Category Archives: Water resources management

How to allocate our scarce most precious resource

Why Californians aren’t meeting the state’s call for more water conservation

Governor Gavin Newsom called for a voluntary reduction in water use of 15% in July in response to the second year of a severe drought. The latest data from the State Water Resources Control Board showed little response on the part of the citizenry and the media lamented the lack of effort. However, those reports overlooked a major reason for a lack of further conservation.

The SWRCB conservation reports data shows that urban Californians are still saving 15% below the 2013 benchmark used in the last drought. So a call for another 15% on top of that translates to a 27% reduction from the same 2013 baseline. Californian’s have not heard that this drought is worse than 2015 yet the state is calling for a more drastic overall reduction. Of course we aren’t seeing an even further reduction without a much stronger message.

In 2015 to get to a 25% reduction, the SWRCB adopted a set of regulations with concomitant penalties which pretty much achieved the intended target. But that effort required a combination of higher rates and increased expenditures by water agencies. It will take a similar effort to move the needle again.

California’s water futures market slow to rise as it may not be meeting the real need

I wrote about potential problems with the NASDAQ Veles California Water Index futures market. The market is facing more headwinds as farmers are wary of participating in the cash-only markets that does not deliver physical water.

Their reluctance illustrates a deeper problem with the belief in and advocacy for relying on short-run markets to finance capital intensive industries. The same issue is arising in electricity where a quarter-century experiment has been running on whether hourly energy-only markets can deliver the price signals to maintain reliability and generate clean energy. The problem is making investment decisions and financing those investments rely on a relatively stable stream of costs and revenues. Some of that can be fixed through third-party contracts and other financial instruments but the structures of the short term markets are such that entering or exiting can influence the price and erode profits.

In the case of California Water Index futures market, the pricing fails to recognize an important different between physical and financial settlement of water contracts: water applied this year also keeps crops, particularly permanent ones such as orchards and vineyards, viable for next year and into the future. In other words, physical water delivers multi-year benefits while a financial transaction only addresses this year’s cashflow problem. The farmer still faces the problem of how to get the orchard to the next year.

Whether a financial cash-settlement only futures market will work is still an open question, but farmers are likely looking for a more direct solution to keeping their farming operations viable in the face of greater volatility in water supplies.

A new agricultural electricity use forecast method holds promise for water use management

Agricultural electricity demand is highly sensitive to water availability. Under “normal” conditions, the State Water Project (SWP) and Central Valley Project (CVP), as well as other surface water supplies, are key sources of irrigation water for many California farmers. Under dry conditions, these water sources can be sharply curtailed, even eliminated, at the same time irrigation requirements are heightened. Farmers then must rely more heavily on groundwater, which requires greater energy to pump than surface water, since groundwater must be lifted from deeper depths.

Over extended droughts, like between 2012 to 2016, groundwater levels decline, and must be pumped from ever deeper depths, requiring even more energy to meet crops’ water needs. As a result, even as land is fallowed in response to water scarcity, significantly more energy is required to water remaining crops and livestock. Much less pumping is necessary in years with ample surface water supply, as rivers rise, soils become saturated, and aquifers recharge, raising groundwater levels.

The surface-groundwater dynamic results in significant variations in year-to-year agricultural electricity sales. Yet, PG&E has assigned the agricultural customer class a revenue responsibility based on the assumption that “normal” water conditions will prevail every year, without accounting for how inevitable variations from these circumstances will affect rates and revenues for agricultural and other customers.

This assumption results in an imbalance in revenue collection from the agricultural class that does not correct itself even over long time periods, harming agricultural customers most in drought years, when they can least afford it. Analysis presented presented by M.Cubed on behalf of the Agricultural Energy Consumers Association (AECA) in the 2017 PG&E General Rate Case (GRC) demonstrated that overcollections can be expected to exceed $170 million over two years of typical drought conditions, with the expected overcollection $34 million in a two year period. This collection imbalance also increases rate instability for other customer classes.

Figure-1 compares the difference between forecasted loads for agriculture and system-wide used to set rates in the annual ERRA Forecast proceedings (and in GRC Phase 2 every three years) and the actual recorded sales for 1995 to 2019. Notably, the single largest forecasting error for system-wide load was a sales overestimate of 4.5% in 2000 and a shortfall in 2019 of 3.7%, while agricultural mis-forecasts range from an under-forecast of 39.2% in the midst of an extended drought in 2013 to an over-forecast of 18.2% in one of the wettest years on record in 1998. Load volatility in the agricultural sector is extreme in comparison to other customer classes.

