Colorado Springs Utilities

Transcription

1 CASE STUDY Colorado Springs Utilities A City Prepared for an Uncertain Future: Colorado Springs Utilities Balances Water Conservation and Revenue Stability In partnership with

2 SUMMARY Colorado Springs Utilities (CSU) serves a growing and vibrant community in a semi-arid environment, with limited local water resources transported from mountain sources. Set in the greater context of the western United States, CSU shares a plethora of challenges common to many other utilities, such as recent droughts and recession, long-term economic and population growth, and the prospect of climate change. To manage water use more efficiently, CSU has adapted its water rates and initiated additional active water conservation programs. Indeed, conservation rates and programs coupled with economic conditions have resulted in reduced demand in recent years, as well as unprecedented revenue uncertainty. At the same time, long-term growth and limited local resources have prompted the planning and construction of a major new supply source. CSU takes a balanced approach in its response to revenue uncertainty: 1) they use price signals to promote water use efficiency; 2) they reduce inefficiencies in the water supply system; 3) they nimbly cut or defer projects and prioritize operational costs, and 4) they always work with customer needs in mind. Rather than ignore the uncertainty that affects their water supply and fiscal health, they are working to identify the major sources of uncertainty and take steps to better understand and plan for them. CSU is committed to serving a thriving city, to supporting the local economy, and to maintaining a beautiful community. UTILITY OVERVIEW CSU is part of an enterprise fund of the City of Colorado Springs, Colorado that provides electric, natural gas, water, wastewater, and streetlight services. The organization operates an electric generation, transmission, and distribution system; a streetlight system; a natural gas distribution system; a water collection, treatment and distribution system; and a wastewater collection and treatment system. CSU s service area includes Colorado Springs, Manitou Springs and a number of surrounding communities, as well as several military installations. CSU s water service territory covers 195 square miles. In 2013, its water system served an estimated population of 458,716 persons, including 123,956 single-family meters and 5,447 multi-family meters. For the calendar year 2013, total billed sales were 66,413 AF 1. THE CHALLENGES: GROWTH, UNCERTAINTY AND REVENUE INSTABILITY Challenge 1: A Growing City Colorado Springs economy is driven primarily by the military and by tourism. Its population is expected to grow by 50 percent over the next few decades. Approximately half of this growth is expected to come from the children and grandchildren of current residents. Over the next ten years, the number of residential customers is expected to grow at a rate of 1.6 percent per year and commercial customers at a rate of 1.5 percent per year. 1 Adapted from Colorado Springs Utilities sources. Alliance for Water Efficiency 1

3 Challenge 2: A Dry Climate and Drought Years Colorado Springs is high and dry with an average elevation of 6,035 feet and an average precipitation of 16.5 inches per year. 2 Figure 1 shows that most of the precipitation falls in the spring and summer months. Eighty percent of the precipitation occurs during the irrigation season, mostly as heavy downpours from frequent summer thunderstorms. Annual precipitation is highly variable from year to year, ranging from 8 inches to 21 inches within the last decade. Snowfall ranges from 16 inches to nearly 90 inches, and averages 38 inches per season. Figure 1 Figure 2 shows potable water use peaks in the summer due to outdoor irrigation. Approximately 68 percent of total metered sales occur during the irrigation season from May through October. Peak months include June, July, and August. Several days of hot and dry weather will bring about a spike in water use. Similarly, a few days of heavy downpours or frequent thunderstorms will cause daily water use to plummet. 2 Adapted from Colorado Springs Utilities sources. 2 Alliance for Water Efficiency

