How Utilities in the Past have Saved Money during Economic Hardship: Similarities and Differences for COVID-19

Published for Environmental Finance on May 19, 2020.

Co-written by Erin Ansbro

Right now, water utilities are facing great uncertainty about the coming months and years. When will moratoria on water shut-offs end? When will water consumption be back to “normal”? Will utility staff get COVID-19? And the “Big One” — What will revenue loss be for utilities in the coming months and years? While answers to these questions remain unknown during these unprecedented times, guidance from the past can help utilities think through strategies that may save them money now and in the future. Here, we distill information from a previous EFC report about approaches utilities took in response to the Great Recession of 2008-2009 and discuss how the findings relate to circumstances under COVID-19 conditions.

The report, written in partnership with the Water Research Foundation, comes from ideas discussed during a two-day forum with 17 CEOs of utilities which serve between 78,000 to 19 million customers. During the forum, leaders “discussed how they acted to mitigate the recession’s impact and adapt to a changed financial and economic environment” (p. xi). Although these approaches were used by large utilities, some may be appropriate for smaller utilities. These approaches are starting points for consideration, but are NOT intended to be a specific road map or a recipe for success. In addition to the overarching themes and summary, the report lists some future research needs and then gives details on the 48 strategies implemented by the forum participants.

Highlights from the Report

  • The Recession affected utilities in a plethora of ways, and in conjunction, a wide range of strategies were implemented in response to these challenges. The report made clear that every strategy should be customized.

This is likely to be true during the COVID-19 pandemic as well—utilities will be affected in different ways by closing businesses or by delinquencies from customers who are facing financial hardships and will have a variety of strategies for dealing with difficulties. For example, a utility with a greater proportion of revenue from an industrial or institutional customer relative to their residential revenue may be either more secure or more vulnerable, based on whether that industry or institution stays open or needs to close for a time. We have also seen a wide range of responses from utilities in regards to shut-offs and billing, from suspending shut-offs to rate reductions to payment plan options. Utilities must think of their specific challenges faced to effectively respond economic hardship initiated by COVID-19.

  • The recession offered opportunities for much needed changes in business plans and service operations to improve efficiency or consider innovative solutions that didn’t seem necessary under a “business as usual” mindset. Additionally, the economic downturn offered a re-charged labor market and lower interest rates as a result of reduced demand for construction. In turn, this increased the competition of bids and drove down capital costs. Utilities that could take advantage of these opportunities benefited.

This may also be the case during the COVID-19 times as well, as every utility will need to take a hard look at the way they operate and what projects they plan to initiate or complete in the coming months.

  • Utilities with long-term plans were a bit more resilient, as CEOs could look forward to make decisions even during the downturn that would be good for the utility in the years to come, such as maintaining a good credit score and refinancing, or investing in employee training or new IT technology.

More research would need to be done to determine if this has held true in the last decade since the recession.  We do know that rating agencies look at long-term plans (See minute 41:45-43:00), and such plans can help guide a utility through rough waters.

  • Vulnerabilities became more visible in both utilities and customers. Utilities that did not have rates that sufficiently build capital for future projects were even more financially vulnerable, and customers who struggled to pay their bills normally had an even harder time during the recession.

This is true right now as well. Utilities are forced to consider revenue diversity, depth of reserves, and long-term financial health in the face of the crisis. Moratoria on shut-offs and reconnection policies have highlighted how many customers are vulnerable to shut-offs, or were already shut-off.

Strategies, Actions, and Approaches

Over 50 strategies were introduced and most of them impacted three main categories: operating expenditures, capital expenditures, or revenue.

Operating expenditures

Strategies that were aimed at cutting operating expenditures were most frequent, as well as the fastest to implement and the quickest to have an impact on the budget. These strategies were also the most flexible, as most directors and managers have authority to change these costs autonomously. The strategies included short-term investments that saved money in the long run, an increased attention to efficiency, and stop-gaps that may have reduced costs for a season but were not sustainable in the long term. Below are categories and examples of strategies.

Labor: Cutting labor costs was a common focus including salary freezes, hiring freezes, early retirement offers, and sometimes layoffs. Reductions in travel and other spending also played a part, as well as cross-training and hiring part-time and/or temporary employees. Some utilities recognized the benefit of the competitive job market and invested in hiring and training new employees.

In COVID-19 times, we see many businesses, institutions, and utilities (p. 31, question 9) that have already implemented some of these strategies to reduce expenditures. In regards to the job market, as of April 2020 the national unemployment rate was 14.7 percent, and it is likely we will see a competitive job market in the weeks or months to come. However, one difference from 2008-2009 recession is that a portion of people who are currently unemployed will be hired back to their jobs (i.e. they only needed unemployment benefits temporarily), but it remains unclear how many, and when.

Reducing energy costs: Utilities found ways to reduce energy costs such as reducing the use of electricity in operations, replacing old IT servers with virtual software, and optimizing rates for energy, such as bulk rate negotiation. This could also be an effective strategy during COVID-19 times—here’s a resource to help you get started.

Chemicals and water:  During the Recession, utilities optimized prices by re-bidding contracts or joining with other agencies’ contracts. By evaluating prices and going with the least expensive options, some utilities were able to save money.  This could also be effective now, though some utilities have cited difficulties with getting chemicals because of supply chain changes (p. 15) which might mean higher costs for chemicals.

