THINKING, GETTING AND STAYING COMPETITIVE

A Public Sector Handbook

Every day, water and wastewater utilities face increasing pressure to become more competitive. Some of this pressure comes from customers who are reacting to inevitable increases in water and/or sewer charges associated with increasing regulatory requirements. Some comes from elected officials or governing hoards who are reacting to the proposals of private vendors promising better service, lower costs, or both, Other pressures come from within the organization — from astute managers who realize that public monopolies can no longer operate as if competition did not exist.

This handbook addresses the issue of competitiveness in publicly owned and operated water and wastewater utilities. It presents the rationale for thinking, getting and staying competitive, plus specific processes that any utility can make to attain competitiveness goals. These processes are based generally on the experiences of more than 100 water and wastewater utilities that have embraced the competitiveness challenge, plus an in-depth examination of the exact steps followed by four utilities: Orange County Utilities, Florida; Fort Wayne City Utilities, Indiana; Colorado Springs Utilities, Colorado; and Houston Public Utilities Group, Texas.

The Role of Water and Wastewater Utilities in Local Government, Communities, And the Nation

Modern water and wastewater utilities deliver a wide range of services to the communities they serve. Core water supply services are well known: assurance of adequate raw water supplies, state-of-the-art water purification capabilities, maintenance of finished drinking water distribution networks, and maintenance of line pressure for fire fighting. Core wastewater management services are also well known: removal of raw sewage from homes and businesses; purification of sewage before release to the environment; safe handling, beneficial reuse, or disposal of biosolids; and protection against airborne releases of pollutants. These services are delivered with comfortable margins of safety that ensure reliable performance even in the face of unforeseen conditions.[emphasis added]

Other services sometimes are less well known. Typically, water and wastewater utilities offer enhanced or convenience services such as:

· Water conservation education and program implementation;

· Watershed planning and protection;

· Protection against sewer backups, fires, and explosions through the national industrial pretreatment program,

· Technical assistance (to industrial customers) on wastewater treatment and waste minimization;

· Ambient surface arid ground water quality and sediment monitoring;

· Provision of reclaimed water supplies and groundwater recharge, and

· Septic tank retrofitting and septage pumping and disposal.

 

In addition, water and wastewater utilities often take part in broad initiatives such as disaster planning, emergency preparedness and public education and outreach, participation with state and federal agencies on issues of policy and rule-making, and research and development projects in association with academic institutions and research foundations. Utilities also deliver compliance with government programs and public priorities such as supporting local businesses, encouraging minority hiring and advancement, and complying with public personnel and procurement programs.

Customers are paying for all these services through user charges and should expect to enjoy the benefits of a cleaner environment and continued economic prosperity. Water and wastewater capacity enable communities to attract and retain large commercial and industrial users, which in turn facilitate economic growth, expansion of local tax bases, and jobs. Safe pure drinking water contributes significantly to quality of life and community well-being. Clean waterways promote fishing, boating, water sports directly, and contribute to private investment in waterfront amenities such as riverwalks or seaport redevelopment.

Acknowledgment and understanding of the full range of core and services and their costs becomes critically important in the competitive process, since many communities inevitably explore whether and to what extent they are willing to pay for these services, or indeed whether another bundle of services may be preferable.

Historically, public utilities have focused on service delivery and not necessarily on competitiveness. This is changing rapidly. Increasingly, competitive water and wastewater utilities are delivering core services at competitive prices by leveraging skills in systems management, information management and finance.

The Urgency to Examine Competitiveness

The urgency for competitiveness in the water and wastewater industries is a natural extension of recent trends toward deregulation and competitiveness in the electricity, gas, and telecommunications industries across North America. Public service in general is increasingly challenged by generic demands for lower cost and higher performance. This trend is motivating a very basic reassessment of public service provision, and a focus on reinventing government and reengineering public service. Water and wastewater managers can harness this sense of urgency to help drive the competitiveness process and depart from business as usual.

Simply put, consumers are demanding that regulated monopolies act more like market competitors and that governments promote such behavior. Private entrepreneurs, consequently, are finding ways of introducing competition and reducing prices to consumers. It is not surprising that the kind of innovation, price benefits to consumers, and new enterprises that we have seen in the long distance telecommunications industry are beginning to show up in local telecommunications, electricity distribution, and gas distribution. Water and wastewater utilities may very well he next.

