Guiding utilities on their path to success
Since our founding, RFC’s focus has been on providing utilities with the financial, rate, management, and operational expertise needed to maintain financial sustainability while providing high quality services to their customers. The challenging environment of economic uncertainty, resource scarcity, and increasing public involvement has made it critical for a utility to have the requisite resources available. RFC provides utilities with the tools and expertise to overcome these challenges and meet their goals. While we continue to maintain our focus on the financial and management aspects of water industry utilities, we are constantly evolving our service offerings to provide our clients with the innovative approaches necessary to navigate the ever-changing landscape of the utility industry.
Financial and Rate Consulting
A utility must maintain rates that generate sufficient revenue, while also meeting its pricing objectives, such as equitably distributing costs to its customers. RFC provides many different financial and rate consulting services to help utilities meet their goals while maintaining a financially sustainable organization. RFC has provided financial and rate assistance to hundreds of utilities, from some of the largest, most complex utilities in the country to small towns with only a few thousand customers. Through this experience, we are able to see our clients’ issues from different perspectives and to provide them with innovative, value-added solutions.
Affordability Analysis and Program Development
Affordability is a growing concern in the water industry. Water and wastewater rates consistently increase at rates that exceed inflation and wage growth. Regulatory compliance, cost increases, and deteriorating system infrastructure will continue to compound affordability issues. RFC is an industry leader in the area of assessing affordability concerns and implementing comprehensive solutions. We have worked with many municipal utilities to gauge the impact of ever-increasing water and wastewater rates on different socio-economic components within the larger customer base. Utilities have used this information to determine the extent of their affordability problems and communicate those problems to utility rate-setting officials and the community as a whole.
RFC has also assisted several utilities in developing and implementing affordability programs that address critical needs within the community and minimize administrative and cost impacts to the utility. We have helped utilities balance the subsidy given to economically disadvantaged customers against the cost recovery burden placed on the remaining customer base. In addition, we have researched ways to leverage existing community resources to minimize program administrative burdens.
Debt Issuance Support
As the need for capital projects continues, including repair and replacement of aging infrastructure and new assets, more utilities are leveraging their available funds through the issuance of tax-exempt revenue bonds or other types of debt financing. These funding sources are often a better alternative than funding capital improvements with rates, and can dramatically decrease the rate volatility that often accompanies pay-as-you-go funding. However, in order to fully realize the benefits of debt financing, the utility must take steps to reduce its cost of borrowing.
Through the preparation of a Financial Feasibility Report that is included in the Official Statement prepared to help market and sell the bonds, RFC helps our clients demonstrate to potential investors and rating agencies the relatively low level of risk that is associated with their borrowing, thereby reducing the utility’s cost of borrowing. Rating agencies, investors, and underwriters are familiar with RFC’s reports, providing them with a degree of comfort regarding the information provided in the report. Another benefit of having RFC serve on the financing team is that we can help translate different financing options into potential rate and customer impacts allowing the utility to understand the long-term ramifications of the debt issuance. Additionally, RFC has participated in many meetings with rating agencies or state agencies that regulate the issuance of municipal debt to demonstrate the viability of the financial forecast prepared for the issuance.
Due to the nature of the utility industry, it is not uncommon for disputes to arise between utilities and contract customers, regulatory agencies, or others involving financial and management issues. Resolution of such disputes typically involves mediation, arbitration, and/or judicial action. Regardless of the dispute resolution process, parties involved in these matters often find that it is in their best interest to retain an expert firm to analyze and render opinions regarding the issues surrounding the dispute and, if necessary, provide expert witness services. Much like good legal counsel, a well-respected, skilled, and experienced expert witness can be fundamental to the successful resolution of a dispute. RFC’s consultants have the experience, knowledge, and industry visibility to effectively provide these services.
Financial and Capital Improvements Planning
Today’s utility managers are faced with increasingly complex challenges. Their concerns involve funding improvements of aging infrastructure and addressing increasingly stringent environmental regulations under a backdrop of declining per capita consumption. RFC’s financial and capital planning services help utilities understand these challenges so that they are ultimately able to meet them. In today’s environment, a utility needs to have a multi-year financial plan that integrates capital improvement financing. RFC has prepared 5- and 10-year plans (and even up to 100-year plans) for hundreds of utilities across the country. We tailor each plan to meet the specific needs of the utility.
