Utility Comparisons - Return On Equity
Comparing utilities can be difficult. Typically, they are compared by the rates they charge. This comparison does not take into consideration asset status. New capital expansions may cause rates to inflate above the norm. Established utilities should enjoy lower rates if their operational costs remain in check. Treatment choices will effect rates, reverse osmosis costs more to operate than lime softening. Advanced wastewater costs more than secondary only treatment. The variables are numerous.
We use a variant of the DuPont Model. In essence, it highlights three specific areas, operational efficiency, asset efficiency and equity.
Operational Efficiency - Highlights the margin between operating revenue and operating costs. Operating revenue minus operating costs leaves an amount capable of funding major capital, R&R, general fund transfers and reserves.
Asset Efficiency - Exhibits the annualized return over cost generated by the capital investments of a utility. The result indicates the capital investment capability of generating revenue. Returning revenue for capital investment is critical to the viability of any capital program.
Equity - Reflects the utility's position in the capital improvement debt cycle. For every dollar of equity (facilities paid for), how much is still owed (debt). This ratio is very useful when considering additional capital improvements.
The resulting values can give an "overall" picture of a utilities operation. Additional "drilling" within each category is usually required to give a more precise indication of the weaknesses or strengths of a utility. The following examples are provided for comparative value and reference.
We use a variant of the DuPont Model. In essence, it highlights three specific areas, operational efficiency, asset efficiency and equity.
Operational Efficiency - Highlights the margin between operating revenue and operating costs. Operating revenue minus operating costs leaves an amount capable of funding major capital, R&R, general fund transfers and reserves.
Asset Efficiency - Exhibits the annualized return over cost generated by the capital investments of a utility. The result indicates the capital investment capability of generating revenue. Returning revenue for capital investment is critical to the viability of any capital program.
Equity - Reflects the utility's position in the capital improvement debt cycle. For every dollar of equity (facilities paid for), how much is still owed (debt). This ratio is very useful when considering additional capital improvements.
The resulting values can give an "overall" picture of a utilities operation. Additional "drilling" within each category is usually required to give a more precise indication of the weaknesses or strengths of a utility. The following examples are provided for comparative value and reference.
Individual Utilities
As stated previously, additional examination is often required. Take the City of Coral Springs. Their numbers look good, high operating efficiency, high asset efficiency and low debt. The numbers do not support the rate increase of 2011 or the proposed additional increases in 2012. Further analysis indicates that the water and sewer enterprise fund is returning a large percentage of its' revenue to the General Fund. A type of "backdoor" tax some local governments are utilizing as ad valorem and other revenue streams are declining. Conversely, low numbers may not be specific to a poorly run utility. Heavy investment in regulatory compliance without growth revenue is one of the most often seen explanations of low results.
If you want to have your utility's ROE results, please contact our office.
If you want to have your utility's ROE results, please contact our office.