DROUGHT PRICING – LESSONS LEARNED A Presentation to 2003 RMSAWWA / RMWEA Joint Annual Conference by Kerry Kuykendoll Manager of Rate Administration Denver.

DROUGHT PRICING – DROUGHT PRICING – LESSONS LEARNEDLESSONS LEARNED

A Presentation to 2003 A Presentation to 2003 RMSAWWA / RMWEA Joint Annual RMSAWWA / RMWEA Joint Annual

ConferenceConferencebyby

Kerry KuykendollKerry KuykendollManager of Rate AdministrationManager of Rate Administration

Denver WaterDenver Water

September 14, 2003September 14, 2003

DENVER WATER BACKGROUNDDENVER WATER BACKGROUND

• Denver Water provides water to Denver Water provides water to approximately 1 million people.approximately 1 million people.

• Customers are located both inside and Customers are located both inside and outside city boundaries.outside city boundaries.

• Customer groups include residential, Customer groups include residential, commercial, industrial, government and commercial, industrial, government and wholesale.wholesale.

• Water supply is 100% surface water.Water supply is 100% surface water.• Reservoirs fill with spring runoff.Reservoirs fill with spring runoff.• Snow pack is critical.Snow pack is critical.

N

EW

S

September 20005 0 5 10 Miles

Denver WaterPresent Service Area

Legend

DenverTotal ServiceRead and Bill

Fixed Special ContractsMaster Meter

DENVER

DENVERINTERNATIONAL

AIRPORTROCKYMOUNTAINARSENAL

SOUTH ADAMSCOUNTY

-334 MI2

-77 Distributors

Denver Board of Water Commissioners

Water Collection System

CONTINENTALDIVIDE

STREAM ORRIVER

TUNNEL, CANALOR DITCH

COLLECTION SYSTEMS

SOUTHPLATTE

MOFFATTUNNEL

ROBERTSTUNNEL

WILLIAMSFORK

WATERSHED

TREATMENTPLANT

N:\@wra\gis\dw-sys\sys6-lp.ppt

&

&

&

#

# #

Colorado Springs

Boulder

Buena Vista

FOOTHILLSMARSTON

MOFFAT

WILLIAMS FORK

RESERVOIR

WolfordMountainReservoir

GreenMountainReservoir

DILLONRESERVOIR

ANTERORESERVOIR ELEVEN MILE

RESERVOIR

CHEESMANRESERVOIR

ColoradoRiver

SouthPlatteRiver

GROSSRESERVOIR

BlueRiver

ArkansasRiver

TarryallCreek

ROBERTSTUNNEL

STRONTIASPRINGS

RESERVOIR

RALSTON RES.

ChatfieldReservoir

CherryCreek

Reservoir

MOFFAT TUNNEL

05/13/99

DROUGHT:DROUGHT: “I’LL KNOW IT WHEN I SEE “I’LL KNOW IT WHEN I SEE

IT.”IT.”• Denver Water had revised its Drought Denver Water had revised its Drought

Response Plan in July 1997.Response Plan in July 1997.• The worst 100-year drought occurred 1953-The worst 100-year drought occurred 1953-

1955. This one beats it in intensity.1955. This one beats it in intensity.• Snow pack in the winter of 2001/2002 was 63% Snow pack in the winter of 2001/2002 was 63%

of normal. Storage was average.of normal. Storage was average.• Spring runoff was 25% of normal. Precipitation Spring runoff was 25% of normal. Precipitation

was 33% of normal.was 33% of normal.• Other communities started declaring drought Other communities started declaring drought

in early spring. Denver Water did not until two in early spring. Denver Water did not until two months later.months later.

UPPER COLORADOSNOW WATER EQUIVALENT

0

2

4

6

8

10

12

14

16

18

20

11/1 11/11 11/21 12/1 12/11 12/21 12/31 1/10 1/20 1/30 2/9 2/19 3/1 3/11 3/21 3/31 4/10 4/20 4/30 5/10 5/20

Note: Average based on 23 Snotel Stations Historic based on 1971-2000.