Impact fees (also known as system development fees, capital recovery charges, or capital fees) are traditionally assessed to new development to recover the value of system capacity constructed for new customer service. Impact fees have significant economic and social impacts that must be considered in addition to the fair allocation of costs between the existing and future new users of the system. Impact fees are typically imposed for a variety of infrastructure including water utilities (potable water, wastewater, and reuse water) and non-utilities (police, fire, recreation, roads, and other services).
RFC has assisted numerous clients across the country in determining cost-justified impact fees that are consistent with both industry practices and state enabling legislation. Our approach to determining impact fees includes identifying the objectives of the client and calculating fees to address as many of those objectives as possible based on approaches recognized by both the American Water Works Association (AWWA) and the Water Environmental Federation (WEF). In general, two approaches are most often used and recognized in the utility industry as cost-justified and legally defensible. These two approaches are the system buy-in method and the incremental cost method. Under the system buy-in method, impact fees are based upon the “buy-in” concept that existing users, through service charges and other up-front charges, have developed a valuable public capital facility. This method calculates the impact fee based upon the proportional cost of each user’s share of the existing system capacity available for new customers. The incremental cost method focuses on the cost of adding additional facilities to serve new customers that can be tied to an approved capital improvements plan (CIP), infrastructure improvements plan (IIP), or master plan.
Due to the controversial nature of impact fees and the potential for legal challenges, the process of implementing impact fees should always consider state enabling statutes. Understanding local development fee legislation is becoming increasingly more important due to recent economic trends and developer attitudes towards development fees. Our experience and continued assistance in determining impact fees for clients throughout the country provides RFC with a strong understanding of many of the recent revisions to state development fee legislation. In addition to determining impact fees, RFC also helps to implement impact fees including assisting with public outreach and external stakeholder education and involvement.
Rate Case Support
RFC has assisted many client utilities through the process of rate case filings, including preparing briefs, exhibits, and testimony based on our cost of service and rate design work. Our staff has decades of experience providing expert testimony on behalf of clients seeking water and wastewater rate increases. RFC’s rate case support clients benefit from our ability to explain complex cost of service methodologies in an effective manner. One of the key elements of this explanation is a model that identifies the assumptions used in the filing and shows the calculations. Having a model allows the utility the opportunity to conduct sensitivity analyses prior to the filing and to efficiently determine the impact of any suggested or required changes.
Rate studies are the core of RFC’s financial services. The goal of these studies is to develop rates and charges that best meet a utility’s goals and objectives while recovering costs equitably from different customer classes. RFC has conducted numerous studies ranging in complexity from comprehensive cost of service studies to revenue sufficiency studies. The tasks within a rate study vary depending on its focus and typically include:
RFC works collaboratively with clients to develop pricing objectives that help to guide the utility in determining an appropriate rate structure to meet its goals and objectives. During a pricing objectives workshop, RFC facilitates a discussion of common pricing objectives and a prioritization of the most important objectives. Some typical pricing objectives include: affordability, conservation/demand management, cost of service-based allocations, economic development, revenue stability, and ease of implementation.
Once the utility's pricing objectives have been prioritized, RFC works with the utility to develop rate structure conceptual designs that address as many of the utility’s objectives as possible. Typically, several alternative rate conceptual designs will be considered and evaluated to determine the most effective rate structure in addressing the utility’s pricing objectives.
One of the primary tools a utility has to help it meet its pricing objectives is its rate structure. RFC is knowledgeable about a wide variety of rate structures employed by utilities across the country. Through conducting hundreds of rate study projects, for utilities both large and small, RFC has developed many different basic and innovative rate structures based on the specific needs and preferences of each utility and its customers and stakeholders including: declining block rates, uniform rates, increasing block rates, lifeline rates, seasonal rates, individualized rates, and water budget rates, among others. In addition, rate structure data is collected as part of the biennial AWWA/RFC Water and Wastewater Rate Survey, allowing us to gain further insight into the different rate structures being employed across the country. Therefore, RFC has the expertise and experience to assist a utility in determining the rate structure that best meets its pricing objectives.
