The essential workers that run North America’s water systems are not a group that the average citizen hears about, or thinks about, too often. Which is a good thing – it means they are doing an excellent job. They are delivering safe and reliable water service so seamlessly that most forget or are unaware of the intricate network of utility staff, government, private organizations – an entire industry – operating behind the scenes.
Without easy access to clean water, we would not be able to abide by current health and sanitation standards to mitigate the spread of COVID-19. So, first, a big round of applause for all the dedicated water purveyors who are keeping our taps flowing.
In this post we’ll lay out impacts and opportunities presented by the COVID-19 pandemic. As this issue is complex and quickly evolving, the factors below are not intended to be an exhaustive list and primarily relate to the financial management of water systems. We encourage you to use these projected impacts and opportunities as a guide in navigating this crisis, as well as identifying areas of vulnerability to futureproof your utility. Feel free to leave a comment below with anything we missed.
According to the American Water Works Association’s annual State of the Water Industry report, for the past 5 years “Emergency preparedness” has only just cracked the top 10 out of 30 issues facing the water industry, and only 1/3 of water utilities rated it as “critically important”. While this was on the periphery of the industry’s radar, we can see issues like financing and replacing aging infrastructure were given higher priority attention.
As is the nature of emergencies, we cannot fully predict how or when they will happen, or what the effects will be. Now that we’ve experienced a month of this pandemic, we are better able forecast the impacts, develop mitigation strategies, and prepare for the future.
AWWA’s Top 10 Issues Facing the Water Industry 2015-2019
AWWA 2019 State of the Water Industry
Anticipated Impacts of COVID-19 for Water and Wastewater Systems
Absenteeism & Knowledge Silos
97% of public water systems are classified by the EPA as “small systems”, serving 10,000 people or fewer. Unique to these small systems is that they are often operated by multi-talented, small groups of staff who wear many hats throughout the day. From financial management to technical knowledge, these staff members possess a collection of utility-specific expertise that can make them knowledge silos and difficult to replace.
So, it is no surprise that 75% of respondents to a 2020 AWWA survey ranked “Absenteeism/Continuity of Operations” as their primary concern. If staff or their family members fall ill, utilities face challenges in maintaining operations with limited access to qualified back-up personnel.
For municipally controlled systems, there is also risk that these staff members are pulled to other emergency response efforts.
Non-Residential Water Use
As large industrial and many smaller businesses, particularly high water-use service businesses like restaurants, spas, dental offices, are forced to suspend operations, utilities will see a reduction in non-residential water use. The degree of impact to your water system will depend on the percentage of your revenue that comes from industrial, commercial and institutional customers.
If there is a drop off in construction within a community, utilities should anticipate a reduction in revenue collected through impact fees.
Residential Water Use
With widespread calls to stay at home, water utilities are seeing an increase in residential consumption. Depending on your community’s rate structure, particularly those with inclining block rate structures as usage reaches higher tiers, you may see an increase in billed revenue for the residential class.
The ability of customers to pay those bills is another matter. To date, 6.6 million people in the United States have filed for unemployment, and more than 4 million people have applied for financial assistance in Canada. While many are waiting for federal funds to flow to them, if they qualify, this combination will undoubtedly lead to affordability issues for rate payers. Consequently, utilities should anticipate a drop in residential revenue collected in the coming months. (Hint: this is what your Revenue Shortall reserves are for! More on reserves below). Affordability should also be taken into considerations when analyzing rate increases necessary to recoup these losses.
Suspending Water Shutoffs
The AWWA’s Statement of Public Policy on the Discontinuance of Water Service for Nonpayment states that “certain circumstances may require some flexibility because water service is a necessity in maintaining sanitary conditions in the home, and may be required for life‐sustaining equipment, or for other critical purposes.”
Currently, 12 US states (California, Montana, Wisconsin, Michigan, Indiana, Kentucky, Ohio, North Carolina, Maryland, New Jersey, New Hampshire and Maine) have released orders to suspend water shutoffs during this crisis. Some are also choosing to forgo late fees.
When suspending water shut off, it is important to clearly communicate to customers that you are not waiving their bill. They are simply deferring their payment until a future date.
Some utilities may also consider offering alternative payment plans (for example, a flat fee per month). Or, they may develop customer assistance programs. It is advised to consult local regulations before creating a customer assistance program, as there may be restrictions on how where funding can be pulled from.
Reduced Capital Expenditure
Most water systems are quickly looking for ways to cut costs. From this, we can anticipate a reduction or at least a deferment in capital expenditure (CAPEX). However, Bluefield Research tell us that for the water industry, effects on CAPEX from economic downturns tend to lag months to years behind other industries. This is due to longer planning cycles (your capital improvement plan, CIP) and demand inelasticity (because water is essential to life, external economic forces have little effect on total demand).