Competition In The Water And Wastewater Sectors

Neither water supply riot wastewater treatment is distributed in a competitive setting. The average household, for example, cannot buy a gallon of either service from a dozen suppliers or select the quality and price that best meets individual needs and budgets. Instead, these services constitute "natural monopolies" where because of high fixed costs only one delivery system makes economic sense across a broad geographic region.

As former monopolies in telecommunications electricity and gas have learned however, the need for only one distribution system no longer shields service providers from competition. Recently, private vendors — largely overseas water companies in partnership with US engineering firms — have stepped forward to offer better service at lower costs through contract operations, long-term lease concessions, or asset purchases. For some municipalities, such offers may, indeed, represent the lowest cost service available. For others, this threat of competition is all that is needed to drive internal reengineering to become more competitive.

Recent competition has resulted in increased private participation in water and wastewater services The number of private operating and maintenance O&M contracts has increased from 100-200 in the late 1980"s to nearly 1,000 in 1997 The largest of the private firms offering contract services to the public water and wastewater sectors has seen their annual revenues grow from less than $50 million in 1991 to nearly $300 million in 1997.

Despite these seemingly large numbers, potential marker share is even larger. According to a recent survey; only nine percent of the 261 city Wastewater systems surveyed report that they contract with private firms to provide O&M services. Private firms provide O&M services within only six percent of surveyed wastewater Systems.

The Concept Of competitiveness

How big are the competitiveness savings that any utility might expect? The concept of "competitiveness margin" provides one perspective on this question. Based on more than 100 water and wastewater utilities examined over the last five years, one firm reports that service delivery by public water and wastewater utilities is, on, average, 24% more expensive than comparable private services. This margin isolates the controllable operations and maintenance budgets of public utilities and compares them to benchmarked costs associated with operations of two large French water/wastewater utilities.

Nationwide, saving 24% of all water and wastewater O&M costs would reduce local expenditures by nearly $5 billion a year. Even if a small percentage of this total is actually attainable, local governments face savings in the hundreds of millions of dollars every year.

Not every municipality may choose to narrow the entire margin that may exist. Recall from above, that publicly owned and operated water and wastewater utilities serve their communities in ways that go beyond direct delivery of drinking water or wastewater treatment. Examples include wide margin of safety resulting in clearer effluents than needed under permit, maintenance of reserve capacity to accommodate industrial growth, and cooperation with other city services. It may be the case, for example, that some municipalities choose to retain and pay for these other services.

On the other hand, reducing this margin may he one way for utility managers to avoid rate increases or reductions in service. Some systems may find that eliminating the competitiveness margin can free up funds to meet new environmental requirements, or to meet a broader range of municipal capital needs.

The Challenge

Eliminating the competitiveness margin is an opportunity as well as a challenge. Change in and of itself may be the most significant dimension of this challenge. But other dimensions lie in reforming outdated and institutionalized thinking to embrace competitiveness, reorganizing staff to accommodate change, and learning new work practices and operating conventions that a compete with private firms.

One obvious dimension is the existing culture in some utilities. Not surprisingly, most publicly owned and operated water and wastewater utilities are driven by a concern for public health and the environment and not necessarily a concern for least-cost or profitable operations. Consequently, many are simply unaware of opportunities to get more competitive. Others are ready to act, but need guidance. Another dimension of the challenge is meeting the expectations of management, labor, and unions during the change process. Successful, competitive utilities have learned that all constituencies must agree that their mutual interest is best served by working together.

The Choices

What choices do utilities have? Assuming that public utility managers prefer to retain control over at least some parts of service delivery (i.e. an asset sale is not contemplated), they have three choices,

· get competitive internally;

· conduct a competitive bidding process where private vendors at asked to bid against the current public staff, or against their best estimate of costs (bid to goal strategy) to deliver a specific array of services; or

· contract directly with the lowest-cost private vendor to operate and maintain facilities in question.

Of these choices, most water and wastewater utilities should find it in their and their customers’ best interest to pursue competitiveness first.

Getting Competitive

Utilities that pursue a competitiveness process typically reengineer their organization and operations to improve performance or reduce costs to levels comparable so their private sector counterparts. Not all reengineering techniques will suit every local situation, bus typically the following changes have produced desired outcomes:

· Cross-training staff and other workforce flexibility reforms;

· Creating performance-based and gain-sharing incentive programs for staff;

· Rightsizing. unattended operations, and human resource reforms;

· Automating processes with enhanced instrumentation;

· Switching from reactive to predictive and preventive maintenance;

· Contracting out non-core competency functions;

· Reducing costs of materials and chemicals through new technologies or cooperative purchasing agreements;

· Reducing energy consumption, through conservation techniques, new technologies, or contracts with multiple suppliers;

· Reforming cumbersome procurement restrictions; and

· Reducing parts and supplies inventories.

