Water Rate Consultants: Tomorrow’s Steam Train Engineers?

What is the future for consulting now that we have software that lets people do rates analysis themselves with ease and confidence? Are rate consultants tomorrow’s steam train engineers, fighting it out in a sunset industry?
I actually think consultants will continue to have an important role — but the game will change dramatically over the next decade.

Note that when I say consulting, I’m not talking about contracted experts like engineers who help with water supply master planning, auditors who help with annual financial reporting, or analysts who help with debt issuance and other complicated municipal financial challenges. These experts will have a key role for years to come. I’m talking about consultants who do rate reviews, following the procedures in the American Water Works Association’s Principles of Water Rates, Fees and Charges Manual (aka M1).

M1 sets the industry standard for how rate reviews are done, and every consultant — myself included — sticks to it fairly closely. It establishes a common language for how we talk about setting water rates and charges, it’s referenced in court challenges, and it has been mentioned in pretty much every conference presentation on water and wastewater system financing given in the last two decades.

Here’s the thing, though: most of the techniques and procedures set out in M1 are based on algebra that we learned in Grade 9.

This isn’t to say that the community issues and policy challenges that drive people to review water and wastewater rates are simple. Things like affordability, water conservation, equity and revenue sufficiency are tricky. They demand careful planning to make sure we get the balance of interests right, and that we communicate clearly to make sure residents and elected officials understand why changes are necessary. But the math is fundamentally quite simple. With the right tools, most municipal water and finance managers can easily do this work themselves.  

So why do people continue to use consultants, given the availability of online tools and services? Over the past few years, I’ve talked to hundreds of finance directors, directors of public works and administrators around North America. Through these discussions, I’ve identified six reasons we’re still hanging onto the old ways. Have a look:

1.“It will save time / be easier.”

This one can be dispensed with pretty quickly. Doing a rate review with a third-party consultant will not save time, and it’s not particularly easy, either. You have to create the RFP, go through the whole procurement process, and then manage the contract. The data needs are going to be the same no matter which route you take — in fact, data requirement specifications are more refined than ever before. (Anyone offering rate management services through a software solution is going to go out of their way to make sure the data and onboarding requirements are ultra-efficient.)

A consultant rate review must also be done fairly quickly within the boundaries of a single project — over six months, say. You lose the flexibility to pace work out (by doing the most important things earlier and picking away at lower-priority issues at your convenience) over several budget cycles.

2. “Having a consultant do the work will cover my backside.”

The idea here is that if you have a third party do the analysis, you’ll be insulated from repercussions if there’s a revenue shortfall or if the analysis is otherwise off the mark. Presumably this is because the consultant could be sued. Alternatively, at least you’ll have someone to blame if things go wrong. There are at least three problems with this thinking.

First, this amounts to a very expensive insurance policy. If it’s insurance you want, why not just go to an insurance broker? Second, you’ll still feel your council or board’s disappointment if the analysis proves inaccurate: after all, you managed the project and you picked the consultant. Third, one of the main disadvantages of using a consultant is that they are only brought in every 3–5 years — or longer. Doing it yourself with a good tool and some coaching lets you look at rates and revenues every year; if there’s a flaw in the revenue projections, you can correct course quickly and easily. Staying on top of things every year means nobody’s backside needs covering

Steam train in a open countryside.
3. “I’m overdue for a rate review.”

The reason you’re overdue for a rate review is because you do them infrequently; reviews are time consuming and expensive. Consultant reports are, by their nature, static documents — yet water system management is anything but static: water demand goes up and down; construction project costs change; regulatory requirements become more onerous; infrastructure fails unexpectedly. The greatest advantage of using an online tool is that you can do it easily and inexpensively, so you can do it every year. There’s no longer any reason not to be on top of your water system financing — down to the minute.

4. “Having a third party do the analysis will make it more credible.”

I get that. There’s something comforting about having an outside expert come in and give you all the answers. It’s probably even true that your elected officials are less likely to challenge the results when it’s time to seek approval. But taking this path undermines confidence in the capabilities and authority of your in-house staff. You’re effectively telling elected officials and the public that you can’t be trusted do the work yourself, yet you regularly present other work like annual budgets and staffing plans. Our experience with communities that have managed their water systems using software over several annual cycles is that once everyone is acclimatized to the process, rate changes sail through with little debate, and personal credibility gets boosted. After all, who better to propose the necessary rate changes than the people who live in the community, and who are ultimately responsible for the outcomes? As Edwin Meese, Ronald Regan’s Attorney General, once put it, “An expert is somebody who is more than 50 miles from home, has no responsibility for implementing the advice he gives, and shows slides.”

5. “But I always use consultants.”

We used to have to plan our evenings around the TV listings, too. Some people use consultants for rate reviews simply because that’s what they have always done. In business school they talk about the “product adoption lifecycle”, which tells us that some people are quick to adopt new innovations, whereas others wait for the majority to get on board and then catch up. We’re definitely seeing this in the gradual shift into software. After all, using online tools to support decision making is a new thing to the world, never mind water service provision. How long did it take you to adopt online banking? What about Google Maps? Sometimes it just takes time for people to adjust to innovations that make their lives easier.

6. “I have a very big challenge and I really need an expert.”

This is the only one that really resonates for me. Sometimes you have a tricky management problem and everyone is in agreement that using skilled, external support will lead to a better outcome. I’ve heard many examples from this category: merging two formerly separate water systems; having a complicated array of wholesale and retail customers; or a challenging equity problem among customers that requires an in-depth cost-of-service analysis.

You’ll note that I didn’t include “big revenue shortfall” in the examples of “big challenges” above. From a mathematical point of view, this is actually just an ordinary problem with a few extra zeros behind it. This might be a communications challenge to resolve, but again, that’s something you should be able to do in-house with a bit of coaching.

I also don’t include changing a rate structure itself as a big problem. Software lets you model countless rate structures and see the impacts on revenues for each. This used to be a big problem, but the technology we have at our fingertips has changed the game.

Given the affordability of today’s software, I think rates consultants will be used much less often in the near future. More likely, their role will shift to handle those complex and thorny problems where we genuinely require their highly skilled services.

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