Water and Wastewater
Finance
and Pricing
A Comprehensive Guide
Third Edition

Water and Wastewater
Finance
and Pricing
A Comprehensive Guide
Third Edition
George A. Raftelis
Published in 2005 by
CRC Press
Taylor & Francis Group
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Waster and wastewater finance and pricing : a comprehensive guide / edited George A. Raftelis.
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Rev. ed. of: Comprehensive guide to water and wastewater finance and pricing / George A. Raftelis.
2nd ed. c1993
Includes bibliographical references and index.
ISBN 1-56670-680-7 (alk. paper)
1. Water-supply Finance. 2. Water-supply Rates. 3. Sewage disposal Finance. 4. Sewage disposal
Rates. I. Raftelis, George A. II. Reftelis, George A. Comprehensive guide to water and wastewater finance
and pricing. III. Title.
HD4456.R34 2005
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Dedication


With gratitude and love in my heart,
I dedicate this book to my wonderful wife Eva.
She has been my partner, my friend, my sounding board,
and the “wind beneath my wings”
for 31 years of a beautiful marriage.
I feel her presence and influence in all I do.
Thank you, Eva.


Preface

Over the past 25 years, I have had the opportunity to work with over 300 water and wastewater
utilities across the country. Most of my assistance to these utilities has been in the area of financial
planning and pricing. There has been a need for a document that discusses and consolidates, in an
understandable manner, some of the common themes and trends across the country in this field.
Numerous approaches to water and wastewater financial planning and pricing exist. It is important
to evaluate these different approaches and tailor a financial plan and pricing structure to address
the unique requirements of each utility. In this book, my co-authors and I want to share with the
industry our experiences in effective financial planning and pricing. This book provides a framework
in which a utility professional can work in addressing financial planning and pricing objectives. In
addition, the book can be used as a management tool and a technical guide to effective financial
planning and rate-setting practices.
Since the second edition of this book was published, numerous changes have taken place in
the water and wastewater financing and pricing environment. This third edition of the book sub-
stantially expands our discussion into emerging areas of finance and pricing. We are excited about
sharing our experiences and insights with the reader.

George Raftelis

President and Chief Executive Officer

Raftelis Financial Consultants, Inc.


Acknowledgments

It is with great pride that I acknowledge the hard work of all those who have contributed to the
third edition of our book. In the first two editions, I took the lead in crafting the technical content
of the book. The third edition has truly been a team effort of my talented fellow consultants at
Raftelis Financial Consultants (RFC), my high-profile colleagues in the industry, and an extremely
committed administrative, graphics, and editorial staff. Specifically, our efforts for the third edition
have been distributed among numerous capable professionals and have made it an even more highly
effective source of knowledge, technical achievement, and usefulness for readers.
Many of the co-authors are my fellow consultants at RFC. Every day, these consultants live
and breathe the principles we discuss in this book. Frank Davis, one of RFC’s best writers, authored
Chapter 5 and Chapter 11 (System Development Charges and Identification of Revenue Require-
ments). He provides his insights on how communities should develop and implement capital
recovery charges, as well as identify the costs that provide the basis for rates and charges. He is
an important part of RFC and is always dependable, helpful, and sincere, no matter how large or
small the challenge. Harold Smith, vice president with RFC, was the author of Chapter 7 (Overview
of Delivery Methods

)

. Harold has a down-to-earth quality which connects well with his clients,
coworkers, and colleagues. It has been a pleasure observing the growth of his skills in finance and
pricing, as well as with public–private partnerships over the years at RFC.
Lex Warmath, a vice president and my first consulting employee 11 years ago, authored Chapter
10 (Water and Wastewater Pricing Process). He has been a devoted consultant to the firm and
instrumental to its success. He has vast consulting skills, which he uses in being highly responsive
to our clients. Bill Stannard, a vice president and RFC’s chief operating officer authored Chapter

