EID Q&A: Confronting challenges - EID General Manager Responds
You’ve now been with EID for four years. What has surprised you most during this time period? As a resident of El Dorado County and customer of EID for the past 22 years, it was well known that EID had to reinvest in its infrastructure and comply with government regulatory mandates, but I was surprised that the district had become over-reliant on facility capacity charges (FCCs) — also known as “hook up” fees, to pay off debt. Although there were some increases implemented periodically in the mid-1990s, there were several years in the late 1990s and early 2000s when there were no increases. It was not surprising that past boards were reluctant to raise rates when hookup fees were plentiful, but with the recession, that strategy was not sustainable.
Can you tell me more about some of the infrastructure improvements the district had to make in the last decade that required the district to take on so much debt?
In the period from 2000 to 2009, EID invested nearly $400 million in capital projects to maintain the reliability and safety of our services. This included upgrades to our water and wastewater treatment facilities to comply with new regulations and provide adequate capacity, and nearly $100 million for necessary repairs for Project 184, which the district acquired from PG&E. The Project 184 system supplies one-third of our water supply to our customers, so it is a very important system to have acquired from PG&E and it is critical to our ability to provide water to our customers.
Other capital projects included improvements to the wastewater collection system such as pipeline replacement and sewer lift station upgrades and new water tanks to eliminate uncovered storage reservoirs and meet our customers’ operational, emergency, and fire flow needs. Many of these investments address years of long-known, long-deferred maintenance that had caused catastrophic system failures — like the Pleasant Oak Main and Project 184 — or costly fines and enforcement actions, like the Deer Creek wastewater treatment plant and the uncovered reservoirs. However, the need to comply with ever-stricter state and federal regulations has often forced EID to make facility investments it would otherwise decline or defer. Approximately $141 million (35 percent) of these expenditures were to comply with regulatory mandates.
What has been the most satisfying accomplishment you’ve achieved over the past four years?
I am proud of the fact that we devised a three-pronged approach to deal with the loss of FCC revenue, due to the recession, and increased debt costs, and that our approach was successful. By taking these actions, I believe we have established a good formula for ensuring the district’s ability to maintain a safe and reliable water supply for our customers now and into the future.
Can you tell me more about the three-pronged approach?
First, we increased non-rate revenue by renegotiating our existing hydroelectric contract with PG&E into a more lucrative contract. The contract now averages approximately $8 million-$11 million in annual revenue, versus $3 million–$5 million previously. Second, we lowered costs by making significant cuts to operating and personnel expenses. We also restructured some debt payments and deferred some capital projects. And third, after cutting costs, increasing hydroelectric revenue, and exhausting other possibilities, our final option was to implement rate adjustments. We also conducted an extensive 18-month cost-of-service (COS) study that reinforced the need to revise our rate structure to cover the remaining debt service costs associated with capital reinvestment and to pay down the debt incurred for this reinvestment.
Can you give me some specifics about this cost-cutting?
Just prior to my arrival, the previous general manager had actually begun the process of reducing costs and cutting staff, as the recession caused a severe drop off in the income from FCC fees. As I mentioned earlier, this was problematic because the district had become dependent on FCC fees to cover debt. I continued with those cost-cutting actions and then added some immediate and sustained additional measures. For example, the operations and maintenance (O&M) costs in 2008 were $46.3 million. By comparison, in 2012, the costs are down to $41.5 million. Additionally, staff was reduced from a high of 305 at the beginning of 2008 to 216 right now. Meanwhile, the number of district customer accounts has increased by 51 percent since the late 1990s. The district has applied for and received grants worth $28.6 million since 2003. These grants helped pay for water reliability projects, improvements to recreation facilities, water conservation programs, and alternative energy projects. We will continue to seek cost-efficient grants to assist in our services and programs.
Can you tell me more about the steps you took to stabilize the district’s finances?
We established internal controls and reestablished the industry principle that stipulated that ratepayers should pay for the O&M costs and debt service for projects that benefit them.
Once that principle was adopted by the board, the COS committee participated in the restructuring of the rates and establishing the financial model and rate increases necessary to pay for past capital projects that benefited them. We further tackled our debt problem by refinancing our bonds at lower interest rates and restructuring our total debt portfolio.
In the past I have heard that the district implemented a new financial model to ensure its financial health. Can you tell me about that?
The district is required by its bond covenants to annually have revenues exceed its operating expenses and debt service requirements for that year by 125 percent. The revenue consists of rate and hydroelectric revenue, property tax, and other non-operating revenue as well as FCCs. The new financial model that we have implemented internally, called the 1.0 test, requires the district’s revenue — excluding FCC revenue — exceed or be equal to its operating expenses and debt service. In other words, rate revenue (not counting FCC revenue) should pay for operating expenses and debt service expenses. By adhering to this rule, we should never get into the same predicament that we experienced before, whereby we were totally reliant on FCCs to cover our costs.
Was the three-pronged approach successful?
Yes, I believe it was. Although no one likes rate increases, the added revenue that the increases provided and the newly adopted financial plan established a fiscally responsible approach to help pay for the infrastructure replacement projects and projects required to meet regulatory requirements. And the lending institutions took notice of our improved financial performance as well. For instance, Standard & Poor’s rating agency increased the district’s rating from an A to an A+, which speaks volumes about how the market perceives our financial soundness. This is very important as it means lower costs to borrow money for future projects, saving our ratepayers from paying higher interest rates. We have also been able to prepay debt over these past four years, paying down $15 million in debt in 2012 alone.
We are also one of a few public utilities to implement a key provision in last fall’s cost-saving Public Employee Pension Reform Act (PEPRA) four years early, whereby employees must pay 50 percent of the “normal costs” of their pensions, up to a maximum of 8 percent of their salary, which is their full share. This saves our ratepayers an estimated $3.1 million from 2013–2017, before the law is fully enacted. The vast majority of unfunded liabilities will be paid over the next 30-plus years.
Are there any other financial issues you are tackling?
Yes, we are reviewing and revising the new FCCs (hook up) fees to ensure that new development continues to pay for capacity expansion. In fact, once approved by the board, the capital reserves in our budget will have a positive cash flow so that we pay for expansion of facilities from reserves instead of having to borrow funds.
So, what do you see for the future for EID?
Well, we will continue to control costs and improve efficiency so that future rate adjustments will be in the 3–5 percent annual range and strive to never go back to double-digit rate increases. We will continue to control capital expenditures, but never defer so much as to jeopardize safety and service reliability to our customers. Lastly, we will continue to monitor our performance measures to ensure that our customer satisfaction is maintained above 90 percent, that our service reliability is in the top quartile of utilization, and that our rates are below the median compared to other water and wastewater utilities.
Do you have any final words for our customers?
It has truly been a pleasure serving you over the past four years. The EID team is committed to providing you the best service possible and will continue with that commitment in the future.