As part of the 2014 AE2S Nexus North Central Region Utility Rate Survey, participants were asked to report 2013 financial data such as rate revenue, non-rate operating revenue, operation and maintenance (O&M) expenses, debt service principal and interest payments, rate-funded capital, contributions to reserves, and depreciation. Based on the reported information, AE2S Nexus reviewed important financial indicators to compare water and wastewater utilities in our region. The regional results are very similar to those reported by nationwide surveys, and provide a benchmark each utility can use to measure individual performance.
Operating Ratios
The Source has previously published articles about the concept of full cost pricing and the use of the Operating Ratio as a quick check on full cost pricing. The Operating Ratio is calculated by dividing operating revenues by operating expenses, consisting of O&M expense and depreciation. An Operating Ratio of 1.0 or greater indicates the utility is generating sufficient revenues to cover the O&M expenses and some portion of capital investment / reinvestment. An Operating Ratio less than 1.0 could indicate the utility relies on reserves or outside resources to meet total revenue requirements.
Figures 1 and 2 illustrate the calculated 2013 Water and Wastewater Utility operating ratios, as reported by participants of the 2014 North Central Utility Rate Survey. The average 2013 value calculated was 1.16, and the median value was 1.11. These values increased from those reported in 2013 based on 2012 financial data, which indicated average and median operating ratios of 1.09 and 1.06, respectively.
Of the systems that reported 2013 financial data, the calculated operating ratio for 68 percent of water respondents and 61 percent of wastewater respondents was greater than 1.0. This is similar to the 2012 data, when 66 percent of water and 59 percent of wastewater utilities reported an operating ratio greater than 1.0. It should be noted that the reported statistics are not individually verified, and that factors such as use of reserve funds may account for some instances in which the financials would suggest an operating ratio less than 1.0 was achieved. How reserves and non-rate revenue sources figure into the discussion of full cost recovery varies based on the philosophy established by each utility.
Figure 1: Calculated Water Utility Operating Ratios for Respondents to the AE2S Utility Rate Survey
Figure 2: Calculated Wastewater Utility Operating Ratios for Respondents to the AE2S Utility Rate Survey
Non-Capital Operating Ratios
In addition to the Operating Ratio, the Non-Capital Operating Ratio is another indicator used to gauge basic financial health of utilities. As the name suggests, the Non-Capital Operating Ratio does not factor a component of capital depreciation in the calculation. Nationwide, it has been reported that 90 to 96 percent of utilities achieve a Non-Capital Operating Ratio greater than 1.0, which is what would be expected. For respondents of the 2014 North Central Utility Rate Survey, it was found that 93 percent of water and wastewater respondents achieved Non-Capital Operating Ratios greater than 1.0 in 2013, with an average reported value of 1.91 and a median value of 1.62. Of those that did not report a value of 1.0 or greater, eight were less than 0. Data collection was not detailed enough to confirm that the financial performance of these systems indeed yielded a non-capital operating ratio of less than 1.0. As philosophy regarding utility funding can vary according to City policy, it may be that for these eight systems, non-operating revenues are utilized for a portion of operating expenses. In the absence of a review of detailed financial data, it should be noted that uee of these statistics was strictly intended as a general benchmark for systems in our region. Figures 3 and 4 illustrate the calculated Non-Capital Operating Ratios for Water and Wastewater respondents, respectively.
Figure 3: Calculated Water Utility Non-Capital Operating Ratios for Respondents to the AE2S Utility Rate Survey
Figure 4: Calculated Wastewater Utility Non-Capital Operating Ratios for Respondents to the AE2S Utility Rate Survey
Operating Expense and Revenues per Capita
Another trend that is commonly monitored by utilities for the purpose of benchmarking utility performance is measurement of Operating Expense and rate revenues per capita. While this indicator may not be meaningful for all communities, it is interesting to compare the average and median values for rate survey respondents in recent years. Figures 5 and 6 illustrate, respectively, the calculated average and median per capita operating expense and rate revenue values for fiscal years 2012 and 2013 as reported by survey respondents. It should be noted that the survey respondents are not necessarily the same in 2013 and 2014, so the figures represent only a general illustration of changes in the average utility operating expense and rate revenues based on the available data.
Figure 5 suggests that while reported average and median values for per capita Water operating expense increased in the past year, reported average and median per capita values for Wastewater operating expense and revenue decreased. Both the average and median per capita values for Water revenues were generally unchanged from those calculated one year ago. AE2S Nexus will continue to calculate this indicator in future years, and it is expected that as the number of systems participating in the annual survey increases, the results will become increasingly more reflective of actual conditions in the region.
Figure 5: Average Per Capita 2012 and 2013 Operating Expense and Rate Revenue Values from the 2013 and 2014 AE2S North Central Region Utility Rate Studies
Figure 6: Median Per Capita 2012 and 2013 Operating Expense and Rate Revenue Values from the 2013 and 2014 AE2S North Central Region Utility Rate Studies
Looking Ahead
As utilities prepare to close out another year, it is a good time to compare planned expenditures and projected revenues to actual values realized. Reviewing trends in water sales and wastewater flows can be helpful in making adjustments to rate schedules and budget projections. Utilities should continue to strive for annual rate-setting actions that are based on the cost of service. It may also be beneficial to monitor the utility’s operating ratio and changes in annual expenses and revenues on a per account or per capita basis. These are just a couple of the tools that can be used to easily assess efforts to promote and maintain financial sustainability. If you have questions, please contact AE2S Financial Analyst, Miranda Kleven, PE, at 701-746-8087 or Miranda.Kleven@ae2s.com.
Article Reference:
Defining a Resilient Business Model for Water Utilities, Water Research Foundation, 2014.