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.