Ave

rage

SW

E (

inch

es)

2002-2003

2001-2002

2000-2001

Historic

80 % of Average

5/27/2003

Variation of Annual Natural FlowSouth Platte River at South Platte

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1916 1922 1928 1934 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000

Acr

e-fe

et

Average = 296,000 af 2002 = 63,000 af (21% of average)

Example of Mother Nature’s irregularity.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Apr-01

Jun-01

Aug-01

Oct-01

Dec-01

Feb-02

Apr-02

Jun-02

Aug-02

Oct-02

Dec-02

Feb-03

Apr-03

Jun-03

Pe

rce

nt

Fu

ll

Actual Normal

Reservoir ContentsReservoir Contents

FINANCING RESPONSE:FINANCING RESPONSE:

In-Drought ConcernsIn-Drought Concerns

• Utility’s PerspectiveUtility’s Perspective

• Commissioners’ PerspectiveCommissioners’ Perspective

• Customers’ PerspectiveCustomers’ Perspective

Post-Drought ConcernsPost-Drought Concerns

• Financing ConcernsFinancing Concerns

SummarySummary

• Lessons LearnedLessons Learned

FINANCING RESPONSE -FINANCING RESPONSE -UTILITY’S PERSPECTIVEUTILITY’S PERSPECTIVE

• Limited to no guidance available.Limited to no guidance available.

• Managing revenue shortfalls and reserve Managing revenue shortfalls and reserve balances.balances.

• Price signals – do they work?Price signals – do they work?– Price elasticity of demand.Price elasticity of demand.– Billing frequency.Billing frequency.– How high is meaningful?How high is meaningful?– Can you develop a cost justification for drought pricing?Can you develop a cost justification for drought pricing?

• Accountability – how much, from whom, how Accountability – how much, from whom, how used?used?

• What is feasible – billing limitations. What is feasible – billing limitations.

FINANCING RESPONSE – FINANCING RESPONSE – COMMISSIONERS’ PERSPECTIVECOMMISSIONERS’ PERSPECTIVE

• There is a relationship between price and There is a relationship between price and demand.demand.

• Control demand first and worry about Control demand first and worry about fairness second, or vice versa?fairness second, or vice versa?

• Accountability – not for lost revenue, Accountability – not for lost revenue, used to pay for “unbudgeted” drought.used to pay for “unbudgeted” drought.

• Do it now but have public input.Do it now but have public input.

• They hear all the individual concerns.They hear all the individual concerns.

FINANCING RESPONSE – FINANCING RESPONSE – CUSTOMERS’ PERSPECTIVECUSTOMERS’ PERSPECTIVE

• Inside Denver – Charge outside Denver – the water is ours.Inside Denver – Charge outside Denver – the water is ours.• Outside Denver – Our rates are already higher than inside.Outside Denver – Our rates are already higher than inside.• All – Indoor water, trees and shrubs should not be All – Indoor water, trees and shrubs should not be

penalized.penalized.• Some -Some -

– I have 10 kids.I have 10 kids.– I am on a fixed income and like to garden.I am on a fixed income and like to garden.– I have an acre of land.I have an acre of land.– We provide park area to the public.We provide park area to the public.– We use your water in production of our product (beer We use your water in production of our product (beer

and bottled water).and bottled water).• Bottom Line – Customers support a drought price signal but Bottom Line – Customers support a drought price signal but

none of them personally used too much and their needs none of them personally used too much and their needs were not wasteful. It was someone else who wasted.were not wasteful. It was someone else who wasted.

WHAT WE DID!WHAT WE DID!• Originally “basket” of programs, based Originally “basket” of programs, based

on restrictions, supported by surcharges on restrictions, supported by surcharges and enforced by penalties.and enforced by penalties.

• Then summer surcharges became a Then summer surcharges became a “belt and suspenders.”“belt and suspenders.”– Residential – 8 increasing blocks with range of 50% Residential – 8 increasing blocks with range of 50%

to 500% increase in rate. (Replaced “sissy” to 500% increase in rate. (Replaced “sissy” surcharge).surcharge).

– Commercial/Industrial/Government/Master Meter – Commercial/Industrial/Government/Master Meter – 70% targets relative to 2001.70% targets relative to 2001.