13 (Designing a Water and Wastewater Rate Structure). Our practice has been blessed with Bill’s
energy, insights, and connectivity with the industry. He has enormous experience in water and
wastewater finance and pricing over his 27-year career.
Peiffer Brandt, a vice president and deputy chief operating officer, authored Chapter 14 and
Chapter 15 (Conservation Pricing: An Alternative to Traditional Rate Structures and Benchmarking
Water and Wastewater Rates and Charges). His energy, intelligence, and responsiveness have been
crucial in providing our clients with superior quality and service. Patrick Smyth, our second
consultant, joining the firm ten years ago, authored Chapter 17 (Affordability). His commitment
to RFC and the contributions he has made to the practice cannot be described appropriately in
words. He is also our technology manager, and his handy work is present in much that we do.
Finally, from RFC, Leta Hals, our recently named Certified Business Appraiser, authored
Chapter 16 (Valuation of Water and Wastewater Utility Assets). She has brought to RFC boundless
initiative, focus, and intelligence. “Getting it done!” are the first words that come to mind when I
think of Leta. In summary, the book has been blessed with such a talented group of consultants
who have surrounded me over the years and who bring their experience and rich insights to the
readers.
I have also been fortunate to develop a rich network of highly visible professional colleagues
during my career. They have expanded my knowledge, insights, and connectivity, and made me
better able to serve our industry. The selection of colleagues to author specific chapters was based
upon their expertise and backgrounds. Gerry Wexelbaum, a personal friend and fellow partner from
our Ernst & Young days, authored Chapter 2 (Capital and Financial Planning for Water and
Wastewater Utilities). Gerry is president of Strategy Support Associates and works with our com-
pany extensively in the areas of strategic planning and strategic financial management. Gerry is

insightful and sensitive, a consummate entrepreneur and businessman, and always ready to exercise
his clever wit.
Chapter 8 (Project Delivery Systems) was authored by Judy Bedard, a consultant with Red
Oak Consulting. I have had the pleasure of working with Judy on several important engagements
for large communities in the United States. She brings a strong background in assisting government
utilities to evaluate and implement traditional and alternative project delivery methods. Teno West

of Holland & Knight authored Chapter 9 (Legal Aspects). He is the consummate attorney who
possesses strong technical credentials, brings an effective marketing and business approach to his
projects, and has an effective “bedside manner,” which translates into strong communication with
his clients. Chris Woodcock, president of Woodcock and Associates, is the author of Chapter 12
(Determination of Cost of Service). He has been a friend, colleague, and true inspiration to me
during just about all of my 30-year career. We have worked side by side on numerous client projects,
as well as on many finance and pricing assignments and committees for the American Water Works
Association and the Water Environment Federation. I look to Chris as one of the most recognized
industry leaders in water and wastewater finance and pricing, and a true visionary. Last but not
least is Kevin Whitt, author of Chapter 18 (Department of Defense Utilities Privatization). He is
the utilities privatization program manager with the U.S. Navy and has been a huge champion of
implementing the utility privatization (UP) initiative for the Navy. He has explained in very
understandable terms in his chapter the evolution of UP, the Department of Defense’s UP regula-
tions, how the process was implemented, and the Navy’s approach in addressing UP requirements.
In preparing his chapter, he used as a sounding board, reviewer, technical colleague, and editor,
Vickie Jones, an important member of Kevin’s team in Norfolk. RFC personnel have enjoyed our
working relationship with Kevin, Vickie, Navigant Consulting, and the Navy in addressing numer-
ous technical, financial, regulatory, and scheduling challenges related to UP.
I would be remiss if I did not acknowledge the “real team” that has made this third edition a
reality. My gratitude, praise, and respect go out to several key people who participated in organizing
the book and related process, and reviewed and edited countless drafts of the book, prepared the
graphics and tables which facilitate the understanding of complex concepts presented in the book,
coordinated with the co-authors and CRC Press on a daily basis, and performed the necessary
quality control steps to make this edition a highly professional and cutting-edge document for the
industry. Maria Adams from RFC organized the project with me and effectively coordinated it with
the authors and CRC Press. Enough cannot be said of Elizabeth Cozad with RFC for picking up
the project in midstream and carrying it relentlessly to its final conclusion. Her commitment and
attention to detail in editing, proofreading, and final coordination will be a lasting legacy of the book.
Quinn Marvin, a recent graduate with a degree in journalism and mass communication from
the University of North Carolina, made significant contributions in preparing the many graphics in

