DEALING WITH RISKS

As discussed in the prior post, water and wastewater utilities can be exposed to several different types of risk in their operations. What measures or strategies may be available to utilities to deal with or to mitigate such risks?

* Ratemaking. It is obvious that efforts to control risks to operations likely will require expenditure of funds, and the primary source of funds generally is operating revenue produced from rates for services rendered. The adequacy of revenue to fund, for example, new infrastructure, or security measures, or new sources of supply, is dependent upon rates which recover all revenue requirements--all the costs of service.

Revenue will not be adequate if rates are not reviewed and adjusted frequently to assure that all costs are being recovered. Further, unless there is some local legal impediment that permits recovery only of operating expense , the costs of service to be recovered should include depreciation expense and/or other cost items necessary to fund reserves such as renewal and replacement reserves.

Many municipal-owned water and wastewater systems have been built initially by developer contributions of cash or plant during growth periods. Unless adequate reserves have been recovered through rates over subsequent time, such systems will face difficulty in funding replacement infrastructure when the need arises.

Depending upon the nature of a proposed expenditure to deal with a risk, a utility may be able to consider the amortization of the cost in rates over a relatively short period of tine.

* Debt. Incurring debt, typically by means of a bond issue, has been a traditional funding mechanism for municipal-owned utilities. Of course, the feasibility of this mechanism is dependent upon the sufficiency of revenues produced by rates. Payment of debt service is a cost of service. In addition to bond issues, utilities may be able to participate in low interest revolving loan programs available on the state level.

* Grants. Certain governmental agencies, such as the US Environmental Protection Agency, have given grants of funds from time to time for improvements to facilities. Of course, grant money tends to be limited.

* Joint Actions. Another possible way to mitigate risk is to engage in a joint action with one or more other entities-the notion that there is safety in numbers. For example, a municipality facing a costly upgrade of its water system could consider privatization- the sale of the system to a regulated investor-owned utility. Consolidation might result in economies of scale as well as a means to finance needed improvements. Or the municipality could enter into a public-private partnership with an investor-owned utility, whereby the town might retain ownership of the system, which would be upgraded and managed by the investor-owned utility.

A water system needing to upgrade its treatment facilities may find a better alternative in purchasing water from a wholesale joint action agency or a neighboring utility with available surplus capacity. In the same way, a wastewater utility may find it more efficient to deliver its wastewater to a larger regional treatment facility than to maintain its own plant.

WATER AND WASTEWATER UTILITIES CAN FACE MANY RISKS

Many assume that water utilities and wastewater utilities are relatively risk free operations. After all, in the case of water, one installs a pipe in the ground or into a water body to collect some water, then somehow makes the water collected "pure", and furnishes it to customers in pipes, all of which is generally hidden from public view. The same is true for waste water-- when a toilet is flushed, that is the end of the matter. In actuality, however, water and wastewater utilities can be exposed to many challenging risks in their operations. Here are some examples:

* Aging Infrastructure. Utilities, particularly those in operation for some time, must deal with infrastructure that may be beyond its useful service life and requires repair, replacement and upgrade. Infrastructure work obviously is capital intensive and strains funding options for utilities as well as service reliability.

* Diminishing Sources Of Water Supply. As is evident in several areas of the United States, water utilities are experiencing reduced sources of supply, due to drought, excessive withdrawal of ground water or population exceeding available water sources. Hunting for more water or rationing water delivered to customers can be frustrating.

* More Restrictive Regulations. Compliance with governmental regulations is a constantly moving target for utilities. Moreover, compliance issues tend to impose the need for infrastructure and operational enhancements, necessitating increases in capital funding and revenue requirements, and resulting in unwelcome rate increases or revenue shortfalls.

* Contamination of Source Water. Recent examples of source water pollution include upstream industrial chemical spill and algae. While a water utility may not have caused a contamination, it faces the burden to provide safe water, which means it generally has to deal with the consequences of upstream contamination of its source water, no matter what.

* Leaks. Unaccounted water can be a real headache for utilities, particularly in areas where water supplies are limited. Finding leaking mains is not an easy task, but must be done.

* Main Breaks. Nothing is more troublesome than a main break that floods a street or nearby basements, particularly if it happens in the middle of winter.

* Vulnerability. In today's world, utilities face the risk of terrorism and vandalism. Security measures can be expensive and imperfect, but are necessary.

* Finished Water Quality. If a contaminant required to be removed is not removed in the treatment process, water and wastewater utilities become exposed for any adverse effects on customers or receiving streams, as the case may be.

* Conservation. Using less water may be meritorious. However, for water utilities, conservation can translate into revenue reductions and idle capacity, which in turn can translate into rate increases to customers for using less water--a public relations headache.

* Waste water Issues. Wastewater utilities face many of the risks encountered by water utilities, and have a few more of their own. For example, inflow and infiltration of storm water can cause sewer backups into homes and the need for excess flow bypasses of a treatment facility. Flushing into the wastewater system of certain products can interfere with biological treatment processes or be beyond treatment capabilities, such as the case of certain medications.

In my next posting, I will discuss how water and wastewater utilities may be dealing with the risks they may face.

A HARVEST OF FRUSTRATION

The year has passed quickly, from a mean-spirited Winter to a Spring that was an extension of Winter to a Summer that was a Spring, and now to Autumn. I watch my lawn disappear under a blanket of discarded leaves falling as a gentle rain of from tired limbs. Today, I came across a poem by Robert Frost, fitting for the season, called "Gathering Leaves":

Spades take up leaves
No better than spoons,
And bags full of leaves
Are light as balloons.

I make a great noise
of rustling all day
Like rabbit and deer
Running away.

But the mountains I raise
Elude my embrace,
Flowing over my arms
And into my face.

I may load and unload
Again and again
Till I fill the whole shed,
And what have I then?

Next to nothing for weight;
And since they grew duller
From contact with earth,
Next to nothing for color.

Next nothing for use,
But a crop is a crop,
And who's to say where
The harvest shall stop.

What does this have to do with water and wastewater utilities? Substitute "regulations" for "leaves".