– Aggregated Customers – 80% targets relative to Aggregated Customers – 80% targets relative to 2001. Similar entities (e.g. Denver Parks) were 2001. Similar entities (e.g. Denver Parks) were combined to allow for management of the entire combined to allow for management of the entire system.system.

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

Bi-monthly Consumption (Thousands of Gallons)

$ P

er 1

,000

Gal

lons

Normal Rates Summer Surcharge

$1.58

$2.37$1.90

Indoor Outdoor Water Large Outdoor User Excess Outdoor Use

Residential Drought Surcharge

Surcharge = $11.85

Total = $14.22

Summer Surcharges by Summer Surcharges by CycleCycle


% of Customers % of Customers Receiving a Receiving a SurchargeSurcharge10 – 20%



20 – 40%



20 – 40%



20 – 40%

40 – 60%



20 – 40%

40 – 60%

60 – 80%



20 – 40%

40 – 60%

60 – 80%

40%

70%



20 – 40%

40 – 60%

60 – 80%

79%

Highest percentage of customersReceiving a surcharge in one cycle?



20 – 40%

40 – 60%

60 – 80%



20 – 40%

40 – 60%

60 – 80%

2003 Budget Review2003 Budget ReviewItemItem FinanciaFinancia

ll

PlanPlan

BudgetBudget Est.Est.

ActualActual

SourcesSources

Water SalesWater Sales

SDCSDC

SurchargesSurcharges

Bond ProceedsBond Proceeds

OtherOther

TotalTotal

152152

2323

00

4040

1616

231231

$133$133

2424

1515

3131

2222

225225

$125$125

1717

1212

9292

2727

273273

UsesUses

O&MO&M

CapitalCapital

Debt ServiceDebt Service

TotalTotal

101101

133133

3434

268268

$108$108

112112

3434

254254

$110$110

118118

3535

263263

Use of CashUse of Cash -37-37 -29-29 1010

Post Drought: Post Drought: Financing ConcernsFinancing Concerns

• Additional costs largely offset by surcharges Additional costs largely offset by surcharges but not completelybut not completely

• A renewed awareness of water and priceA renewed awareness of water and price– General opinion that it is a high value and low General opinion that it is a high value and low

price productprice product– There are questions of whether our water is under There are questions of whether our water is under

pricedpriced– Not all uses are equally elasticNot all uses are equally elastic

• There is a desire to avoid the consequences There is a desire to avoid the consequences of lack of supply in the future. As a result the of lack of supply in the future. As a result the Board:Board:– Accelerated the completion of the Recycle ProjectAccelerated the completion of the Recycle Project– Accelerated the timing of the North End Supply Accelerated the timing of the North End Supply

ProjectProject

Accelerating Capital ProjectsAccelerating Capital Projects

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

($ M

illio

ns)

$140

130

120

110

100

90

80

70

60

50

40

30

2003 Plan

2004 Plan

Change 1: Acceleration of Recycled Distribution System

2004 Recycle Impact2004 North End Sol. Impact

Change 2: Acceleration of North End Solution

2004 Other

Means Financing More and SoonerMeans Financing More and Sooner

Accelerating Capital CostsAccelerating Capital Costs

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

($ M

illio

ns)

$140

130

120

110

100

90

80

70

60

50

40

30

2003 Plan

2004 Plan

$44

$52 $52

$68

$94

$123

$58

$32$29 $22

2004 – 10: Add $183 million

2011-12: Subtract $100 million

Means Financing More and SoonerMeans Financing More and Sooner

Demand Changes After A Demand Changes After A DroughtDroughtEast Bay MUD’s ExperienceEast Bay MUD’s Experience

100

150

200

250

30019

61

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Con

sum

p pe

r Acc

ount

(tho

us. o

f gal

lons

)

242“Normal” 219

“Normal”

199“Normal”

-35%-18%

1961 – 1976Average = 242

1978 – 1987Average = 219

Relative to Previous Period = Down 10%

1989 - PresentAverage = 199

Relative to Previous Period = Down 9%

After each drought “EXPECTED” demand was no longer related to the past “NORMAL” demand