Fleet management: Some utilities implemented anti-idling policies and removed unnecessary tools and supplies from vehicles to improve gas mileage. They also made sure the fleet was the “right size” for what was needed. During COVID-19 times, utilities may be able to save some money because of gas-saving measures and reduction of their fleet. However, some utilities may need more vehicles than normal because they implemented a “one person in a vehicle at a time” policy to reduce personnel contact.

Capital Expenditures

The Great Recession was a key time for careful examination of projects, whether they were just in the planning stages or already started. Value engineering (project evaluation by an independent team) was cited as a key strategy for saving money on projects. For some utilities with a severe revenue shortfall, projects needed to stop or be delayed. Although delaying a project in the short term may reduce expenses in the moment, it did not necessarily lead to savings in the long term.  For utilities with a strong financial foundation, the ability to speed up a project to take advantage of low interest rates or low construction prices during the recession led to savings in the long term. Below are some lessons learned:

Financing: Maintaining a good credit rating was cited as a key component to the overall financial strategy of the utility, and utilities that had solid credit ratings fared well in terms of interest rates. Many utilities needed to use their reserves. This is likely true for COVID-19 circumstances as well. Utilities may need to use even more of their reserves to make up for lost revenue during shut off moratoria, which will decrease their days cash on hand.

Communication: A strong take away from the forum was that customer support is key to maintaining a strong utility. Communication to staff, customers/community, and governing boards was essential.  “Leaders continually stressed that a utility’s ultimate success, as well as the success of many of the short-term initiatives, depended on how the community, governing board and customers viewed its services.” (p. 9). One program’s goal was “to assure that the utility is viewed throughout the community as, first and foremost, a provider of health and security.” (p. 10).

Communication is essential during COVID-19 times as well. Water utilities have gained attention because of the moratoria on water shut-offs in many states, which are often accompanied by a declaration of the importance of water to public health (e.g. Michigan’s EO 2020-28). However, it is still important that individual utilities communicate with customers about water service and any changes in billing or collection services.

Revenue

The economic downturn led to an examination of revenue sources—both current and potential. Some strategies included reducing non-revenue water, selling reclaimed water, leasing property, and providing billing or construction services to others.  “Despite the interest in innovative revenue sources, at the end of the day (literally in terms of the workshop), participants fell back on the overarching importance of traditional pricing issues in assuring the fiscal health of their enterprises before, during and after financial downturns”(p. 9). They noted that customer education is key to expressing the full cost of service.

Utilities may use some of these strategies to increase revenue from non-traditional sources during COVID-19. However, they will still need to examine their pricing structure and recognize that the long-term financial health of the utility is dependent on rate revenue.

Financial Sustainability

Approaches to financial sustainability varied widely in scope and development, with different emphases and purposes between them. Some were symbolic, such as freezing senior level salaries. This strategy didn’t make a big difference in the budget but showed comradery during a difficult time. Other approaches were stop-gap, aimed at fixing a problem right now, and were not sustainable in the long term. Still others were “silver linings” and included taking advantage of the good environment for construction projects and competitive labor market or taking the time to seriously consider business practices or consolidation possibilities.

“Some utilities noted that smaller neighboring utilities were struggling financially, and that the recession had created an atmosphere for them to consider consolidation with a larger utility. The recession provided the opening and impetus to move forward with a project that might have been good idea all along. “ (p.13 call out box) The EFC has multiple publications on consolidation and regionalization considerations that discuss different options available as well as how to craft an agreement.

Finally, the Recession forced utilities to take a thorough look at their business practices, and they found things they should have been doing differently all along. Utilities adopted innovative approaches to staffing and construction projects and initiated green projects that would save money in the long run. Leaders from utilities that had long-term, integrated business plans found it easier to navigate the difficulties and changes that the economic downturn brought because they had clear plans. Many utilities found that the Recession forced them to make improvements that were good for the long-term health of the utility.

This is true right now as well—each utility needs to take their unique needs and opportunities into account when creating approaches to this difficult time. The sustainability of these approaches should be considered, and the more a utility is able to account for the long-term needs and goals in their solutions right now, the better.

Conclusion

There were several key considerations that arose from the discussion and are detailed in the report. Most approaches are NOT universal—what may be appropriate for one utility under certain circumstances may be wildly inappropriate for another.  During the Recession and today, it is important to consider the urgency of different needs, the autonomy of the utility, the governance and ownership structure, and existing plans that can help guide decisions, in addition to the legality of different approaches and any reporting requirements of your state.

While there is great uncertainty about what the coming months will bring for water and wastewater utilities, these strategies taken during the 2008-2009 Recession offer some ideas as to how to save money during economic hardships. Although there have been, and will be, many challenges for utilities, this time also provides the opportunity to evaluate, innovate, and plan for a different future.

Elsemarie Mullins joined the EFC at UNC in 2020. In her role as Project Director, she conducts applied research and provides technical assistance and training for environmental service providers. Elsemarie completed her M.S. in Geological Sciences at UNC in 2018, and holds a B.S. from Wheaton College in Environmental Science.

Erin Ansbro is a Data Researcher at the EFC working on statewide water and wastewater rates surveys. Erin graduated from the University of Chapel Hill in May 2019 with degrees in Biology and Environmental Studies.

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Topics - Local and State Government