Developing a Revenue Protection Program to Control Apparent Losses

The most significant impact of apparent losses for water utility managers is uncaptured revenue. The label revenue protection program is used to identify the collective activities used to protect the utility's revenue base by controlling apparent losses. As noted above, a number of distinct components, and subcomponents, of apparent losses occur in water utilities; therefore a revenue protection program must be tailored to the individual needs of the water utility. Figure 11.76 shows an example revenue protection plan for the fictitious water utility County Water Company (CWC). Revenue protection plans should be developed by considering each of the major components of apparent losses: customer meter inaccuracy, data transfer error, systematic data-handling error,

SAMPLE REVENUE PROTECTION PLAN

Name of Utility: County Water Company

Date: 7/10/2007

I. Revenue Protection Plan Approach

After completing County Water Company's (CWC) first annual water audit the CWC manager determines to create an ongoing revenue protection program that identifies causes of the most significant apparent loss components, and launches efforts to begin to reduce these losses to economic levels. After initial gains are evaluated, additional, less significant occurrences of apparent loss will be evaluated for reduction.

The CWC water audit quantifies apparent losses as:

Residential meter under-registration 134.33 Mil Gal @ \$556,395

Industrial/commercial/agricultural meter under-registration 29.97 Mil Gal @ \$108,701

Systematic data transfer error 12.57 Mil Gal @ \$49,589

Systematic data analysis error 8.72 Mil Gal @ \$34,400

Data policy/procedure impacts 11.63 Mil Gal @ \$45,880

Unauthorized consumption (default 0.25% of water supplied) 11.0 Mil Gal @ \$43,395

Total apparent losses 208.22 Mil Gal @ \$838,360

(Composite customer retail cost is \$3,945/Mil Gal; total cost to operate the water system is \$9,600,000)

From this summary the cost impact of customer meter inaccuracy is \$556,395 + \$108,701 = \$665,096. This is equal to 6.9% of the total cost of running the system (\$665,096/\$9,600,000). The three sub-components of systematic data handling error add to a total cost impact of \$129,869 or 1.3% of the total cost of running the water system. Unauthorized consumption is believed to be a very minor occurrence in the CWC system and is estimated using the default value of 0.25% of water supplied. From the results of the water audit, the Revenue Protection Plan should focus primarily on customer meter inaccuracy, with a secondary focus on systematic data handling error. In following the recommended first step in addressing apparent losses, the Manager of CWC plans to flowchart the workings of the customer billing system in order to ascertain the integrity of the customer consumption data and identify occurrences of systematic data handling error.

II. Customer Billing Process Analysis

Il-a. The Manager determines to assign one CWC billing analyst to work part time over a period of 2 months, in conjunction with a billing system consultant, to analyze the customer meter reading and billing process. From these findings, any apparent loss that is deemed to be readily correctable will be implemented. Such corrections are recognized as relatively minor procedural or programming changes; an example of which might be a programming lapse that inadvertently left a two-year old housing development of 50 homes off of the meter reading/billing roles. The cost of this effort is basically the human resources to implement it.

l-b. Staffing costs, including wages and benefits for CWC personnel

Number of CWC staff Cost, \$/hour 33.50 \$/day 268.00

Number of consultant staff _1_ Cost, \$/hour 75.00 \$/day 600.00

Duration

Days, per project task Flowcharting/Analysis CWC staff 14.00

Consultant 25.00 Total 39.00

Corrections 4.00

7.00 11.00

Total days 18.00 32.00 50.00

Total project costs, \$ 4,824.00 19,200.00 24,024.00

Figure 11.7 Sample revenue protection plan. (Source: Ref. 6.)

III. Customer Meter Accuracy Testing

Ill-a. The water audit for CWC estimates that customer meter inaccuracy caused under-registered consumption worth \$665,096 of revenue during the audit year. This amount represents the majority of the revenue recovery potential in CWC. During the water audit process CWC undertook customer meter testing on a sample of metersâ€”50 random residential meters and 5 random large (industrial, commercial, and agricultural) meters. The findings of this meter testing were extrapolated to the entire meter population to determine an estimate of the entire apparent losses attributed to customer meter inaccuracy. Based upon the value of this testing, the CWC Manager determines to continue such testing on an annual basis; both to continually gauge meter accuracy, and to also observe the rate of long-term degradation in accuracy with increasing cumulative consumption. CWC does not have its own meter testing facility, therefore they utilize contracted testing services. The metering supervisor and one staff person participate by identifying meters for testing, rotating meters from customer properties, and performing the administrative and analysis work.

