Streamline - Fall 2016 - 32

Capital Projects: Savings or Debt? BY ANTHONY HESS, SUSTAINABILITY COORDINATOR - VDH-OFFICE OF DRINKING WATER So what can smart utility managers do to walk this fine line between debt and savings financing? A wise strategy may be to use a combination of both debt and savings. MANY UTILITIES STRUGGLE with the question of whether they should pay for capital projects with savings or debt. Although this question seems fairly straightforward at first, there are many nuances that cause this to be one of the toughest decisions many utilities managers will face. Each community has their own unique strategy based upon what their customers are willing to pay and what the political climate will tolerate. Paying with debt When a waterworks decides to pay for capital projects with debt it often means that they will delay necessary maintenance until the infrastructure (pipes, pumps, buildings, etc.) has to be completely replaced. This allows them to build a solid case for funding and also allows them time to build the reserves needed to back debt for the large project. In this scenario, if current rates only cover day-to-day operations and not substantial repairs, the rates would need to be increased to cover the new cost of debt payments. This can be a real problem when the political climate is opposed to rate increases or when the rates have already been increased to pay for debt related to past projects. In some cases the rates can become so expensive that collection of revenue from the customer's water bills becomes difficult. Many private utilities are regulated by the State Corporation Commission (SCC) and in order to raise their rates, they must navigate a SCC rate case, which takes tremendous time and effort. (Commonwealth of Virginia State Corporation Commission) Rate increases to offset debt are so difficult to obtain that many may assume private utilities would chose to finance all projects with savings instead. Condition 1 2 3 4 5 Deterioration Curve 0 Option 1 Do Nothing 200 Maintenance 400 Rehabilition Option 2 600 Option 3 Replace 800 1,000 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 % Effective Life (Portland Water Bureau, 2016) As the above graph indicates, small investments in infrastructure rehabilitation at the right time can extend the life of the infrastructure. This can allow the waterworks to continue to build its CIP reserves for a longer period of time since the existing equipment is lasting longer. The reality, though, is that many utilities only collect enough revenue from water bills to cover their operations cost. This provides little or no savings left to extend the life of their infrastructure by routine rehabilitation projects. It also leaves them completely dependent upon debt for the eventual replacement of this infrastructure. Disincentives to building savings Paying with savings Paying for capital improvement projects with savings means the utility has access to enough cash to cover the both the routine rehabilitation projects needed to extend the life of the infrastructure and reserves to pay for larger infrastructure projects. 32 S T R E A M L I N E * F a l l 2 0 1 6 There are often disincentives to building savings for either debt service or for cash savings to pay for repairs and improvements. Private utilities are discouraged from maintaining savings due to tax implications. This is even more complicated for private utilities that have to get approval from the SCC prior

Table of Contents for the Digital Edition of Streamline - Fall 2016

From the President: Life Decisions
From the Executive Director: Communicating – Networking – Team Work!
The 2016 VRWA Expo
Leaks/Water Loss – Everyone’s Problem
How to Reduce FOG in Your System
Succession Planning
Dominion Coal Ash Ponds
Reporting on Your System
Cost-Based Rates, Part 1
Coming Back from the Edge
Capital Projects: Savings or Debt?
When to Repair or Replace Pipe
NRWA Recap
Throwing My Loop: Where Do You Live?
VRWA Members Corner
eLearning Benefits
Membership Application
Benefits for VRWA Members
Board of Directors
VRWA Committees
Index to Advertisers/Ad.com
Streamline - Fall 2016 - cover1
Streamline - Fall 2016 - cover2
Streamline - Fall 2016 - 3
Streamline - Fall 2016 - 4
Streamline - Fall 2016 - 5
Streamline - Fall 2016 - 6
Streamline - Fall 2016 - 7
Streamline - Fall 2016 - 8
Streamline - Fall 2016 - From the President: Life Decisions
Streamline - Fall 2016 - 10
Streamline - Fall 2016 - From the Executive Director: Communicating – Networking – Team Work!
Streamline - Fall 2016 - The 2016 VRWA Expo
Streamline - Fall 2016 - 13
Streamline - Fall 2016 - 14
Streamline - Fall 2016 - 15
Streamline - Fall 2016 - 16
Streamline - Fall 2016 - 17
Streamline - Fall 2016 - 18
Streamline - Fall 2016 - Leaks/Water Loss – Everyone’s Problem
Streamline - Fall 2016 - 20
Streamline - Fall 2016 - How to Reduce FOG in Your System
Streamline - Fall 2016 - 22
Streamline - Fall 2016 - Succession Planning
Streamline - Fall 2016 - 24
Streamline - Fall 2016 - Dominion Coal Ash Ponds
Streamline - Fall 2016 - 26
Streamline - Fall 2016 - Reporting on Your System
Streamline - Fall 2016 - Cost-Based Rates, Part 1
Streamline - Fall 2016 - 29
Streamline - Fall 2016 - Coming Back from the Edge
Streamline - Fall 2016 - 31
Streamline - Fall 2016 - Capital Projects: Savings or Debt?
Streamline - Fall 2016 - 33
Streamline - Fall 2016 - 34
Streamline - Fall 2016 - When to Repair or Replace Pipe
Streamline - Fall 2016 - 36
Streamline - Fall 2016 - 37
Streamline - Fall 2016 - 38
Streamline - Fall 2016 - 39
Streamline - Fall 2016 - NRWA Recap
Streamline - Fall 2016 - 41
Streamline - Fall 2016 - 42
Streamline - Fall 2016 - 43
Streamline - Fall 2016 - 44
Streamline - Fall 2016 - Throwing My Loop: Where Do You Live?
Streamline - Fall 2016 - 46
Streamline - Fall 2016 - VRWA Members Corner
Streamline - Fall 2016 - 48
Streamline - Fall 2016 - eLearning Benefits
Streamline - Fall 2016 - Membership Application
Streamline - Fall 2016 - Benefits for VRWA Members
Streamline - Fall 2016 - 52
Streamline - Fall 2016 - VRWA Committees
Streamline - Fall 2016 - Index to Advertisers/Ad.com
Streamline - Fall 2016 - cover3
Streamline - Fall 2016 - cover4
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