Water Research Foundation’s ( WRF) Defining a Resilient Business
Model for Water Utilities (project #4366) was undertaken to
help utilities address the challenges of revenue gaps. These
can be exacerbated by rising customer expectations, declining
water consumption, aging infrastructure, and the necessary
integration of utility finance functions with asset management, environmental justice, risk management, and other
initiatives. This project will lay the groundwork for a shift in
thinking by utilities to modernize financial and management practices. Jeff Hughes, Director of the Environmental
Finance Center at the University of North Carolina at Chapel
Hill, served as principal investigator for the project.
Water Research Foundation: What is unique about
Jeff Hughes: The greatest contribution of this report is
the “deep dive” into the revenue side of the utility business model and the identification of creative options that
may exist to help utilities address revenue concerns.
Historically, many utility financial studies focused on the cost
side (aging infrastructure, tighter regulations, etc.). This is interesting because many other industries focus their analyses on
revenue as much, if not more than, on costs. We intentionally
focused on the revenue side of the water industry’s financial
picture. We wanted quantitative results to determine where revenues were going and by how much. What we found was that, for
the aggregate industry overall, revenues are not actually decreasing, but the rate of increase has been slowing down.
You had 29 utilities participate in the study. While
there are bound to be different financial realities
with each, what common challenges did you find
among the group?
One of the striking things we saw was the huge diversity
in what was actually happening on the ground. Working
with the 29 utilities reinforced the obvious truth that utility
experiences can be very different and generalizing problems
or solutions is ill-advised. However, in general, decreasing
demands is prevalent for most utilities. In fact, it was hard to
find a utility that did not have at least some concerns that its
volumetric sales were not perform-
ing as predicted. Another common
trend was a concern about the
ability to adjust rates as needed.
As a trend, are more water
utilities experiencing revenue
fluctuations than, say, 10-20
years ago? What is the cause
for these gaps?
We found it varies quite a bit
from year to year and from one
region to the next. In general,
though, we found greater revenue
fluctuations in the early to mid-2000s than in more recent
years. The overall decline in revenue growth started in 2008
and lasted until 2011. Up until 2007 revenue figures and
revenue growth for the industry as a whole were quite positive. Likewise, revenues since 2011 have started to improve.
Why the change after 2011? Is this weather related?
There are a lot of factors at play. Weather certainly can be a factor. However, there are a number of other drivers explored in
this report. First off, many utilities seem to have readjusted their
usage projections to take into consideration current trends
rather than older historic trends of steady demand increases.
And then there is the fact that water utility revenues, in large
part, reflect the economic conditions in the country. When economic activity was down, as it was during the Great Recession
of 2008-2011, water utility revenues slowed down a great deal.
What are some of the innovative ways utilities
are identifying and reducing risks associated with
The risk of revenue variability is different for different utilities.
For some utilities we found their primary objective was to stabilize revenues, and many have adjusted their pricing structure
so that a larger portion of their revenue stream is independent
of the volume they sell. Others had different objectives with different resulting strategies. For example, some had water supply
Q&A with Jeff Hughes
Director of the Environmental Finance Center
University of North Carolina at Chapel Hill
Helping Utilities Address Revenue Gap Challenges