the book and in assisting in carrying the book to completion. Her creative insights and talents will
serve her and RFC well in the future. John Miller, my highly creative nephew, also contributed his
artistic talent by preparing several graphics early on in the process. In addition, many RFC
consultants and administrative personnel have made tremendous contributions to the book by
conducting research, preparing tables, editing, and proofreading. These people include Tom Beckley,
Janet Cureton, Jon Davis, Howard Hoover, Bart Kreps, Melissa Levin, Lisa Shabashow, and Elaine
Vastis.
A special acknowledgement goes to our clients who have believed in us and given us the
opportunity to serve them. Our clients are very dedicated, intelligent, and personable individuals
who strive daily, without expecting great recognition, to provide their customers with high quality
water and wastewater services. Most of the principles in the book relate to our client assistance.
After going through the acknowledgments and recognizing the amount of hard work that has
gone into the third edition, I realize that this book is really about my immensely talented and
qualified team and not about me. I am grateful that I can be a facilitator for them to display their

knowledge and experience for the reader’s benefit. I leave this book as their legacy, and tip my hat,
with a gleam in my eye, to them as they prepare for the fourth edition.


Author/Editor

George Raftelis

,

CPA

, is president and chief executive officer of
Raftelis Financial Consultants and resides in Charlotte, North
Carolina. As president and CEO of RFC, he assists water and

wastewater utilities in addressing financial, management, account-
ing, and public policy requirements. In addition, his clients include
public and private sector organizations involved in other environ-
mental disciplines such as solid waste, hazardous waste, and storm-
water.
He has over 29 years of consulting experience in the environ-
mental industry. Prior to founding Raftelis Financial Consultants,
he was director of Ernst & Young’s national environmental con-
sulting practice. He has provided environmental consulting assis-
tance to over 300 utilities across the country. His experience with
small, medium, and large utilities includes the development of system development charges (impact
fees), water and wastewater cost of service and rate structures, and water and wastewater financial
plans. In addition, he has conducted valuations and acquisition feasibility analyses, and provided
litigation support services related to water and wastewater pricing and finance, utility management,
and organizational reviews.
George received a B.S. degree in mathematics with a minor in economics from Eckerd College
in St. Petersburg, Florida, in 1969. As an Eckerd alumnus, he received the award for “Excellence
in Career Achievement and Outstanding Service Contributions.” Following 4 years of service as
an officer in the Military Intelligence Branch of the United States Army, he attended Fuqua School
of Business at Duke University and received a Master’s degree in 1975. After graduation from
Duke, he was elected president of the Alumni Council, Fuqua School of Business. In 1975, he
joined Ernst & Young in Charlotte, where he established Ernst & Young’s environmental consulting
practice.
He has published technical articles of finance and pricing in periodicals such as

American
City and County, American Public Works, American Water Works Journal,

and


Environmental
Finance

. He co-authored several of the American Water Works Associations’ (AWWA) rate
manuals to include M34 alternative rates and M35 revenue requirements. In addition, he has
developed and conducted numerous technical workshops for professional organizations and envi-
ronmental agencies such as the American Water Works Association, the Association of Metropol-
itan Water Agencies, the American Bar Association, the Water Environment Federation, the
Environmental Protection Agency, the Water Resources Research Institute, the Government
Finance Officers Association, the American Society of Public Administrators, the National League
of Cities, the U.S. Conference of Mayors, and the International City Management Association.
He is active in the American Water Works Association, the Association of Metropolitan Water
Agencies, the Water Environment Federation, and the American Institute of Certified Public
Accountants. He chairs the Committee on Rates and Charges, American Water Works Association,
and is a charter member of its environmental financial advisory board, which provides policy
guidance on finance and pricing issues to the Environmental Protection Agency. In addition, he has
been on the editing and advisory boards of the publications

Environmental Finance

and

Environ-
mental Network.


Contributors

Judy Bedard, PE, DEE


is a senior associate in Malcolm Pirnie’s
Red Oak Division. She has more than 20 years of experience in
assisting municipal clients on a broad range of water, wastewater,
and solid and hazardous waste management projects. She specializes
in serving as an owner’s representative in the implementation of
alternative delivery systems to procure public works projects, as well
as performing utility performance assessments, organizational effec-
tiveness studies, and workshops. Her experience includes system-
wide planning, preparation of requests for qualifications, review of
statements of qualifications, preparation of requests for proposals,
contract negotiations, contractor selection, and financing support for
funding and bond issuance processes.
She is a past president of the Delaware Engineering Society and a member of the National Society
of Professional Engineers and AWWA. She graduated summa cum laude from Villanova University
in 1979 and received her Master’s degree in civil engineering (environmental engineering and science)
from Stanford University in 1984. She is also a Diplomate of the American Academy of Environmental
Engineers.

