Transcript DROUGHT PRICING – LESSONS LEARNED

DROUGHT PRICING –
LESSONS LEARNED
A Presentation to 2003 RMSAWWA /
RMWEA Joint Annual Conference
by
Kerry Kuykendoll
Manager of Rate Administration
Denver Water
September 14, 2003
DENVER WATER BACKGROUND
• Denver Water provides water to approximately 1
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•
million people.
Customers are located both inside and outside
city boundaries.
Customer groups include residential,
commercial, industrial, government and
wholesale.
Water supply is 100% surface water.
Reservoirs fill with spring runoff.
Snow pack is critical.
Denver Water
Present Service Area
SOUTH ADAMS
COUNTY
ROCKY
MOUNTAIN
ARSENAL
DENVER
DENVER
INTERNATIONAL
AIRPORT
-334 MI2
-77 Distributors
Legend
Denver
Total Service
Read and Bill
Master Meter
Fixed Special Contracts
N
W
E
S
September 2000
5
0
5
10 Miles
Denver Board of Water Commissioners
Water Collection System
WILLIAMS
Wolford
FORK
Mountain
Reservoir RESERVOIR
COLLECTION SYSTEMS
GROSS
RESERVOIR
Colorado
River
#
Green
Mountain
Reservoir
SOUTH
PLATTE
Boulder
RALSTON
RES.
Blue
River
MOFFAT TUNNEL
MOFFAT
&
&
MARSTON
FOOTHILLS
DILLON
RESERVOIR
ROBERTS
TUNNEL
Tarryall
Creek
N:\@wra\gis\dw-sys\sys6-lp.ppt
STRONTIA
SPRINGS
RESERVOIR
CHEESMAN
RESERVOIR
Arkansas
River
Buena
Vista
South
Platte
River
&
Cherry
Creek
Reservoir
Chatfield
Reservoir
#
ANTERO
RESERVOIR
MOFFAT
TUNNEL
ROBERTS
TUNNEL
WILLIAMS
FORK
WATERSHED
TREATMENT
PLANT
CONTINENTAL
DIVIDE
STREAM OR
RIVER
#
ELEVEN MILE
RESERVOIR Colorado Springs
TUNNEL, CANAL
OR DITCH
05/13/99
DROUGHT:
“I’LL KNOW IT WHEN I SEE IT.”
• Denver Water had revised its Drought Response
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Plan in July 1997.
The worst 100-year drought occurred 19531955. This one beats it in intensity.
Snow pack in the winter of 2001/2002 was 63%
of normal. Storage was average.
Spring runoff was 25% of normal. Precipitation
was 33% of normal.
Other communities started declaring drought in
early spring. Denver Water did not until two
months later.
UPPER COLORADO
SNOW WATER EQUIVALENT
80 % of Average
5/27/2003
20
18
16
Average SWE (inches)
14
2002-2003
2001-2002
2000-2001
Historic
12
10
8
6
4
2
0
11/1 11/11 11/21 12/1 12/11 12/21 12/31 1/10 1/20 1/30 2/9 2/19 3/1 3/11 3/21 3/31 4/10 4/20 4/30 5/10 5/20
Note: Average based on 23 Snotel Stations
Historic based on 1971-2000.
Variation of Annual Natural Flow
South Platte River at South Platte
700,000
Example of
Mother Nature’s
irregularity.
600,000
Acre-feet
500,000
400,000
300,000
200,000
100,000
0
1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000
Average = 296,000 af
2002 = 63,000 af (21% of average)
Reservoir Contents
Actual
Normal
100%
90%
80%
Percent
Full
70%
60%
50%
40%
30%
20%
10%
0%
Apr01
Jun- Aug- Oct01
01
01
Dec- Feb- Apr01
02
02
Jun- Aug02
02
Oct02
Dec- Feb02
03
Apr03
Jun03
FINANCING RESPONSE:
In-Drought Concerns
• Utility’s Perspective
• Commissioners’ Perspective
• Customers’ Perspective
Post-Drought Concerns
• Financing Concerns
Summary
• Lessons Learned
FINANCING RESPONSE UTILITY’S PERSPECTIVE
• Limited to no guidance available.
• Managing revenue shortfalls and reserve balances.
• Price signals – do they work?
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Price elasticity of demand.
Billing frequency.
How high is meaningful?
Can you develop a cost justification for drought pricing?
• Accountability – how much, from whom, how
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used?
What is feasible – billing limitations.
FINANCING RESPONSE –
COMMISSIONERS’ PERSPECTIVE
• There is a relationship between price and
demand.
• Control demand first and worry about
fairness second, or vice versa?
• Accountability – not for lost revenue, used
to pay for “unbudgeted” drought.
• Do it now but have public input.
• They hear all the individual concerns.
FINANCING RESPONSE –
CUSTOMERS’ PERSPECTIVE
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Inside Denver – Charge outside Denver – the water is ours.
Outside Denver – Our rates are already higher than inside.
All – Indoor water, trees and shrubs should not be penalized.
Some – I have 10 kids.
– I am on a fixed income and like to garden.
– I have an acre of land.
– We provide park area to the public.
– We use your water in production of our product (beer and
bottled water).
Bottom Line – Customers support a drought price signal but
none of them personally used too much and their needs were
not wasteful. It was someone else who wasted.
WHAT WE DID!
• Originally “basket” of programs, based on
restrictions, supported by surcharges and
enforced by penalties.
• Then summer surcharges became a “belt
and suspenders.”
– Residential – 8 increasing blocks with range of 50% to
500% increase in rate. (Replaced “sissy” surcharge).