In order to calculate rates, it is necessary to understand the costs of the utility that must be recovered from customers (the revenue requirements) and the units from which these costs must be recovered (the number of accounts and amount of billable units). The revenue requirements are typically the sum of: 1) the O&M expenses; 2) the capital costs (debt service and rate-funded capital); and, 3) any transfers to reserves or other funds. A utility’s billing records provide the number of customers and the amount of billable units (the consumption). However, the number of billable units may fluctuate from year to year due to weather or economic conditions, so it is important to understand the potential variability of demand.
To ensure appropriate recovery of costs from different user classes, many of our rate studies involve a review of existing customer classifications to ensure appropriateness, a review and analysis of historical customer class usage characteristics and peaking characteristics of different classes, and an allocation of costs to customer classifications. Our water cost of service allocations are typically based on either the Base-Extra Demand approach or the Commodity Demand approach and are performed consistent with American Water Works Association (AWWA) standards. Our wastewater cost of service allocations consider capacity-related costs, commodity costs, high-strength waste treatment costs, customer costs, and other direct and indirect costs. Our wastewater cost of service analyses are performed to be consistent with Water Environment Federation (WEF) pricing standards and industry practices.
RFC’s models are tools that calculate utility rates and allow our clients to conduct ongoing financial planning and sensitivity analyses. RFC has developed some of the most sophisticated yet user-friendly financial/rate models available in the industry. Our models are custom-built on a client-by-client basis and are non-proprietary, ensuring that our models fit the specific needs and objectives of each of our clients. RFC’s models are tools that allow us to examine different policy options and the financial/customer impacts in real time. The models are developed with the expectation that they will be used by the client as a financial planning tool long after the project is complete.
RFC uses forecasted customer demands and annual revenue requirements to calculate and project user rates and charges. We create rate projections to ensure that all covenant requirements and other financial metrics are met evaluating annual customer impacts to avoid rate shock, or substantial rate increases in a given year that may result in an unnecessary financial burden on the rate payer.
In order to codify recommended rates and fees, municipal utilities are often required to prepare ordinances that outline the rates and fees. In addition to identifying the amount of the rates and fees, these ordinances provide some context for the application of the rates and fees. It is important that the ordinance is well-crafted, as a confusing or misleading ordinance can lead to legal exposure for the utility. RFC’s experience ensures all concerns will be considered in developing rate and fee ordinances.
It is important to document and present the results and recommendations of a rate study in a clear and concise manner. RFC prepares a report that summarizes the study and the results. This report provides the utility with a record of the study and can be used for future reference. RFC also typically presents the results of the study to the utility’s governing board. RFC is very adept at preparing and presenting persuasive summaries of the study and the recommendations to help get proposed rates successfully adopted. Our experience has allowed us to develop an approach that effectively communicates with elected officials about the financial consequences and rationale behind recommended rates to ensure stakeholder buy-in and successful rate adoption. This includes developing a “message” regarding the changes in the proposed utility rates that is politically acceptable, and conveying that message in an easy-to–understand manner.
If recommended rates aren’t approved and implemented, then a rate study is unlikely to be a success. In an effort to increase the likelihood of gaining approval of recommended rates, RFC has assisted utilities with many elements of public outreach and education. RFC has vast experience in facilitating varying degrees of stakeholder/customer input at various stages throughout the rate implementation process to ensure that stakeholders are aware of the utilities rate-setting objectives and financial challenges. This stakeholder education and input can prove extremely beneficial in gaining acceptance of rate increases.
There are a variety of components that can be included in water, wastewater, and stormwater rate and cost of service studies depending on the needs of the utility. These components can be performed as stand-alone projects or as part of a rate study. Some of the components that RFC specializes in include:
- High-strength surcharge analyses
- Industrial waste surcharges analyses
- Outside-city differential analyses
- Wholesale rate analyses
RFC has pioneered the use of risk analysis in utility rate setting and financial planning and can also incorporate risk analysis into cost of service and rate models. There are key variables in the rate-setting process that have a tremendous impact on utility revenue and thus on rate setting. RFC’s risk analysis process helps utilities understand these risks and their organizational risk tolerance. Different utilities have different risk tolerances depending upon the circumstances of the utility and the customer base that it serves. RFC is skilled in working with utilities to define their risk profile. This risk profile can then be used to develop a description of the possible behavior of the key variables that drive consumption, such as climate and population growth. Using a sophisticated risk analysis process, RFC can then analyze the impact that fluctuations in these variables have on the utility’s revenue, coverage covenants, and overall financial position. We can then use this information to develop rates that are consistent with the utility’s unique risk profile.