Peiffer Brandt

is vice president and deputy COO of Raftelis Finan-
cial Consultants. He has managed a variety of projects to assist water
and wastewater utilities in addressing economic and financial issues.
He has also gained a broad knowledge of water and wastewater rate
structures and rate-setting practices as the project manager for various
rate surveys, including the 2000, 2002, and 2004 Water and Waste-
water Rate Surveys

.


He is currently chairman of the North Carolina
AWWA–WEA Finance and Management Committee. In addition, he
recently conducted a workshop titled “Utility Finance 101” for the
North Carolina AWWA–WEA, which focused on the rate-setting
process and the appropriate methodology for developing cost of
service allocations. He received a B.S.E. in chemical engineering
from Princeton University in 1994 and an M.S.P.H. in environmental management and policy from
the University of North Carolina in 1997.

Frank Davis

as an employee of Raftelis Financial Consultants, has
been involved in numerous projects for public utilities. He has been
involved in a variety of studies involving transitions to new rate
structures designed to address specific pricing objectives, including
financial sufficiency, water conservation, and high strength waste
charges. These types of studies often include other related analysis,
including calculations of development impact fees, outside-city rate
differentials, and wholesale pricing studies. He has also provided
assistance to professional associations by presenting the technical
aspects of the utility rate-setting process, alternative methods for
assessing impact fees, and implementing impact fees in South Caro-
lina. He has extensive financial modeling experience. He holds a
B.A. degree in political science from the University of South Caro-
lina–Columbia, a B.S.B.A. in finance from the University of South Florida–Tampa, and an M.B.A.
from the Babcock School of Management at Wake Forest University.

Leta Hals, CBA

is a manager with Raftelis Financial Consultants

and is RFC’s director of valuation services. Since 1999, her work
with RFC has included valuation, economic feasibility, rate and
utility pricing, privatization, bond feasibility, and other financial
services for utilities. She has also provided expert witness testimony
before the Illinois Commerce Commission. Prior to joining RFC,
she served as a consultant with Andersen Consulting in Atlanta,
Georgia, and Oslo, Norway. She holds a B.S. degree in biology from
the College of William and Mary in Virginia and an M.B.A. from
the University of Tennessee. She is a member of the Institute of
Business Appraisers and has been designated as a Certified Business
Appraiser (CBA) by this organization.

Harold Smith

vice president of Raftelis Financial Consultants, is
currently chair of the Competitive Practices Committee, AWWA.
He is a nationally recognized expert in water and wastewater
finance, management, and pricing. His broad based experience
includes development of comprehensive financial plans, cost of
service and pricing analyses, revenue bond feasibility studies, stra-
tegic planning, privatization procurement and feasibility, regional-
ization and consolidation, utility valuation, and groundwater
resource management.

Patrick Smyth, CPA

is technology manager at Raftelis Financial
Consultants. Patrick has been with RFC since 1994 and serves as
a financial and technical consultant on projects ranging from afford-
ability and cost of service development to privatization and litiga-

tion support. Patrick graduated magna cum laude from the Univer-
sity of North Carolina at Charlotte with a B.S. degree in earth
science, and he has a B.S in business administration from Appala-
chian State University. He is a Certified Public Accountant.

William Stannard, PE

is vice president and COO of Raftelis
Financial Consultants. He is a nationally recognized expert in water
and wastewater finance, management, and pricing. His more than
25-year career has focused on advising municipal water and waste-
water utilities throughout the United States. His broad based expe-
rience includes development of comprehensive financial plans, cost
of service and pricing analyses, revenue bond feasibility studies,
and strategic planning. He has appeared in federal and state courts
as an expert witness on numerous water and wastewater rate cases.
He has served as chairman of the Water Environment Federation
task force, which has developed a manual of practice on wastewater
utility pricing, and is a member of the American Water Works
Association’s (AWWA) Finance, Accounting, and Management
Controls Committee. He received a B.S. degree in business administration and in civil engineering
from Kansas State University in 1975.