This is not a function of restrictions but rather a fundamental change in usage

200

250

300

350

4001

96

0

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

Denver Water’s Consumption Per Denver Water’s Consumption Per AccountAccountThree periods of “normal”Three periods of “normal”

297286

263

1977 Drought

Metering /Two Forks

1977 – 1990Demand Down 4%

1990 – PresentDemand Down 8%

Denver Water has had similar fundamental changes in usage

Tho

usan

d G

allo

ns p

er A

ccou

nt

Revenue Forecast IssuesRevenue Forecast IssuesIf Consumption is at Pre-drought Levels with Existing RatesIf Consumption is at Pre-drought Levels with Existing Rates

2004 Consumption –pre-drought (thous. gallons)2004 Consumption –pre-drought (thous. gallons) 87,500,00087,500,000

Average 2003 Rate ($/thous. gallons)Average 2003 Rate ($/thous. gallons) $1.77$1.77

2004 Revenue Without a Rate Adjustment2004 Revenue Without a Rate Adjustment $154,875,000$154,875,000

Consumption at Pre-drought Levels with PREVIOUSLY PLANNED RATE Consumption at Pre-drought Levels with PREVIOUSLY PLANNED RATE adjustmentsadjustments

2004 Consumption --pre-drought (thous. gallons)2004 Consumption --pre-drought (thous. gallons) 87,500,00087,500,000

Average 2004 Rate (3.5% Rate Increase)Average 2004 Rate (3.5% Rate Increase) $1.83$1.83

2004 Revenue2004 Revenue $160,125,000$160,125,000

Consumption is REDUCED and RATES are INCREASED MORE THAN Consumption is REDUCED and RATES are INCREASED MORE THAN PLANNEDPLANNED

2004 Consumption –Reduced 5%2004 Consumption –Reduced 5% 83,125,00083,125,000

Average 2004 Rate (5% increase)Average 2004 Rate (5% increase) $1.86$1.86

2004 Revenue2004 Revenue $154,613,000$154,613,000

Focus on 2004Focus on 2004

ItemItem

Rate Rate Increases of Increases of 5.4-percent5.4-percent

Projected Revenue at Reduced Projected Revenue at Reduced Demand Demand

(demand reduction of 5%)(demand reduction of 5%) ($ million) ($ million)$155.0$155.0

Original Revenue Target ($ million)Original Revenue Target ($ million) $160.1$160.1

ShortfallShortfall $5.1$5.1

Plan Adjustments:Plan Adjustments:

2004 Inflation Reduction to 2%2004 Inflation Reduction to 2%

2004 SDC Increase of 20-percent2004 SDC Increase of 20-percent

Unidentified 2004 Budget ReductionsUnidentified 2004 Budget Reductions

Total AdjustmentsTotal Adjustments

$2.0$2.0

1.91.9

1.21.2

5.15.1

LESSONS LEARNEDLESSONS LEARNED• Expect controversy.Expect controversy.• Don’t simply raise rates, have a surcharge. Don’t simply raise rates, have a surcharge.

This makes it easier to be accountable.This makes it easier to be accountable.• Surcharge may need to change with Surcharge may need to change with

seasons.seasons.• If you bill in blocks that are fixed, expect an If you bill in blocks that are fixed, expect an

outcry for individualized billing; (number of outcry for individualized billing; (number of people in house and lot size will be key people in house and lot size will be key variables.) Also called water budgets.variables.) Also called water budgets.

• Understand that customers may conserve Understand that customers may conserve and still be assessed a surcharge.and still be assessed a surcharge.

• Come to a consensus on the issue of Come to a consensus on the issue of managing to the average vs. the individual.managing to the average vs. the individual.

• Pray for rain and snow.Pray for rain and snow.

QUESTIONS AND QUESTIONS AND ANSWERSANSWERS

DROUGHT PRICING – LESSONS LEARNED A Presentation to 2003 RMSAWWA / RMWEA Joint Annual Conference by Kerry Kuykendoll Manager of Rate Administration Denver.

Documents

water supply

surface water

year drought

unbudgeted drought

drought response plan

drought pricing lessons

spring runoff

early spring