4 Figure 2 Colorado has been experiencing drought conditions of varying degrees over the last ten years, and most severely in More recently, below average snowpack during the winters of and combined with persistent hot and dry weather have resulted in widespread drought conditions throughout Colorado. These conditions led to below average runoff and water system yield. 3 CSU implemented 2 day a week watering restrictions from April 1 to October System storage has since recovered, but drought and shortages are a persistent issue. Challenge 3: Demand and Revenue is Uncertain Major sources of uncertainty in demand and revenues include drought response (during and after drought), long-term climate change, population growth, and economic growth. 5 The term "drought shadow is used to refer to the permanent customer behavior change related to previous years' drought conditions. Structural consumer behavior change can result in water demand staying low after drought periods instead of recovering to pre-drought levels. CSU faces uncertainty in how customers will respond to drought rates, conservation programs, and water use restrictions. This remains an ongoing challenge in terms of financial sustainability and planning. 3 This Official Statement is dated September 17, 2013 City of Colorado Springs, Colorado $58,915,000 Utilities System Improvement Revenue Bonds 4 Per Colorado Springs Utilities survey: CSU Case Study Illustration Survey Protocol AWE_ docx. 5 Severe natural events are also sources of uncertainty. The Waldo Canyon fire destroyed 347 homes in 2012 (CSU Official Statement Sept , pdf pg 116). Severe rainfall and flooding occurred in September 2013 (2013 CSU Annual Report, pdf pg xii). However, recovery funding for these natural events is approved by governing bodies. Alliance for Water Efficiency 3

5 Challenge 4: Rising Costs, Declining Customer Usage and Fixed Costs Part of the challenge CSU faces is the cost of providing water services is rising faster than in other industries. New supplies and water quality requirements translate into capital and operating cost increases. This challenge coupled with declining customer usage directly impacts water rates and revenue recovery. By its nature, water supply infrastructure has a particularly large share of fixed costs. Efficiency-oriented rates have provided incentives for demand reduction such that revenues are more variable than costs. SOLUTIONS Solutions to the challenges CSU faces have been targeted at both short-run adaptation and long run structural change. Solution 1: Revised Rate Structures Colorado Springs semi-arid climate, droughts, population growth, climate change, new and aging infrastructure, and increasing regulations and costs have all motivated changes to CSU s rate structure. Since 1999, the utility has raised or altered residential water rates 10 times, changing the water rate structure twice, in 2002 and Figure 3 shows the evolution from uniform rates to inclining block rate structure, with subsequent rate increases through Figure 3 4 Alliance for Water Efficiency

6 Prior to 2002, CSU used a flat rate structure. However, the 2002 drought heightened awareness of the scarcity of the water supply. CSU then sought to encourage conservation, increase environmental responsibility and maximize the use of existing supplies. From 2002 to 2005 the utility used a combined seasonal rate structure and increasing block rate structure, with the increasing block rates only being applied from April through October. 6 In 2006, CSU changed to its current rate structure, which includes tiered rates year round for residential customers and seasonal rates for nonresidential customers. No significant changes have been made to the rate structure since Although a notable rate increase of more than 42 percent was implemented in 2009 and additional annual increases continued through Table 1 shows the current rates and structure. Table 1. Current Rates Residential Nonresidential Contract Service available to military Temporary Service Hydrant Use Augmentation W1G and Non-potable Large Potable Irrigator Water Conservation Rate Pilot Program Nonresidential Service Large Non-seasonal Water User Rate Pilot Program Year-round three tier inclining block rates: Daily Service Charge based upon meter size per inches Commodity Charge three tiers (0-999 cf, 1,000 to 2,499 cf and 2,500 cf or greater) Seasonal rates: Daily Service Charge based upon meter size per inches Commodity Charge November through April per cf and May through October per cf Seasonal rates: Commodity Charge November through April per cf and May through October per cf Uniform rates: Daily Customer, Meter and Equipment Charge Commodity Charge by permit class per 1,000 gallons Uniform rates: Commodity Charge per cf Water-Budget rates: Block rate structure based upon percentage of budget allocation and rate per cf Uniform rates: Daily Service Charge based upon meter size per inches Commodity Charge per cf 6 Water Rate Structures in Colorado: How Colorado Cities Compare in Using this Important Water Use Efficiency Tool, Western Resource Advocates with cooperation from the Colorado Environmental Coalition and the Western Colorado Congress, 2004, pg 10. Alliance for Water Efficiency 5

