Balancing Supply and Financial Risks in Water Utility Decision Making under Uncertainty

Water utilities seek to maintain high levels of water supply reliability while also meeting financial stability goals. Financial objectives such as keeping debt levels low and rates affordable can directly conflict with making investments in new infrastructure that ensure high levels of supply reliability. Water utilities have increasingly relied on borrowing via the bond market to support new investment; this makes meeting financial performance standards more critical to maintaining a high credit rating to secure lower interest rates. Balancing supply and financial objectives are challenging because of the uncertainties in demand projections and hydroclimatic conditions. In response to these challenges, utilities can deploy adaptive policy levers such as demand management and rate increases as a means of navigating future development paths that meet supply reliability and financial stability objectives. This research identifies development paths that achieve both objectives using a coupled water supply–financial model that is developed as a long-term planning tool for Florida’s largest wholesale water provider, Tampa Bay Water Authority. The model is used to characterize the utility’s ability to meet its supply reliability and financial stability goals under 1,000 different realizations involving variable conditions related to demand growth and hydroclimate. Financial stability is evaluated via measures of “creditworthiness” (e.g., debt service coverage ratio) used by credit ratings agencies, which ultimately influence utility borrowing costs. Results indicate that achieving supply and financial goals simultaneously are only feasible through active management involving careful calibration of rate increases and demand management.