EID financial report: Employee costs down, electricity costs rise

There’s a lot going on in the water and wastewater world that affects all of us — from regulatory changes and necessary infrastructure maintenance and replacement, to how we manage our revenues and debt. I think it’s vital to share the strategies we use to ensure a sound financial future and maintain the high levels of service. I’d like to take this opportunity to update our customers and community on the state of the district and how we plan to meet these challenges by planning proactively and always aiming to lessen the impact they have on our customers.

Regulatory changes, facility replacement, and infrastructure upgrades

EID faced major challenges to achieve regulatory compliance in the late 1990s. In 1999, the board forecast that $176 million to $300 million in capital investments would be needed to comply with the California Department of Public Health’s requirements concerning the lining and covering of drinking water reservoirs, new wastewater treatment requirements mandated by more stringent Regional Water Quality Control Board regulations and permits, and to address a large backlog of deferred facility replacements that have reached the end of their life.

This estimate did not include the refurbishing of aging Project 184 flume or dam structures, which EID was in the process of acquiring from PG&E. Although extensive work has been completed, a number of these structures, some built as early as 1939, still remain in urgent need of replacement today. Project 184 supplies about one-third of our customers’ drinking water and provides an average of $8 million per year in power generation revenue.

These projects were finally undertaken in the 2000s. About half of the $300 million in capital expenditures was spent on unfunded state and federal water quality mandates, and half on replacing deteriorating assets. Although some projects accommodated new development, the vast majority of the $300 million was spent for the benefit of existing customers — meaning that rate revenues were the proper means of paying for the projects. Despite the previous forecasts and the planned capital work, rates were not adequately adjusted to help pay for these projects from the mid-1990s through 2008.

Debt management

During the height of the housing boom, EID used new connection fee revenues (called facility capacity charges, or FCCs) to fund construction projects and to pay for a significant portion of the debt incurred by these projects rather than to increase rates to pay for these projects. While this strategy minimized rate increases to customers, it was not sustainable. The collapse of the housing market made it necessary for EID to return to the standard industry practice where rates charged to existing customers pay for the debts incurred for the capital projects that directly benefit them. Looking back, the district should have slowly increased rates by about 5 percent each year, starting in the late 1990s, which would have avoided the double-digit rate increase over the last few years.

Revenue variability and strategies for sound financial practices

EID responded by implementing a three-pronged approach in dealing with the FCC revenue variability and increased debt costs.

1) We have increased non-rate revenue by renegotiating our hydroelectric contract, which now averages approximately $8 million of income per year, more than double the old amount;

2) We have lowered costs by making significant cuts to operating expenses, restructuring some debt payments, and deferring projects. EID reduced staff by more than 30 percent, rolling staffing back to 1999 levels even though the number of services the district provides increased by 50 percent.

We also renegotiated our employee association contract in 2010 and 2012, reducing and tightening the retirement benefits for new hires and obtaining other salary and benefit concessions from existing employees. Two rounds of debt refinancing have locked in low interest rates and deferred payments.

Our current five-year capital improvement plan (CIP) is less than one-third its former size. On page 13 of EID’s 2011 Comprehensive Annual Financial Report you can see the results: We’ve reduced annual operating expenses by nearly 10 percent, or $4.7 million, since 2008.

The district’s 2012 operating budget continues a flat budget trend. All of these documents are available on our Website; and

3) After cutting costs and increasing hydroelectric revenue, we resorted to increasing rates to cover the remaining debt service costs associated with capital reinvestment and to pay down the debt incurred for this reinvestment. Standard industry practice allocates appropriate debt costs to existing customers through water, wastewater, and recycled water rates. This ensures that existing customers pay for the portion of debt incurred on capital projects that directly benefit them. Therefore, rate increases for each of these enterprise utilities varied depending on the debt allocated.

Looking forward

The district’s five-year financial plan continues to hold the line on operating costs. Projected increases for operation and maintenance expenditures are limited to 2 percent per year. Recently implemented rates primarily pay for the increase in annual debt from $19.8 million in 2012 to $29.4 million in 2016.

EID’s five-year financial plan has forecast the need to finance approximately $60 million in future CIP expenditures. Again, most of these costs are for mandated projects, such as state and federal requirements to strengthen Forebay Dam at a cost of roughly $16 million. Also included are service reliability projects, such as replacing Project 184’s 73-year-old Flume 41. Failure of these aging flumes would result in costly environmental damage, lost power generation revenues, and severe water supply constraints similar to those suffered in Placer County in 2011.

The district continues to implement cost-cutting measures in pension and healthcare benefits. In 2012, EID was one of the first agencies to reduce pensions for new employees, significantly reducing future pension costs. Present-day pension costs have been reduced from $3.8 million in 2009 to $3.0 million in 2011, primarily through a reduction in staff. The district has fully met all required pension contributions, as well as contributing to a separate account that addresses funding gaps created by the recession and economic volatility.

With board approval, EID will implement a key provision of last fall’s Pension Reform Act five years early, whereby district employees will be paying 100 percent of their retirement contributions. This early implementation will save our ratepayers approximately $325,000 in 2013, $675,000 in 2014, and approximately $3.1 million from 2013 through 2017, when the law is fully enacted.

In closing

I understand that implementing the recent rate increases have been difficult on our customers. Playing “catch up” on rates that should have been implemented many years earlier is not the best strategy. Looking forward, our goal is to keep annual rate increases at or near the Consumer Price Index.

Finally, I want to assure you that EID has a solid long-term financial plan going forward and maintains high levels of performance compared to measurable industry standards. Two things make this outstanding level of service possible: the continuing commitment and dedication of EID’s outstanding employees, and your support as a ratepayer for the necessary reinvestment in our vital water, wastewater, and hydroelectric assets to protect our facilities for many years to come.