Stormwater Utility Development
As a perfect complement to our long history of service to water and wastewater utilities, RFC’s staff are unparalleled in the development and implementation of stormwater utilities. Many local governments are faced with funding ongoing infrastructure maintenance and rehabilitation needs and meeting increasingly stringent water quality requirements. In a time of strained resources nationwide, RFC works in all aspects of funding strategy development to help ensure our clients’ ability to serve their customers over the long term. Our services range from setting up new utilities and fees, to modifying existing rate structures to better reflect utilities’ cost drivers, to assisting local governments with integrating bond funding into long-term plans and bond sales. One of our particular strengths is in the development of processes and software to enable stormwater billing on legacy utility and tax billing systems. In addition to our strong financial, policy and data analysis skills, we specialize in assisting our clients with their customer and public relationships during utility development, implementation, and post-go live periods with our expertise in public outreach, stakeholder facilitation, and customer service provision.
Now more than ever, utilities are benefiting from thoughtful examination and assessment of their organizations to drive enhanced performance. Faced with the need for revenue increases and cost-reduction pressures, today’s utilities must demonstrate to their customers and stakeholders that they have a plan for long-term sustainability and that they are operating with maximum efficiency and effectiveness. They must address a myriad of issues including aging infrastructure, regulatory compliance, environmental sustainability, management of internal change, and communication with customers and other stakeholders. From strategic planning to data management, RFC provides a variety of services to help optimize and enhance utility performance.
- Customer Relationship Management
- Custom Software and Tool Development
- Data Services
- Organizational Optimization
- Performance Management and Benchmarking
- Project/Program Procurement Assistance
- Public/Stakeholder Education, Outreach, and Facilitation
- Stormwater Program Development Support
- Strategic Business Planning
- Water/Wastewater Utility Valuation
Customer Relationship Management
As part of a new utility set up, and particularly for new stormwater utilities, RFC offers our clients a focus on, and experience with, managing customer relations. In addition to public education and outreach, with which we assist clients during utility implementation, we work with clients to ensure that when their phones start ringing after a policy change or new fee implementation, they are ready to respond. RFC assesses customer service response and infrastructure capacity and helps clients plan for adequate resource allocation. RFC develops processes for customer service response, builds information infrastructure to allow for customer account maintenance in billing and finance databases, and develops tools for customer service response. In the case of stormwater customer service, RFC helps clients decide upon the proper division of responsibility for researching and responding to complex billing questions between frontline customer service representatives and technical staff. Frequently, RFC conducts customer service representative training, both on subject matter content (i.e., what is stormwater and how do we explain it to a customer?) and on the use and functionality of new systems or tools. As needed, RFC provides on-site assistance during the crucial initial go-live of a new fee, billing system, or customer service toolset.
Custom Software and Tool Development
Custom software and tools empower our clients to interact with their data and customers in an accessible way. RFC application development staff have designed and implemented customer service applications, billing websites, GIS applications, iPhone apps, and more to help support client needs. Custom software and tools help the user to be more efficient during their daily work, have greater access to the data that matters to them, and have greater connectivity with their stakeholders and customers. RFC staff are able to combine their in-depth knowledge of utilities and municipal governments with strong technological skills to foster communication and decision making.
Databases are the digital warehouses that store billing information used when billing utility customers. RFC has in-house database specialists who can design, develop, modify, and mine the most commonly used billing databases (such as those based on the Oracle or SQL Server platforms), and RFC’s database administrators are knowledgeable in billing system design and data interoperation standards. Our staff have designed and manipulated systems ranging in size from those that support annual bills for 10,000 customers all the way up to monthly bills for 500,000+ customers.