7 The City Council may declare a Stage I, II, III, or IV shortage when either hydrologic or emergency water shortages exists. Stage II adjustments to residential rates are summarized below. 7 STAGE II RESIDENTIAL SERVICE SHORTAGE RATES Level A Block Consumption Range Charge 1... First 999 cf... currently approved 1st level commodity charge ,000 to 2,499 cf... currently approved 2nd level commodity charge ,500 cf or greater... currently approved 3rd level commodity charge Level B Block Consumption Range Charge 1... First 999 cf times currently approved 1st level commodity charge ,000 to 1,999 cf times currently approved 2nd level commodity charge ,000 cf or greater times currently approved 3rd level commodity charge Level C Block Consumption Range Charge 1... First 999 cf times currently approved 1st level commodity charge ,000 to 1,499 cf times currently approved 2nd level commodity charge ,500 cf or greater times currently approved 3rd level commodity charge Solution 2: Improve Planning, Information, and Communication One solution involves the application of robust analysis to issues of uncertainty to generate improved information. This involves looking at a diverse set of possible outcomes CSU thinks more broadly about what might happen in the future, and not just historical average demand and revenue streams. This allows them to make more robust, informed and resilient decisions. CSU conducts monthly sales volume and revenue forecast updates to reflect current customer behavior that provides an up to date picture of current operations and a sales volume forecast that never gets stale. CSU updates the numbers monthly in an effort to keep their year-end forecast as reliable as possible as conditions change. They also, at a minimum, update two, three, and five year forecasts annually. CSU is seeking out planning practices they can adapt. CSU has learned that they need to search more broadly for policy options in responding to revenue uncertainty than they had to in the past. They evaluate what other utilities are doing in similar circumstances and they have adapted their own financial planning process to changing circumstances. 7 Shortage rates for non-residential customers are based on a Threshold defined as the 2012 year Average Daily Usage (ADU) times days in current billing period. For higher shortage stages, the commodity charge increases. Increases are greater for use above the threshold. Adapted from Colorado Springs Utilities Water Rate Schedule, City Council Volume No. 5. approved April Alliance for Water Efficiency

8 CSU is also working to improve customer communication and engagement. CSU has sought to understand and communicate the value proposition of reliable and safe water supply in order both to make better choices of supply investments, and to more effectively communicate why rates are increasing. To communicate rate structure changes or adjustments to customers, CSU used the following methods: Posting a notice of tariff changing in the local newspaper Information in billing (bill stuffer, website and social media) Media coverage Infomercials Educating Call Center to field calls Customer meetings with significant modifications Revenue uncertainty is not merely a question of rate design. Rate making is conducted with support from financial planning processes and policies. Revenue forecasting is not perfectly predictive, so it is important to have policies set in place to deal with variations from the mean forecast. To maintain an AA bond rating, CSU must demonstrate tools they have to support financial stability. CSU is investing in new sales volume forecasting and planning analytic tools. CSU s strategic planning process and identification of primary objectives also helps create a framework for effective financial management. CSU maintains a core value of continuous improvement where lessons learned are documented, reviewed, and included with implementation action plans. CSU s mission is, To provide safe, reliable, competitively-priced electric, natural gas, water, and wastewater services to the citizen owners and customers of Colorado Springs Utilities. 8 Their strategic objectives include the following: deliver safe, reliable utility services; maintain financial stability; keep rates competitive; plan, build and maintain infrastructure and acquire resources; reflect local values; facilitate economic growth; focus on the customer experience; use customer money wisely and attract, develop and retain a skilled workforce. Three examples of measurable criteria include: Keep prices competitive Deliver safe, reliable utility services Plan, build, and maintain infrastructure, and acquire resources Solution 3: Variable Cost Reductions and Maintaining Reserves CSU defers or downsizes expenditures when needed. They do more with less. By its nature, water supply infrastructure has a particularly large share of fixed costs. Conservation rates have provided incentives for demand reduction such that revenues are more variable than costs. Planning for higher revenue volatility means using variable cost reductions, and maintaining reserves. 8 Colorado Springs Utilities: It s How We are All Connected, Strategic Plan, Presentation slides dated January 1, Alliance for Water Efficiency 7

