WaterOne is a water utility in Johnson County, Kan., serving more than 400,000 people, producing and distributing 60 million gallons a day (mgd) of potable water to residential and commercial customers. Production and finance staff at WaterOne worked collaboratively to develop a model that would account for the seasonal fluctuations in demand, power usage, chemical doses and production capacity of each possible combination of facilities in order to ensure WaterOne’s rate payers get the best value for their money. This, in turn, helps WaterOne better predict customer demand and operational costs.
The relationship between financial planning and analysis (FP&A) and operations at WaterOne hasn’t always been smooth. Cultivating this relationship has been high on the priority list for FP&A. Operations is responsible for making decisions in real time that have a bigger impact on the budget than most other departments combined. This makes it essential that FP&A understands the factors considered in operational decisions and that operations understand the financial impacts of those decisions.
FP&A’s role in the organization has been evolving over time. As technology has advanced, FP&A has been freed up to dive deeper into the business units, more fully utilizing the business expertise of the analysts. The analysts are routinely relied upon to help the operational areas translate complicated technical issues into understandable business case problems and solutions. Many of the projects FP&A analyzes identify unique solutions to challenges WaterOne is facing and in turn, help drive change throughout the organization.
Over the course of several years and several budgets, FP&A has been able to demonstrate to operations its potential to add value. It began with small projects and budget line items. Slowly, more information began to flow back and forth between the two departments. Today, these two departments work together year-round, sharing information and ideas to make better operational and financial decisions.
FP&A developed and maintains a long range rate forecast model which projects revenues and expenditures over 20 years into the future. One of the key assumptions in this model is current and future customer demands. In the past, FP&A would use this model to set water rates and project revenues for the utility, but operations would make budget requests based on its own projection for water production.
The first step in building a model to evaluate the different variables impacting production costs was to work with operations and agree on a single method and source for projecting future demands. The projected customer demand is the foundation for the operational model. The two departments now have an annual meeting to discuss, review and agree on the future year’s growth and demand trends before a first budget draft or operational plan is developed. It is important that both departments agree and understand that projections for water production are developed by FP&A using historical trends to define “normal”, which excludes fluctuations based on weather or economic conditions.
The second step is determining the power and chemical costs per location. The cost per location is highly dependent on the amount of water planned to be produced at each location. Therefore, it is important that we work together to develop a model that adjusts as production levels change. Operations does this by projecting the dose in parts per million for each chemical required during normal operating conditions by month and location. FP&A uses a historical dose analysis to review the projected doses for reasonableness.
The two departments have discussions about current operations, river conditions and proposed changes to future operations during this review. Projecting power costs begins with operations using a linear regression to determine the kilowatt hours required per location at various production levels. Then, FP&A inputs the power rates based on the complex rate structure of the power utility. This is another opportunity for the departments to discuss financial impacts of the operational plan based on the rate structure imposed by the power utility.
Once the monthly production levels are projected for the budget year, and the power and chemical factors are in place, the monthly production numbers can be entered in the model. Operations enters the default limitations in the model to account for the capacity limitations of each facility. At this point, the model can be used to run scenarios to determine the most cost-effective operational plan for the budget year.
Making decisions together
The annual operating budgets for power and chemicals are developed using the updated operational model each year. The model is utilized in three important decision-making processes:
- What is the most efficient operational plan?
- How much will we spend on the operational plan?
- What are the financial and operational impacts of proposed capital expenditures?
The model is used to determine which facilities will be operated to produce the winter base demand and in which order facilities will be utilized to cover peak demands. It is also used to consider the timing and impact of downtime required for maintenance. Once the plan is developed to meet the operational needs, it is used by FP&A for the budget request. Power and chemical expenses make up about 27 percent of the annual operating budget and the details of the operational plan become key elements of monthly variance analysis.
The teamwork required to build this multipurpose model is essential. Without the consistent flow of information between FP&A and operations, the model would not be the reliable decision making tool it is today.
Natalie Morrison, FP&A, is manager of financial planning and analysis at WaterOne.