2015 Water and Wastewater Revenue and Expense Data

Every utility is unique. Raw water characteristics, treatment processes, size and capacity of utility systems, topography, and utility age are just a few of the factors that will greatly impact monthly utility charges. Therefore, strictly comparing average monthly utility charges may not be particularly valuable in evaluating the financial performance of an individual utility. However, comparing key financial performance metrics allows individual utilities to better assess financial performance and benchmark against comparable metrics.

As part of the 2015 AE2S Nexus North Central Region Utility Rate Survey, participants were asked to report 2015 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 evaluate 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 financial resources to meet total revenue requirements.


Figures 1 and 2 illustrate the calculated 2015 Water and Wastewater Utility operating ratios, as reported by participants of the 2015 North Central Utility Rate Survey. The average 2015 value calculated was 1.37, and the median value was 1.04. The average is slightly increased from the average of 1.16 in 2014, and the median is slightly lower than the calculated value of 1.11 in 2014.

Of the systems that reported 2015 financial data, the calculated operating ratio for 57 percent of water respondents and 57 percent of wastewater respondents was greater than 1.0. This is decreased from the 2014 data when 68 percent of water and 61 percent of wastewater utilities reported an operating ratio greater than 1.0. This is in part due to the number of respondents who reported data in years 2014 and 2015. 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 reserve funds and non-rate revenue sources are utilized varies based on the philosophy established by each utility.

Figure 1 – 2015 Monthly Water Billing for 6,000 Gallons


Figure 2 – 2015 Monthly Wastewater Billing for 6,000 Gallons


Non-Capital Operating Ratios

In addition to the operating ratio, the non-capital operating ratio is another indicator used to assess the basic financial health of utilities. As the name suggests, the Non-Capital Operating Ratio does not factor a component of capital depreciation into 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. A value of 1.0 suggests only that the utility is generating sufficient revenue to cover annual operating expenses, with no recognition of depreciation or capital investment.

For respondents of the 2015 North Central Utility Rate Survey, it was found that 132 respondents provided data to illustrate water and wastewater Non-Capital Operating Ratios greater than 1.0 in 2015, with an average reported value of 1.72 and a median value of 1.27. In the absence of a review of detailed financial data, it should be noted that use 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 – 2015 Monthly Water Billing for 6,000 Gallons


Figure 4 – 2015 Monthly Wastewater Billing for 6,000 Gallons


Operating Expense and Revenues per Capita

Another trend that is commonly monitored by utilities for the purpose of benchmarking utility performance is the 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 the rate revenue values for fiscal years 2013, 2014, and 2015 as reported by survey respondents. It should be noted that the survey respondents are not necessarily the same in 2013, 2014, and 2015. Therefore, the figures represent only a general illustration of changes in the average utility operating expense and rate revenues per capita based on the available data.

Figures 5 and 6 show a trend for water that was also apparent in 2013 and 2014. On average, the per capita revenue exceeds the per capita expense. The average and median wastewater data also showed a healthy relationship, where the wastewater revenue per person exceeds the expense per person. This is not apparent in wastewater data from the previous two years. AE2S Nexus will continue to calculate this indicator and monitor the trend in future years. 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 2013-2015 Reported Operating Expense and Rate Revenue per Person


Figure 6 – Median 2013-2015 Reported Operating Expense and Rate Revenue per Person


Looking Ahead

As utilities prepare for 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 actual cost of service. It may be beneficial to monitor the utility’s financial performance indicators such as operating ratio and changes in annual expenses and revenues on a per account or per capita basis. These are just a couple of tools that can be used to evaluate performance 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.