– Commercial/Industrial/Government/Master Meter – 70%
targets relative to 2001.
– Aggregated Customers – 80% targets relative to 2001.
Similar entities (e.g. Denver Parks) were combined to
allow for management of the entire system.
Residential Drought Surcharge
$ Per 1,000 Gallons
$14.00
$12.00
Total = $14.22
$10.00
$8.00
$6.00
Surcharge = $11.85
$4.00
$2.00
$2.37
$1.90
$1.58
$0.00
Indoor
0
10
Outdoor Water
20
30
40
Large Outdoor User
50
60
70
80
90
Excess Outdoor Use
100
110
120
130
Bi-monthly Consumption (Thousands of Gallons)
Normal Rates
Summer Surcharge
140
150
Summer Surcharges by Cycle
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
20 – 40%
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
20 – 40%
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
20 – 40%
40 – 60%
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
20 – 40%
40 – 60%
60 – 80%
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
20 – 40%
40 – 60%
60 – 80%
40%
70%
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
20 – 40%
40 – 60%
60 – 80%
Highest percentage of
customers
Receiving a surcharge
in one cycle?
79%
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
20 – 40%
40 – 60%
60 – 80%
Summer Surcharges by Cycle
% of Customers
Receiving a Surcharge
10 – 20%
20 – 40%
40 – 60%
60 – 80%
2003 Budget Review
Item
Financial
Plan
Budget
Est.
Actual
152
23
0
40
16
231
$133
24
15
31
22
225
$125
17
12
92
27
273
O&M
Capital
Debt Service
Total
101
133
34
268
$108
112
34
254
$110
118
35
263
Use of Cash
-37
-29
10
Sources
Water Sales
SDC
Surcharges
Bond Proceeds
Other
Total
Uses
Post Drought:
Financing Concerns
• Additional costs largely offset by surcharges but not
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completely
A renewed awareness of water and price
– General opinion that it is a high value and low price
product
– There are questions of whether our water is under priced
– Not all uses are equally elastic
• There is a desire to avoid the consequences of lack
of supply in the future. As a result the Board:
– Accelerated the completion of the Recycle Project
– Accelerated the timing of the North End Supply Project
Accelerating Capital Projects
Means Financing More and Sooner
$140
130
120
2003 Plan
2004 Plan
2004 Recycle Impact
2004 North End Sol. Impact
2004 Other
110
($ Millions)
100
Change 2: Acceleration of
North End Solution
90
80
Change 1: Acceleration of
Recycled Distribution System
70
60
50
40
30
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Accelerating Capital Costs
Means Financing More and Sooner
$140
2003
Plan
130
($ Millions)
120
$123
2004 Plan
110 2004 – 10: Add $183 million
100 2011-12: Subtract $100 million
$94
90
80
70
$68
$58
60
$52 $52
50
40
30
$44
$32
$29
$22
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Demand Changes After A Drought
East Bay MUD’s Experience
After each drought “EXPECTED” demand
was no longer related to the past
“NORMAL” demand
This is not a function of restrictions but
rather a fundamental change in usage
250
242
“Normal”
219
200
“Normal”
199
-18%
“Normal”
-35%
150
2001
1999
1997
1995
1993
1991
1989 - Present
Average = 199
Relative to Previous
Period = Down 9%
1989
1987
1985
1983
1981
1977
1975
1973
1971
1969
1967
1965
1963
100
1979
1978 – 1987
Average = 219
Relative to Previous
Period = Down 10%
1961 – 1976
Average = 242
1961
Consump per Account (thous. of gallons)
300
Denver Water’s Consumption Per Account
Three periods of “normal”
400
350
Metering /
Two Forks
297
286
300
263
1977
Drought
2002
2000
1998
1996
1994
1990 – Present
Demand Down 8%
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
200
1962
1977 – 1990
Demand Down 4%
1992
250
1960
Thousand Gallons per Account
Denver Water has had similar
fundamental changes in usage
Revenue Forecast Issues
If Consumption is at Pre-drought Levels with Existing Rates
2004 Consumption –pre-drought (thous. gallons)
Average 2003 Rate ($/thous. gallons)
2004 Revenue Without a Rate Adjustment
87,500,000
$1.77
$154,875,000
Consumption at Pre-drought Levels with PREVIOUSLY PLANNED RATE adjustments
2004 Consumption --pre-drought (thous. gallons)
Average 2004 Rate (3.5% Rate Increase)
2004 Revenue
87,500,000
$1.83
$160,125,000
Consumption is REDUCED and RATES are INCREASED MORE THAN PLANNED
2004 Consumption –Reduced 5%
83,125,000
Average 2004 Rate (5% increase)
$1.86
2004 Revenue
$154,613,000
Focus on 2004
Item
Rate Increases
of 5.4-percent
Projected Revenue at Reduced Demand
(demand reduction of 5%) ($ million)
$155.0
Original Revenue Target ($ million)
$160.1
Shortfall
$5.1
Plan Adjustments:
2004 Inflation Reduction to 2%
2004 SDC Increase of 20-percent
Unidentified 2004 Budget Reductions
Total Adjustments
$2.0
1.9
1.2
5.1
LESSONS LEARNED
• Expect controversy.
• Don’t simply raise rates, have a surcharge. This
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makes it easier to be accountable.
Surcharge may need to change with seasons.
If you bill in blocks that are fixed, expect an
outcry for individualized billing; (number of
people in house and lot size will be key
variables.) Also called water budgets.
Understand that customers may conserve and
still be assessed a surcharge.
Come to a consensus on the issue of managing
to the average vs. the individual.
Pray for rain and snow.
QUESTIONS AND
ANSWERS