Figure-2 shows the cumulative error caused by inadequate treatment of agricultural load volatility over the last 25 years. An unbiased forecasting approach would reflect a cumulative error of zero over time. The error in PG&E’s system-wide forecast has largely balanced out, even though the utility’s load pattern has shifted from significant growth over the first 10 years to stagnation and even decline. PG&E apparently has been able to adapt its forecasting methods for other classes relatively well over time.

The accumulated error for agricultural sales forecasting tells a different story. Over a quarter century the cumulative error reached 182%, nearly twice the annual sales for the Agricultural class. This cumulative error has consequences for the relative share of revenue collected from agricultural customers compared to other customers, with growers significantly overpaying during the period.

Agricultural load forecasting can be revised to better address how variations in water supply availability drive agricultural load. Most importantly, the final forecast should be constructed from a weighted average of forecasted loads under normal, wet and dry conditions. The forecast of agricultural accounts also must be revamped to include these elements. In addition, the load forecast should include the influence of rates and a publicly available data source on agricultural income such as that provided by the USDA’s Economic Research Service.

The Forecast Model Can Use An Additional Drought Indicator and Forecasted Agricultural Rates to Improve Its Forecast Accuracy

The more direct relationship to determine agricultural class energy needs is between the allocation of surface water via state and federal water projects and the need to pump groundwater when adequate surface water is not available from the SWP and federal CVP. The SWP and CVP are critical to California agriculture because little precipitation falls during the state’s Mediterranean-climate summer and snow-melt runoff must be stored and delivered via aqueducts and canals. Surface water availability, therefore, is the primary determinant of agricultural energy use, while precipitation and related factors, such as drought, are secondary causes in that they are only partially responsible for surface water availability. Other factors such as state and federal fishery protections substantially restrict water availability and project pumping operations greatly limiting surface water deliveries to San Joaquin Valley farms.

We found that the Palmer Drought Stress Index (PDSI) is highly correlated with contract allocations for deliveries through the SWP and CVP, reaching 0.78 for both of them, as shown in Figure AECA-3. (Note that the correlation between the current and lagged PDSI is only 0.34, which indicates that both variables can be included in the regression model.) Of even greater interest and relevance to PG&E’s forecasting approach, the correlation with the previous year’s PDSI and project water deliveries is almost as strong, 0.56 for the SWP and 0.53 for the CVP. This relationship can be seen also in Figure-3, as the PDSI line appears to lead changes in the project water deliveries. This strong relationship with this lagged indicator is not surprising, as both the California Department of Water Resources and U.S. Bureau of Reclamation account for remaining storage and streamflow that is a function of soil moisture and aquifers in the Sierras.

Further, comparing the inverse of water delivery allocations, (i.e., the undelivered contract shares), to the annual agricultural sales, we can see how agricultural load has risen since 1995 as the contract allocations delivered have fallen (i.e., the undelivered amount has risen) as shown in Figure-4. The decline in the contract allocations is only partially related to the amount of precipitation and runoff available. In 2017, which was among the wettest years on record, SWP Contractors only received 85% of their allocations, while the SWP provided 100% every year from 1996 to 1999. The CVP has reached a 100% allocation only once since 2006, while it regularly delivered above 90% prior to 2000. Changes in contract allocations dictated by regulatory actions are clearly a strong driver in the growth of agricultural pumping loads but an ongoing drought appears to be key here. The combination of the forecasted PDSI and the lagged PDSI of the just concluded water year can be used to capture this relationship.

Finally, a “normal” water year rarely occurs, occurring in only 20% of the last 40 years. Over time, the best representation of both surface water availability and the electrical load dependent on it is a weighted average across the probabilities of different water year conditions.

Proposed Revised Agricultural Forecast

We prepared a new agricultural load forecast for 2021 implementing the changes recommended herein. In addition, the forecasted average agricultural rate was added, which was revealed to be statistically valid. The account forecast was developed using most of the same variables as for the sales forecast to reflect similarities in drivers of both sales and accounts.

Figure-5 compares the performance of AECA’s proposed model to PG&E’s model filed in its 2021 General Rate Case. The backcasted values from the AECA model have a correlation coefficient of 0.973 with recorded values,[1] while PG&E’s sales forecast methodology only has a correlation of 0.742.[2] Unlike PG&E’s model almost all of the parameter estimates are statistically valid at the 99% confidence interval, with only summer and fall rainfall being insignificant.[3]

AECA’s accounts forecast model reflects similar performance, with a correlation of 0.976. The backcast and recorded data are compared in Figure-6. For water managers, this chart shows how new groundwater wells are driven by a combination of factors such as water conditions and electricity prices.




