Utility services are vital to the health and wellbeing of our communities. Healthy utilities generate predictable, consistent revenue and are largely self-sufficient. Time and again, it has been proven that fiscally sound utilities can weather operational impacts.

Still, the Covid-19 pandemic has stretched utilities in unpredicted ways. Here are a few of the observed impacts of the global pandemic and some of the actions utilities can take to prepare for future challenges.

Reserve sufficiency

The pandemic has threatened the stable user-fee revenue that supports utility systems. In an effort to be sensitive to the financial impact consumers are experiencing, from forced business closures to record high unemployment, utilities have taken action in a variety of ways, including payment deferrals, rate holidays, “no shutoff” policies, prohibitions on late fees and penalties, and delays to planned rate increases (see “Utility Belt,” at left). Because of these goodwill strategies, however, utilities are tapping reserves to make up for losses. Many utilities are examining how long funds will last if they continue with their scheduled capital program and running scenarios at different revenue and expense ranges to help inform decision making.

Revenue impacts

Understanding the sources and variability of utility revenue is critical. As we have seen, when commercial and manufacturing sectors are shut down during a global pandemic, demand shifts to residential. If a utility’s residential class has an increase in demand but stops paying their bills, the losses in revenue are magnified. Several Northwest utilities have already started delving deeper into understanding how their mix of residential, commercial, and industrial customers—and their utility rate structure—will translate into changes in revenue. They’re also taking a closer look at their mix of fixed revenue (base charges) and variable revenue (volumetric charges).

Expense reductions

Many utilities have maintained lean operating budgets since the Great Recession, yet are again feeling the pressure to reduce or defer expenses. One area receiving the most scrutiny is capital projects, a common approach for reducing costs when revenues shrink. Not all capital is created equal, however, and care should be taken to assess the urgency of projects. Other managers have observed that having “shovel ready” projects can improve the likelihood of qualifying for any federal infrastructure funding that may become available. In some cases, it can literally pay to keep your capital program moving.

Short-term vs long-term solutions

The headwinds utilities face now are unprecedented, but no one solution is right for every utility. Those utilities that previously implemented sound financial policies are better positioned to weather the storm; those who have not will face bigger challenges in the short term, but they will still have the opportunity to address those policies as they prepare for the future.

FCS Group provides utility rate and fee consulting, utility management consulting, financial planning and analysis, and economic services to public sector clients.