In addition, many utilities have pursued revenue enhancements strategies. Instead of seeking ways to deliver comparable services at less cost, revenue enhancement seeks to increase revenues at no loss in current services through, for example:

· Reclaiming by-products for sale;

· Marketing core services such as laboratory analysis or pipe maintenance directly within the service area or more broadly; or

· Acquiring adjacent service areas through intermunicipal agreements, purchase of distribution systems, or sale of complementary products such as bottled water.

As a rule of thumb, a thorough competitiveness process generally takes three to five years, depending on such factors as readiness for change, executive leadership, and level of resistance. These issues are discussed in considerable detail in subsequent chapters.

Managed Competition

In a managed competition, the public agency bids against private entities for the right to deliver a well-defined package of services over a specified period of time. Typically, the lowest cost bid wins. The process generally includes:

Pre-competition activities including organizing both a bidding and a process management team and communicating with employees, elected officials, labor unions, the general public, and other interested constituencies;

Preparation of competition documents, which typically include both a Request for Qualifications and a Request for Proposals;

Pre-proposal activities, such as document review, physical inspections and facilities visits, and formal question and answer opportunities.

A proposal evaluation process leading to a recommendation for selection; and

Contract negotiations and transition.

A comprehensive managed competition process for a large water or wastewater utility can take a year to complete and cost $500,000 or more. Yet, this process allows both public and private operators to demonstrate the extent to which they can be effective and efficient at providing water and/or

wastewater management services, with the result that ultimate savings can exceed costs by wide margins. Seeking similar savings, many utilities prefer to allow the current public operating team to pursue their own competitiveness process prior to, or instead of, a more costly and time consuming managed competition process.

Contract O&M

A third choice is direct contracting with private vendors and selection of the least-cost bid for a pre-specified bundle of services. Many water and waste water utilities currently contract for some services — engineering, laboratory, solids handling, billing, landscaping, specialty repair and maintenance services, and so on. Under this option, the utility would contract out all of its functions to a single provider who offers to reduce costs of services significantly.

This option may be useful where there is virtually no chance that the current public operation can reengineer itself to get more competitive. Where this is not the case, competition is better served, services are more likely to improve, and costs are more likely to decline under a competitiveness process or a managed competition.

Thinking About Change

How does a water or wastewater utility assess its own readiness or ability to meet the challenge of competitiveness? The "change equation" below, to which we will return throughout this handbook, is one way to answer this question:

CHANGE POTENTIAL = Urgency X Vision X Solution > Resistance
Time

What the equation tells us is that any utility’s potential for change is a matter of four factors: urgency, vision, solution, and time. Change can occur only if the urgency to act is recognized, a vision of the future is shared at all levels, and a solution is formulated to take the organization from its current state to the future vision. If there is no urgency to change, all the vision and solution in the world cannot possibly result in fundamental or sustainable change. Conversely, urgency without vision and solution will not result in change.

Further, the equation tells us that the potential for change grows in proportion to the size of all three factors in the numerator, Change can still occur, for example, if these factors are sizable, even in the face of great resistance.

Finally, the faster each factor can he put in place to motivate and guide change, the greater the potential for change.

In this chapter we deal with only one change factor — urgency. Utilities can measure their own sense of urgency.

Distribute the questionnaire on the following page to a sample of managers, supervisors, and line employees. Ask each person to answer each question with a number 1 to 5, using the following key:

1 = Definitely not
2 = I don’t think so
3 = I’m not sure
4 = I think so
5 =Yes, definitely

Compute the average score across all responses. If the average is less than 20, the sense of urgency at your utility is very low and near-term, sustainable change is unlikely. If the average falls between 20 and 40, your utility feels the urgency to change and has a fighting chance of succeeding with a little luck and a lot of hard work. If the average is greater than 40, your utility fully understands the urgency to change and had better begin the process quickly before it begins without you.

This process also can be used to understand the sense of urgency within any staff level by testing a sample of managers separately from a sample of say, line employees.

You can order a copy of the 160 page study through the internet. Click for the AMSA website order form: http://www.amsa-cleanwater.org/pubs/pubs.htm