Consistent Operating Expenditure
Bluefield Research also indicates from historical recession analysis that there will be little effect of operating expenditure (OPEX). This is due to ongoing and unavoidable demands for the operation and maintenance of existing infrastructure.
However, water utilities should still explore anywhere it is at all possible to reduce OPEX. For example, energy costs are significant for water utilities. The EPA recommends energy-efficient technologies, the Alliance for Water Efficiency recommends joint water-energy efficiency programs, and Water World recommends demand response programs.
Anticipated Opportunities of COVID-19 for Water and Wastewater Systems
Finally, on to some good news! In navigating this crisis, there are many opportunities for water utilities. Spoiler alert: Waterworth is one of
Addressing Your Capital Improvement Plan
Depending on your capital reserves, this may be a good time to address backlogged work in your CIP. Your ability to do so may be contingent on access to State Revolving Funds. The Council of Infrastructure Financing Authorities has submitted several letters to congress outlining recommendations to allow easier and faster access to federal funding for water infrastructure projects immediately following this crisis.
Both American and Canadian governments are discussing infrastructure spending as key pillars of their economic stimulus packages. These programs are still taking shape so it’s best to check regularly with the respective government organizations (quick links at the bottom of this post).
It is also important to have an up-to-date financial model when applying for any grant or loan funding. This demonstrates future ability to repay debt obligations, a firm understanding of your utility’s financial health and long-term thinking. It will also add value to your short-term budget planning.
An added benefit to launching capital projects is that it will create jobs, help boost your local economy, and increase non-residential water use.
The National Rural Water Association announced that the USDA Rural Development has declared Circuit Riders to be essential workers. Circuit Riders provide invaluable financial, managerial, and technical training to small and rural communities. Contact your State Rural Water Association to access this support.
A More Open Schedule (maybe)
This is very individual to the water system and their resources, but the COVID-19 pandemic may have you working from home, perhaps with a more open calendar. If this is the case, we recommend you take care of work that you have been putting off. Consider revisiting your cash reserve policies (use our Developing Cash Reserve Policies white paper) or modeling different cash flow scenarios (see our COVID-19 Financial Impact Model offer).
Strengthen Your Network
Now is an excellent time to strengthen your network within the water industry locally and nationally. This crisis has been a great equalizer as we have all felt its affects in one way or another, and we are seeing many step up to help their neighbors. We encourage you to connect with other water systems in your region, if you haven’t already, to see what resources can be shared. Particularly when planning for backups of specialized staff, these may be the sources you turn to.
Educate Your Rate Payers and Elected Officials
The lack of value that the general public places on water service has always been a challenge for the water industry. Rate payers mostly aren’t aware that they are paying for the provision of clean, safe water from source to tap, rather than the commodity of water. Elected officials often aren’t aware of the complexities of water service delivery, the vastness of hidden infrastructure, and the high costs of infrastructure maintenance and expansion.
Let yourself be known as an essential service and don’t be afraid to speak to your hard work. This will build trust and strengthen bonds with your community. We’re happy to help you craft this messaging and you’ll find several posts on utility communication best practices in our blog.
Debt Forgiveness or Flexibility
Speak with your lenders about if they are offering principal forgiveness or flexibility in repaying your debts during this crisis.
There is much to say about reserve funds (just like we did in this webinar) but the main point is, these are the times that reserves are put aside for. You may choose to lean on your Revenue Shortfall reserve in the short-term to make up for diminishing revenues. Your Emergency Capital reserve can help you address your CIP. And your Debt Service Coverage reserve can help you cover principal and interest payments on debt owing.
If you do not have adequate cash reserves, what a great time to revisit those policies! Again, we can help with this.
If you have built a long-term financial model, say one that extends at least 25 years, you likely have a sense of the capital projects on your horizon. With both the US Federal Reserve and the Bank of Canada slashing interest rates, we recommend modeling your different borrowing options across that term. Maybe it makes sense to tackle larger projects while interest rates are low? Or perhaps you will lean on debt if a water rate increase brings affordability concerns?
COVID-19 Financial Impact Model Offer
To help water systems during this uncertain time, we are offering to help you create a free COVID-19 Financial Impact Model. This will help:
How It Works
It's simple. Just drop us a line and we'll get the ball rolling.
This offer can be used for any enterprise fund or general fund, whichever is most important for your community.
Waterworth’s mission has always been to sustain water systems and the communities that depend on them. Let us help you address immediate concerns and develop strategies to futureproof your utility. We’re here to help you guide your community through these events and emerge with greater financial security.