Long Term Financial Planning
Financial planning incorporates numerous considerations, including projecting revenues and forecasting expected costs using various inflationary adjustments. Utilities also need to account for changes in water / flow demand driven by variations in weather, water availability, State mandates, growth, and economic factors. In addition, system reinvestment, reserves, and debt compliance all influence the revenues needed in future years. With these various components that are dynamically changing, a sound long-term financial plan is a critical asset to ensure a strong financial outlook and prudent planning.
Cost of Service Analysis
The cost of service analysis for setting rates is one of the most critical components of any rate study and requires a comprehensive understanding of Proposition 218, emerging State mandates and ensuring a strong nexus is established between costs incurred and adopted rates. Agencies should update it’s cost of service at least once every five years as usage patterns change over time and the financial obligation between customer classes may require a recalibration. Using industry best practices will maintain a strong connection between actual costs and rates as well as minimize any unnecessary rate shock from usage patterns not being updated over a considerable time period between updates.
Utility Rate Development
Designing utility rates for an agency should compliment strategic objectives while complying with Sate regulations. Utility rates are a tool that may be used by an agency to provide constant signaling to its customers with how water should be used, what costs are included through each component of the rates, and what other financial metrics or system reinvestments are achieved through rate adoption. Rates are unique to each agency and should be structured to achieve short-term and long-term strategic initiatives. As such, it’s common practice to develop multiple rate alternatives for an agency to consider while providing clear direction on how each alternative may vary from one another and how they connect to meeting key objectives.
Capacity Fees
Ensuring “growth pays for growth” is a common practice through the industry and the nation when it comes to new development contributing its fair share to existing facilities that they will benefit from and paying for new facilities that are necessary for new development to occur. There are various methodologies that may be utilized for updating capacity fees that include consideration of existing assets and funding new improvements outlined in a Master Plan. Capacity fees are not governed by Proposition 218, but must follow similar cost of service principles to comply with state statutes and meet the exemption criteria of Proposition 26 to not be considered a tax.
Fiscal Impact Analysis
Agencies commonly have unique situations that arise requiring specific analytical analysis to determine the financial impact that will be incurred initially as well as long-term implications. These occurrences require a fiscal impact analysis to model how new emerging conditions may either generate a positive net impact or negative net impact. Some examples include moving to a new water supply, annexation territory, acquiring facilities or adding new services that may require a new dedicated revenue stream.