RFC’s designers are able to translate billing, customer service, and auditing needs into database designs and finished products. Databases designed by RFC include documentation with easy to understand entity relationship (ER) diagrams and detailed data standards appropriate for IT support staff. Data analysts are familiar with common trends in utility billing and are able to identify and fix inconsistencies with ease. RFC staff are also able to design database maintenance plans to ensure that billing and customer service systems can rely on high quality data into the future.
In addition, RFC staff have assisted a wide range of clients with tying together GIS, legacy billing, customer service, and web systems to allow for the optimal flow and feedback of source and derived data. In a time when many legacy billing systems are in dire need of upgrade, RFC can provide the expert assistance necessary to coordinate the systems that support operations.
Successful 21st century public utility organizations must embrace the need to continuously enhance organizational effectiveness and efficiency. RFC’s clients are utilities, both newly implemented and decades (or centuries) old. Each faces pressures, from resource constraints to aging leadership, that drive organizational change. RFC excels in the diverse skill sets needed to assist clients in envisioning, implementing, and managing organizational change.
Each client is different, but typically our utility optimization approach follows these four steps to guide utilities to enhanced effectiveness and efficiency.
- ENGAGE the organization to understand the organizational structure, culture, and employee and stakeholder perceptions of the functional business area being examined, and any initiatives currently in progress.
- ASSESS current conditions, practices, procedures, roles and responsibilities, coordination and collaboration, policies, technology, and organizational approaches used to manage the functional business area under review.
- COMPARE the current approach and performance of the functional area with those of others to identify differences in approach and performance for consideration as potential enhancement/optimization opportunities.
- ENHANCE current approaches and resulting performance (optimization) by developing implementation steps to elevate functional area efficiency and/or effectiveness.
RFC also provides business process analysis and improvement services to address the evaluation, analysis, optimization, and development of key business processes that drive each organization’s effectiveness. Development and delivery of business process and workflow models are used to support decision making and drive enhanced efficiency in utility organizations. A typical process would include: working with management and key stakeholders to assess goals and drivers for analysis and improvement; development of a framework for information gathering and assessment; detailed interviews with staff performing current processes; independent assessment of data sources, systems, and resource levels and needs for current and envisioned processes; detailed documentation, analysis, and solution generation; working with utility staff to envision and codify changes to processes and new processes; and producing information management solutions to support business effectiveness.
RFC’s strengths in organizational analysis and information management are brought together to help utility organizations improve services and boost efficiency.
Performance Management and Benchmarking
Many utilities have found that comparing their performance with respect to key criteria to the performance of other similar utilities is a productive way of identifying opportunities for improvement. This process has become an important tool for utilities to optimize operations and financial planning.
Since 1996, RFC has conducted the biennial national Water and Wastewater Rate Survey, which has been co-published with AWWA since 2004. This survey is the most comprehensive survey of water and wastewater rates and charges and utility financial characteristics available, and provides an excellent starting point for a financial/rate benchmarking analysis. In addition, RFC has hundreds of water and wastewater utility contacts that are accessible for providing additional information of a more targeted nature, if needed. RFC has conducted specific benchmarking analyses to help utilities understand their operating expense, operating revenue, and debt service ratios.
Through our experience working with a wide variety of utilities across the country, we can also conduct benchmarking analysis that provides insights into business process improvements. RFC provides clients with assistance in building key business unit performance measurement and management systems, and assisting clients in the development of a utility performance measures framework that supports their business intelligence solutions.
Project/Program Procurement Assistance
As utilities strive to provide the most efficient service to their customers, many consider the use of alternative project and service delivery methods that involve partnering with private entities. Whether in the form of outsourcing discrete functions or in a full design-build-operate contract for a new facility, numerous utilities have found that public-private partnerships offer a cost-effective solution. However, enlisting the assistance of the private-sector requires thoughtful consideration and careful implementation. For these relationships to be successful, it must first be determined whether the private-sector participation is a feasible means of addressing a utility’s specific needs. Then, the utility must determine which of the numerous potential private partners is able to offer the greatest total value and enter into a mutually beneficial relationship with the selected partner. RFC helps utilities evaluate the potential benefits of entering into public-private partnerships, and, if a utility decides that working with a private-sector partner is in its best interest, RFC can assist with the selection of the partner and structuring a relationship that will maximize the benefits to the utility.