9 Solution 4: Build Supply Infrastructure CSU has concluded that active efficiency programs, efficiency-oriented rates and better analysis are not enough to meet its long-term needs, given limited available supplies. They do not have a major river, so they must pump their existing supplies over the mountains. The utility has invested in major water supply infrastructure. CSU has been working on the Southern Delivery System (SDS) for nearly 20 years and intensively for the past 12 years. Construction is underway on this project that will provide an additional 70 mgd to their supply portfolio. SDS is a challenge because they have raised rates to pay for it and their rates are higher than some of the other major Front Range suppliers. However, SDS is a highly valuable long-term supply and Colorado Springs is relatively advanced in terms of their adaptation to long run climate change and growth. The current rates also reflect the value of water as a limited resource and SDS as a long-term, viable supply. RESULTS Water consumption has declined substantially over the past 15 years. In Figure 4, CSU s annual water demand since 2000 is juxtaposed with population growth. Average annual water demand from 2008 to 2012 was 13 percent less than in 2000 despite serving an average of 58,000 more people over that time period. 9 Figure 4 This is attributable to a variety of factors, including active savings from the implementation of CSU s conservation and efficiency measures. Following more than two decades of relatively wet conditions, Colorado Springs has experienced persistent drought since In response to shortages, CSU instituted mandatory outdoor watering restrictions in five of the past twelve years. The utility also implemented numerous water conservation policies including conservation-oriented rate structures, 9 Adapted from Colorado Springs Utilities sources. 8 Alliance for Water Efficiency

10 rebates for high-efficiency water appliances and fixtures, and aggressive education and awareness programs. Declines are also due to changes in the price of water, economic conditions, local industry changes, a cultural shift in water use behaviors, and the 1992 Federal Energy Policy Act (EPAct). Figure 5 demonstrates the diverse drivers of this declining demand, and is explained further by the following bullets: The influence of conservation-oriented pricing is included in active savings The conversion from potable to non-potable water for cooling at Drake power plant is included in active savings Rate increases, which were implemented annually from 2009 through 2014, are included in the behavior, industry and economic changes Drought shadow is assumed to be a part of the behavior, industry and economic changes The influence of the economic downturn is assumed to be a part of the behavior, industry and economic changes Industry changes includes multiple large users leaving Colorado Springs between 2006 and 2010 Restrictions savings includes the influence of all drought response measures and is only an influence during the shortage response Savings from the 1992 EPAct are also called passive savings Reductions in use from behavior, industry and economic changes are not considered reliable in the long term and may erode quickly if water emergencies abate and/or economic conditions improve. Figure 5 Alliance for Water Efficiency 9

11 Figure 6 shows the distribution of billed volumes occurring between 100 and 6,000 cubic feet for each of three periods. 10 The first period, from 1999 through 2001, is prior to the drought and shows the use of increasing block rate structures. The second period, from 2002 through 2005, occurred during the drought and with the use of CSU s initial block rate structure. The third period, from 2006 through 2012, illustrates the current rate structure. The chart shows reduced volume in billed water consumption. Figure 6 CSU has concluded that the inclining block structure sends an effective conservation price signal. 11 However, the current rate design has not effectively balanced recovery of revenue requirements, placing the utility at risk during periods when customers significantly cut back on usage. CSU s primary response has been to reduce expenditures, while also working to improve analysis and forecasting to better plan for revenue uncertainty. CSU continues to evaluate options to further stabilize revenue and consider effective solutions utilized by other utilities in similar circumstances. Partly in response to price and rate increases, some customers are either no longer watering their landscapes or are watering significantly less. Also, many customers who have small yards, small households, and/or efficient usage are seeing significantly smaller bills than they would have had without block pricing. Many of these customers benefited from using additional water efficiency programs, which is an often overlooked community advantage of block pricing structure. 10 Colorado Springs Utilities Water Pricing Since 1999, description provided by CSU September 2014, pg The influence of water price on water demand is complicated by the fact that CSU is a four- service utility that provides customers with a combined bill. CSU s staff has noted that customers generally respond to the total bill rather than to the average or marginal price of water. CSU uses the four-service typical bill in their water demand forecasts. Changes to electric, gas, and wastewater rates may impact water demand. 10 Alliance for Water Efficiency

12 LESSIONS LEARNED AND RECOMMENDATIONS FOR OTHER UTILITIES CSU has responded by being nimble in its adaptation to current demand and by focusing on long-term planning and timely forecasting. CSU continues to look for opportunities to anticipate challenges and address revenue instability. CSU recommends the following for utilities facing similar challenges: Use price signals to promote water use efficiency, and maintain a water shortage rate structure that is planned and ready when needed; Frequently update forecasts of demand and revenues; Reduce inefficiencies in the water supply system; Be agile in the ability to reduce expenditures and to prioritize spending; cut or defer projects and prioritize operational costs; Always work with the customer side in mind and respond to their needs. Alliance for Water Efficiency 11