Alexis Warmath

a vice president at Raftelis Financial Consultants,
is a nationally recognized expert in water finance, management, and
pricing. His broad-based experience includes development of com-
prehensive financial plans, cost of service and pricing analyses, rev-
enue bond feasibility studies, and strategic planning. He has over 13

years of consulting experience and has been with RFC for over 10
years. He has served RFC as project manager or lead consultant in
a variety of projects to assist government utilities in addressing finan-
cial, management, and public policy requirements. He is currently a
member of the Rates and Charges Subcommittee of the AWWA’s
Financial Management Committee, where he participated in the
development of

AWWA Manual M54 — Developing Rates for Small
Systems

. He received a B.S. degree in economics from Duke Uni-
versity. He also received an M.B.A. from the Fuqua School of Business and a Master’s degree in
environmental management from the Nicholas School of the Environment and Earth Sciences, both
at Duke University.

Teno West, JD

is a partner practicing in the areas of public
contracts, government law, water law, solid waste law, government
procurement, project delivery, infrastructure development, project
planning and finance, public finance, and intergovernmental rela-
tions. His experience has included representing water, wastewater,
and solid waste agencies in structuring public–private partnerships
as well as developing regional service solutions.
His practice includes representing local, regional, and federal
governments with alternative project delivery arrangements such
as design–build and design–build–operate procurements. His alter-
native project delivery representation has included water, waste-
water, combined sewer overflow, cocomposting, material recovery,

waste–to–energy, as well as other similar environmental infrastruc-
ture projects. He has been involved in a number of such projects
ranging in size from a 1.5 MGD wastewater plant to a water and
sewer system comprising in excess of 200 water and wastewater plants. He has assisted governments
with the drafting and enactment of legislation necessary for such alternative delivery methods to
be lawfully implemented.
He has been town manager of Hardwick, Vermont, and town administrator of Carlisle, Massa-
chusetts. In his capacity as a municipal manager, he served on a regional solid waste district
governing boards in both states.
He has been admitted to practice in New York and New Jersey and is a member of the American
Bar Association, the New York State Bar Association, and the New Jersey State Bar Association.
He earned his bachelor’s degree cum laude in political science and American studies in 1984 from
Saint Michael’s College, and he earned a master’s in public administration in 1987 from the
University of Vermont. He earned his law degree cum laude from the New England School of Law,
where he was lead editor of the

New England Law Review

.

Gerald Wexelbaum

is president of Strategy Support Associates,
a consulting firm dedicated to helping clients become more suc-
cessful through strategic management. During his 30-year career
as a management consultant, he has worked with over 100 clients
in developing and implementing strategic plans. Since resigning
as a consulting partner with Ernst & Young to establish Strategy
Support Associates in 1992, he has helped several water and waste-
water utilities in strategic planning. These clients have ranged from

small rural utilities to large complex urban water and wastewater
providers. Outside of the water and wastewater utility industry, he
has worked with many business organizations in strategic planning
including large financial institutions, Internet retailers, telecom-
munications providers, manufacturers, sports facilities, and others, and brings business techniques
and practices utilized in these industries to address issues faced by public utilities. He holds a B.S.
degree in marketing from Pennsylvania State University and M.B.A degree in marketing and
business economics from the University of Chicago.

Kevin Whitt

is utilities privatization program manager for the U.S.
Navy’s Naval Facilities Engineering Command–Atlantic. He has 8
years’ experience in privatization of military utility systems. He
managed the Navy’s first transaction under the privatization statute
and is considered the principal architect of the Navy’s privatization
process. He is a licensed professional engineer with a background
in utility service contracting, power generation, and industrial plant
systems. He has received numerous awards including the presti-
gious Navy Meritorious Civil Service Award. He has a B.S. degree
in mechanical engineering from Virginia Institute of Technology
and is studying for an M.B.A at the College of William and Mary.

Chris Woodcock, PE

is president of Woodcock & Associates, Inc.,
a firm that provides water and sewer rate and financial consulting
services to municipal and investor owned utilities. During his career
he has prepared some 300 water, wastewater, and stormwater rate
and financial studies for clients from Maine to Florida to California

as well as overseas. He has testified as an expert witness on rates-
related matters before state utility commissions and in court pro-
ceedings numerous times. He is the former chairman of AWWA’s
financial management committee and AWWA’s rates and charges
subcommittee. He holds degrees in both civil engineering and eco-
nomics from Tufts University.