Public/Stakeholder Education, Outreach, and Facilitation
Many RFC engagements involve assisting our clients with the implementation of changes in policy that affect customers’ daily lives and their wallets. Public policymaking benefits from collecting and considering diverse opinions and from consensus building. Solution strategies to public policy issues that are built upon collaborative decision making can be more comprehensive in scope and enjoy broader public support than ones developed under a closed-government model.
RFC assists our clients with planning their approach to informing and educating their customers and then helping to carry out those plans. We have developed and implemented a broad range of stakeholder input processes, some featuring internal organizational stakeholders only and others including external, community stakeholders. RFC provides a variety of services to support outreach efforts including: assistance with messaging; planning and facilitating stakeholder meetings; developing outreach materials such as brochures and factsheets; hosting and developing web presence; and, producing social media content.
Stormwater Program Development Support
A crucial component of cost of service development leading to a stormwater utility is defining exactly which historic activities and which future activities will make up the stormwater program. Unlike some other government activities such as wastewater treatment or police response, stormwater services are frequently provided in a distributed manner by diverse departments. RFC has used a variety of approaches to help clients define these services for cost and stormwater entity development. In addition, RFC provides regulatory compliance support to clients including supporting interaction with regulators, developing permit-based programs and activity timelines, and performing compliance activities such as public involvement and outreach activities.
Strategic Business Planning
RFC assists clients in developing strategic plans to guide policy and operational decision making. Our strategic planning program utilizes a series of interviews, focus groups, workshops, Board retreats, and facilitated meetings to drive the planning process and to develop relevant goals and objectives.
With the emergence of Effective Utility Management (EUM), we have developed a unique strategic planning program which encompasses EUM’s 10 Attributes of Effectively Managed Utilities and the 5 Keys to Management Success. Our approach allows clients to update existing strategic plans or develop new strategic plans around the EUM framework.
Water/Wastewater Utility Valuation
RFC has provided a wide range of valuation services to meet the needs of all types of buyers and sellers in the water and wastewater marketplace. RFC’s extensive experience and leadership in the water and wastewater utility industry gives us a key advantage over other specialists and appraisers. Furthermore, RFC’s objectivity and consistency in approach has provided confidence as to the reliability and objective nature of its results. RFC staff holds a unique set of experience, skills, and education vital to utility appraisal. Our staff includes Registered Professional Engineers (PE) and Certified Public Accountants (CPA), and we also have relationships with Certified Business Appraisers (CBA).
RFC has assisted public entities throughout the United States with valuation issues, and has performed more than 30 utility valuation analyses. The majority of these engagements included an assessment of the fair market value of the subject asset(s) and a financial feasibility analysis to estimate customer rate impacts and the long-term economic impact associated with acquisition or divestiture of utility assets. Overall, RFC has provided a variety of valuation services in the water and wastewater industry including the following:
Fair Market Value Appraisals
RFC utilizes the income, market, and/or asset approaches to value utility assets based on an arm’s length exchange between willing buyers and sellers in the marketplace. This service can involve more detailed, formal appraisals or high-level, preliminary valuation analyses. The subject of the appraisals can include physical infrastructure assets, appraisals of utility business as a going concern, or valuation of “intangible” utility assets, such as water rights or capacity rights in a system.
Investment Value (Feasibility) Analysis
In this type of analysis, RFC determines the “value” of a set of utility assets to specific buyers or sellers. These analyses typically include the feasibility of buying a utility at a range of purchase prices. “Value” in this sense is typically defined by the client and can include the consideration of potential loss/gain in revenues, ability to pay for a system, specific rate impacts on customers, etc.
In some instances, utilities feel it may be in their best interest to consolidate their operations through acquisition or regionalization. RFC provides a variety of acquisition/regionalization assistance including: consultation regarding potential political, public relations, and resource impacts; assessment of acquisition costs; assistance with negotiations; development and evaluation of various financing and repayment options; due diligence review of financials; operations procurement; and rate setting.
RFC has experience working with legal counsel to provide litigation services in support of our appraisal determination, and we have also provided expert witness testimony involving our appraisal work or other valuation matters.
RFC can review and critique valuation analyses and/or appraisals performed by other appraisers, which is particularly important when two parties require an independent, third-party to review the appraised value of a utility.