14.1: Managing With Numbers


Every water utility has a management staff that directs, plans, organizes, coordinates, and communicates the direction of the organization. But, what does this mean? It means that managers do a variety of functions that sometimes go unnoticed and at times can be difficult to measure. However, one important function of utility managers is financial planning. Managers are responsible for preparing budgets, working on water rate structures, and calculating efficiencies within the organization.

Budgets

How much money does a utility need to perform the routine, preventative, and corrective action maintenance items? How much money is needed to operate the utility? How much needs to be spent on Capital Improvement Projects? Does the utility have any debt to pay off? How much are salaries, benefits, etc., etc., etc.? These are some of the main items that managers look at when determining budgets. Many times budgets are not only prepared for the upcoming year. Frequently utilities will look 5, 10, even 20 years into the future for budgetary analysis. Let’s define some of these budget items.

Operations and Maintenance (O&M)

These two items typically go hand and hand. There are certain costs that the utility must cover and must properly budget for in order to keep the water flowing. Chemical costs for treating water, repairs on vehicles and mechanical equipment, power costs to pump water, leak repairs, and labor are just a few of the items that fall under this budgetary classification. Some are known, such as labor (salaries), as long as overtime isn’t too large. Others are predictable, such as power and chemicals. Based on historical water production, power and chemicals can be predicted within a reasonable amount of accuracy. Others, like water main breaks can be estimated based on history, but other factors come into play such as age, material, location, pressures, etc. Regardless of the predictability of O&M costs, managers must come up with an accurate budget number and then make sure that number is covered with revenue.

Capital Improvement Projects (CIP)

In addition to the reoccurring O&M costs, utilities need to plan and budget for future growth and the replacement of old infrastructures, such as pipelines and storage structures. Depending on the age of the utility and the expected future growth, CIP investment can be quite extensive. Typically, utilities can recover the costs of new infrastructure from the developers that are planning to build within the utilities service area. However, as infrastructure ages, it eventually needs to be replaced. The timing and funding of these replacements is an important part of a manager’s responsibility.

Debt

More times than not, utilities will take on large amounts of debt to cover major capital improvement projects. Debt is used by utilities as a way to keep water rates lower. If a utility were to cover the cost of replacing major infrastructure projects through rates, the water rate could be too high for many people to pay. With a proper debt structure, the utility can spread out the costs over many years to help keep rates lower.

Revenues and Rates

In order for water utilities to pay for all their expenses (i.e., pumping, chemicals, material, salaries, benefits, etc.) they need to collect enough money. This is known as Revenue Requirements. A utility must identify all revenue requirements and then identify the means for collecting this revenue. Utilities can have different revenue sources such as property taxes, rents, leases, etc. However, most water utility revenues are collected through the sale of water. The cost of water is determined through a Rate Study. A rate study is a report that lists the revenue requirements and then calculates how much the rate of water needs to be to collect these requirements. Water rates can be set in a variety of different structures (flat rate, single quantity rate, tiered rate, etc.), but regardless of the structure, the utility must sell water at the calculated rate to recover the needed revenue.

Efficiencies

As part of the budgetary process, managers need to identify if and when certain pieces of equipment will fail. Calculating the return on investment and identifying when the cost of maintenance exceeds the cost to replace the asset is crucial. An example of this is looking at the efficiencies of pumps and motors. Over time the efficiency decreases and the cost to operate and maintain the pump and motor increases. Another example is with pipelines. As pipes age more and more leaks occur. At some point in time, the cost to repair leaks becomes greater than the cost to replace the pipe.

Now that these topics have been loosely defined, let’s take a look at how it all works mathematically. The table below demonstrates some O&M numbers for a typical small utility.

Example Exercise

 O&M Item Monthly Averages Cost per Unit or Number Monthly Cost Annual Cost Water Production Groundwater Purchased Water 440 MG 190 MG $230$1,200 $101,200$228,000 $1,214,400$2,736,000 Staffing Hourly Employees Salary Employees Benefits $3,500$6,200 40% of Pay 15 10 $52,500$62,000 $45,800$630,000 $744,000$549,600 Chemicals Chlorine (1.5 ppm) 5,504 lbs $2.70$14,860 $178,330 Vehicle Maintenance$250 17 $4,250$51,000 Leaks and Repairs (Materials Only) $2,500 3$7,500 $90,000 Pumps and Motors (Materials Only)$1,000 6 $6,000$72,000 Treatment Equipment $75 8$600 $7,200 Miscellaneous$1,125 NA $1,125$13,500 TOTAL $523,836$6,286,030

Using the information provided in the table above, fill in the information in the table below.

 O&M Item Percentage of Annual Budget Water Production GW & Purchased Staffing Salary & Benefits Chemicals Vehicle Maintenance Leaks and Repairs (Materials Only) Pumps and Motors (Materials Only) Treatment Equipment Miscellaneous

Think about which items are controllable and which would be considered fixed costs. List the fixed costs versus variable costs and give an explanation justifying your response. Some might seem fixed, but there are ways to look at them as a variable cost. Others might seem like a variable cost, but in reality, there is limited control of the cost and would be considered fixed.

• Fixed Costs Reason:
• Variable Costs Reason:

Discussion

Although the cost of water is “fixed” sometimes water utilities can control the amount that is purchased versus the amount that is pumped from wells. Buying water from another entity can be quite costly. However, more information would be needed about the utility to understand their production flexibilities. Staffing and benefits would also be considered a “fixed” cost, but staffing reductions or adjustments in benefits could also occur. There are certain fixed vehicle expenses, such as oil changes, tune ups, tires, etc. There are also some unknown maintenance issues such as a bad battery, a faulty water pump, etc. All of these examples can be looked at as fixed or variable costs. The idea is not to “pigeon hole” these expenses as fixed or variable. The idea is to be able to accurately estimate these and other expenses in a budget.

It is extremely important that utility managers have a general understanding of the concepts associated with utility management as well as the mathematical computations necessary to support the budgetary decisions being made. The exercises in Chapter 13 provide some basic examples of utility budgeting practices.

Exercises

1. Will the vehicle cost more than 60% of a new vehicle cost before reaching 150,000 miles?

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