and customers close accounts. …Utility budgets also suffer when ‘money is being diverted to balance local government general funds at the expense of the reinvestment, replacement, and maintenance of water and sewer infrastructure, which ultimately puts the public health at risk. We need to educate local officials on the potential public health impacts of deferring [repairs to] at‐risk or obsolete infrastructure”

-Murphy, M (2012) JAWWA 106:6:44.

Assessing Nonpayment Risk, Post Shutoff Moratorium

Once water shutoff moratoriums are lifted, utilities will face an unprecedented nonpayment situation.  Assessing the level of nonpayment risk will be critical for continuity of operations, customer service, and financial resilience once the shutoff moratoriums are lifted. Utilities should be ready to answer: how many customers will need subsidies, how many a short-or medium term payment plan?  What is the magnitude of the nonpayment and arrears forecast over the short- and medium-term?

Customer Assistance Program (C.A.P.) Funding Assessment 

Related to offering the nonpayment trend analysis above, a prudent utility manager will quickly analyze the utility’s Customer Assistance Program (C.A.P.) to answer these questions: 1) Is the current C.A.P. sufficiently funded and equipped to handle the projected # of applicants through 2021? 2) What is the forecast # of applicants and total $ required in the short- and medium-term?

What is the sensitivity of your utility rate structure to an economic downturn?

The 2008-09 U.S. recession taught utilities a lot about the sensitivity of various rates structures to economic downturns.  We suggest that utility business analysts compare recession-era scenarios to their current rate structure and assess how to fortify your rate structure and rate levels to withstand various economic scenarios. Consider price elasticity and nonpayment trends in your analysis.  The study by USBR earlier in this blog includes suggested elasticities during economic downturns, for residential only.

These assessments will not be perfect but can quickly help assess the level of risk and prioritization of activities to prepare your utility for all scenarios under COVID -19 and through FY 2021.

About the Author

Dr. Christine Boyle is Solution Area Lead for Xylem’s Metering Insights Group. Her work focuses on developing decision support software that achieves both resource and financial sustainability goals for water utilities. She received a doctorate in water resource planning in 2011 and “spun” a water analytics company, Valor Water, out of her thesis work at University of North Carolina at Chapel Hill. She is a trustee of the Cal-Nevada American Water Works Association.

We wish to salute the brave men and women keeping our water and wastewater services operational during this crisis.  Utilities, associations, nonprofits and private sector are all collaborating at this time at an unprecedented level. It is imperative that we continue our collaboration and share information quickly to lead our water and wastewater utilities through this difficult period.