Ill-b. Staffing & testing service costs, including wages and benefits for CWC personnel Number of CWC Staff _2

Supervisor cost, \$/hour 35.00 \$/day 280.00 # of days 3 Cost, \$ 840.00 Service worker cost, \$/hour 27.50 \$/day 220.00 # of days 15Cost, \$ 3,300.00

lll-c. Estimated Costs of Meter Testing Program-55 annual meter tests

Meter Testing Services cost, \$/small meter 35.00 Cost for 50 meter tests, \$ 1,750.00 Meter Testing Services cost, \$/large meter 250.00 Cost for 5 large meter tests, \$ 1,250.00

Meter Testing Service Cost, \$ 3,000.00

lll-d. Total cost for annual meter testing program, \$ 7,140.00

IV. Revenue Protection Program Summary lV-a. The total cost of the two components of the initial revenue protection program are given below: Customer Billing Process Analysis,\$ 24,024.00 Annual Meter Testing Program, \$ 7,140.00

Total Revenue Protection Program Cost, \$ 31,164.00 lV-b. Economic level of revenue recovery

During its first year of its new revenue protection program, CWC anticipates spending \$31,164 to launch the program. ln order to recover the cost of this program, CWC would need to recover revenue equal to this amount. By applying the composite customer retail billing rate of \$3,945/Mil Gal of customer consumption, an equivalent volume of consumption can be determined, as shown below:

\$31,164.00

Breakeven Recovery Volume = --------------- = 7.90 Mil Gal

\$3,945/Mil Gal lf CWC's initial revenue protection efforts recover merely 7.90 mil gal of consumption, then the revenue protection program will have paid for itself in its first year of operation. This level is only 3.8% of the total apparent losses of 208.22 mil gal quantified in the water audit. Since apparent losses are valued at the customer retail rate, recovering these losses can be highly cost-effective. CWC has strong potential to more than recoup its first year revenue protection program costs in its first year. lf this level of revenue recovery is met or exceeded, then CWC will be well on its way to creating a very cost-effective apparent loss control and revenue enhancement program.

Figure 11.7 (Continued)

and unauthorized consumption. Data from the water audit should be evaluated to assess the relative impact that each component exerts on the water utility. In the CWC example in Fig. 11.7, CWC estimates that very little unauthorized consumption occurs in its system, so this component is not included in its initial revenue protection program.

As shown in Figure 11.7, the cost impact in lost revenue to CWC due to apparent losses is \$838,360, which is 8.7% of the total annual operating cost of \$9,600,000.

In following with the above recommendations, the CWC manager determines to launch a revenue protection program that will analyze the customer billing process and institute annual customer meter accuracy testing.

The billing process analysis (flowcharting) is envisioned as a 2-month project costing \$24,024. This cost includes the analysis and any low-cost apparent loss corrections that can be immediately incorporated into the process. CWC conducted accuracy testing of a sample of customer meters during the compilation of its initial water audit and determines to continue testing a sample on an annual basis in order to track the accuracy of the customer meter population and monitor degradation of accuracy over time. The projected cost of this effort is \$7,140 to test 50 residential meters and 5 large meters. The total first-year cost of the two component revenue protection program is estimated at \$24,024 + \$7,140 = \$31,164. By applying its composite customer retail billing rate of \$3,945/million gal, CWC need only recoup 7.90 million gal of apparent loss to break even during the first year of program operation. This is only 3.8% of the total apparent loss volume of 208.22 million gal quantified in the water audit. If each residential customer consumes 800 cubic feet/month of water (71,808 gal/year), then the equivalent of recovering 110 missing accounts from the billing roles would meet the cost-effective breakpoint of 7.90 million gal recovered. This is less than 1% of the total of 12,196 accounts in the customer billing system. It is evident that recovering losses valued at the customer retail rate offers a swift and high payback.

During the early phases of a revenue protection program, significant recoveries may be recouped with less costly programming and procedural refinements. However, as the program matures, the water utility will ultimately consider more extensive and costly improvements to control apparent losses. Such efforts can include wholesale meter change-out, installation of automatic meter reading (AMR) systems, or implementation of a new computerized billing system. The economics of such long-term improvements should be carefully considered, but with a mature program, sufficient data will exist to provide a basis for rational decision making.