Our water utilities have historically enabled the economic growth for our cities. With the availability of federal and state grants and low cost debt, the average person in the United States has access to a seemingly inexhaustible supply of safe, reliable and clean water at very low cost. While water and wastewater utilities across the country have built some of the most advanced systems in the world to deliver these services to all corners of the country, the processes, technology and cost required to do so remain largely invisible to most users.
With past resource and financing surpluses, it is not surprising that the general public has historically taken these services for granted, and believes that our water systems can simply weather any situation. Today, however, the storm clouds that are building threaten to undermine the stability of our utilities and the trust of the public.
Winter is Coming
Water systems are the lifeblood of our cities and our economy. Without sustainable and viable water supplies, cities, and indeed civilizations, have suffered significant decline, and in some cases outright collapse. Thanks to substantial post-Depression and post-World War II investment, most of us have grown up without the need to give water a second thought. We open the taps and a clean, safe, and seemingly unlimited supply of water is available to us at incredibly low cost.
Without action, however, this situation will not last. Stalled economic growth, decreasing federal and state funding, declining revenue, and aging infrastructure are the whispering winds of winter.
Decreasing Global Growth
The world’s Gross Domestic Product (GDP) has been at best at, and at worst declining over the past decade. The Economist reported in May 2016 that “Global GDP growth has declined for five consecutive quarters and is at its lowest since the beginning of 2013.”1
This increases fiscal pressures and has marked implications for economies—particularly in countries that need to increase investment in infrastructure.
In the US, these low GDP numbers have significantly hampered the ability for governments to generate funds for investment. Specifically for the water and wastewater sector, this has translated to increasingly scarce federal funding. Outside disaster relief activities, federal funding established by the Safe Drinking Water and Clean Water Acts have remained at since inception, and declining in real dollar terms — despite the recognized need to ramp up funding for the replacement of our aging infrastructure.
The American Water Works Association (AWWA) State of the Water Industry (SOTWI) report suggests that a minimum of $21 billion is required to be invested annually in water infrastructure. With federal funding averaging less than 5 percent of that requirement ($0.913 billion annually2), it is clear that current federal fiscal support falls well short of the need.
Declining Utility Revenue
Compounding the financial winter for our utilities is the fact that utility revenue is declining. Analyses by the University of North Carolina Environmental Finance Center has found that year-over-year revenue for 35 percent of the utilities surveyed is declining.3 Respondents to the AWWA SOTWI survey indicated that nearly 80 percent of utilities are experiencing at or declining water sales. Combined with regulatory-driven conservation requirements like those imposed by the California State Water Resources Control Board, the result is guaranteed revenue destruction.4
Notably, rate increases, the typical response to revenue shortfalls, are proving to be ineffective against this tide, as the cost of water hits the elastic threshold for customers.5
In addition, our utility financial problems are colliding with the other major issue in the water sector: the continuing decline of our aging infrastructure. In 2013, the American Society of Civil Engineers (ASCE) gave our water systems are report card grade of “D” in a clear indication that our systems are failing.6
Separately, the American Water Works Association (AWWA) has concluded that a massive $526.4 billion is needed to replace existing water mains due to be at “end-of-life” between 2011 and 2035. When growth- driven new infrastructure requirements are included, the gure balloons to over $1 trillion7 – that’s trillion, with a T.
Further, the 2015 SOTWI found that a staggering 88 percent of respondents felt that utilities were “not at all able”, just “slightly able” or only “moderately able” to meet the infrastructure needs of the future.8
The implication is that our water infrastructure is deteriorating at a rate that far exceeds our replacement efforts, ability and wallets.
The Perfect Storm of aging infrastructure, declining revenue and a lack of available funds for investment have put our water utilities on the precipice of collapse – and with it the health, welfare and economic stability of our cities.
Water is, in the end, always a local issue. And the continued prosperity of our cities falls squarely on the shoulders of our water utilities. To meet this objective, utilities require a different approach. Utilities need to become experts at monetizing every drop of water, and every efficiency, using the efficiency of operations and found revenue to fund the future.
TECHNOLOGY-ENABLED, FINANCIAL-ENABLED SERVICES
Fortunately, in today’s fiscal environment of low interest rates, combined with the desire for yield generating instruments by the investment community, and the stability and longevity of municipal bonds, a utility that can maximize cash now and monetize efficiency can generate significant capital for investment in infrastructure. In fact, Technology- and Finance-enabled Services thrive in this environment and are the perfect vehicle to launch these initiatives.
The Walls Street Journal recently reported that “governments have reported significant drops in borrowing costs while their ratings remain unchanged,” and that Barclays PLC’s municipal bond index “reached a 20-year low of 1.6% in 2016, compared with about 4.2% in summer 2006.”10 This is a significant opportunity for municipalities.
Notwithstanding, many municipalities are not taking advantage of this opportunity, primarily as a result of government revenue projections that “leave no room for additional debt payments or upkeep costs for newly constructed projects,” and that tax revenue recovery has been sluggish.
Again, this is where the advent of technology- and finance-enabled services shines through the clouds. Investment in meter data management and customer information systems funds sufficient revenue in the data to be self-funding, and begins a curve of freeing cash from other operations in the utility.
By collecting all the revenue that their existing rates provide, ensuring all meters and services are billed, and minimizing bad-debt, utilities surface significant “found revenue”. This found revenue can be leveraged into technologies that themselves liberate further cash ow by reducing power, chemical, and labor costs, reduce the strain on our aging infrastructure and potentially extend its useful life and ultimately, fund further investment.
The virtuous cycle of technology-enabled, finance-enabled services, funds money in existing processes and budgets and leverages those efficiencies to meet the current and future needs of our customers.
As an example of the power of this approach to meeting the infrastructure needs of our sector, consider the case where a utility, through the application of meter data management services, funds an annual
recurring revenue of $400,000. At current 20-year municipal bond yields, that cash flow can support a capital investment of over $6 million – a 15x return.
At FATHOM, with our established revenue assurance mechanisms and built-in tax exempt financing, we are pioneering the emerging field of technology-enabled, finance-enabled services.
With FATHOM, our partner utilities have benefited from an average revenue increase of 15 percent — revenue that can fully offset the costs of installing Advanced Metering Infrastructure and fund ongoing costs of services. The reduction in operational expenses generated by FATHOM, liberates further funds that can be used for investment in other efficiency measures.
As we can predict with high-precision the expected revenue impacts from meter data management and revenue assurance systems, FATHOM is the ideal platform to begin the cycle of monetizing efficiency.
And with it welcome the warmth of spring.