The State Water Board needs to act to start Flood MAR pilot projects

I recently presented to CDWR’s Lunch-MAR group the findings for a series of studies we conducted on the universe of benefits from floodwater managed aquifer recharge (MAR) and the related economic and financing issues. I also proposed that an important next step is to run a set of pilots to study the acceptability of on-farm floodwater recharge projects to growers, including how do they respond to incentives and program design, and what are the potential physical consequences.

The key to initiating these pilots is getting a clear declaration from the State Water Resources Control Board that excess floodwaters are surplus and available. Unfortunately, the Water Board has not provided sufficient clarification on how these projects can take “advantage of seasonal or occasional flood waters that overtop the banks of a stream and are then directed into a designated recharge area.” Instead, the Board’s website says that such diverted floodwaters cannot be stored for future beneficial use–which obviates the very purpose of retaining the floodwaters in the first place.

The Board should be at least issuing temporary use permits for floodwaters above certain designated levels as being available for pilot projects on the basis that non-use of those floodwaters constitute a surrender of that right for the year. Then those agencies interested in flood MAR can design projects to experiment with potential configurations.

Is the NASDAQ water futures market transparent enough?

Futures markets are settled either physically with actual delivery of the contracted product, or via cash based on the difference in the futures contract price and the actual purchase price. The NASDAQ Veles California Water Index future market is a cash settled market. In this case, the “actual” price is constructed by a consulting firm based on a survey of water transactions. Unfortunately this method may not be full reflective of the true market prices and, as we found in the natural gas markets 20 years ago, these can be easily manipulated.

Most commodity futures markets, such at the crude oil or pork bellies, have a specific delivery point, such as Brent North Sea Crude or West Texas Intermediate at Cushing, Oklahoma or Chicago for some livestock products. There is also an agreed upon set of standards for the commodities such as quality and delivery conditions. The problem with the California Water Index is that these various attributes are opaque or even unknown.

Two decades ago I compiled the most extensive water transfer database to date in the state. I understand the difficulty of collecting this information and properly classifying it. The bottom line is that there is not a simple way to clearly identify what is the “water transfer price” at any given time.

Water supplied for agricultural and urban water uses in California has many different attributes. First is where the water is delivered and how it is conveyed. While water pumped from the Delta gets the most attention, surface water comes from many other sources in the Sacramento and San Joaquin Valleys, as well as from the Colorado River. The cost to move this water greatly varies by location ranging from gravity fed to a 4,000 foot lift over the Tehachapis.

Second is the reliability and timing of availability. California has the most complex set of water rights in the U.S. and most watersheds are oversubscribed. A water with a senior right delivered during the summer is more valuable than a junior right delivered in the winter.

Third is the quality of the water. Urban districts will compete for higher quality sources, and certain agricultural users can use higher salinity sources than others.

A fourth dimension is that water transfers are signed for different periods and delivery conditions as well as other terms that directly impact prices.

All of these factors lead to a spread in prices that are not well represented by a single price “index”. This becomes even more problematic when a single entity such as the Metropolitan Water District enters the market and purchases one type of water which they skews the “average.” Bart Thompson at Stanford has asked whether this index will reflect local variations sufficiently.

Finally, many of these transactions are private deals between public agencies who do not reveal key attributes these transfers, particularly price, because there is not an open market reporting requirement. A subsequent study of the market by the Public Policy Institute of California required explicit cooperation from these agencies and months of research. Whether a “real time” index is feasible in this setting is a key question.

The index managers have not been transparent about how the index is constructed. The delivery points are not identified, nor are the sources. Whether transfers are segmented by water right and term is not listed. Whether certain short term transfers such as the State Water Project Turnback Pool are included is not listed. Without this information, it is difficult to measure the veracity of the reported index, and equally difficult to forecast the direction of the index.

The housing market has many of these same attributes, which is one reason why you can’t buy a house from a central auction house or from a dealer. There are just too many different dimensions to be considered. There is housing futures market, but housing has one key difference from the water transfer market–the price and terms are publicly reported to a government agency (usually a county assessor). Companies such as CoreLogic collect and publish this data (that is distributed by Zillow and Redfin.)

In 2000, natural gas prices into California were summarized in a price index reported by Natural Gas Intelligence. The index was based a phone survey that did not require verification of actual terms. As part of the electricity crisis that broke that summer, gas traders found that they could manipulate gas prices for sales to electricity generators higher by simply misreporting those prices or by making multiple sequential deals that ratcheted up the price. The Federal Energy Regulatory Commission and Commodity Futures Trading Commission were forced to step in and establish standards for price reporting.

The NASDAQ Veles index has many of the same attributes as the gas market had then but perhaps with even less regulatory protections. It is not clear how a federal agency could compel public agencies, including the U.S. Bureau of Reclamation, to report and document prices. Oversight of transactions by water districts is widely dispersed and usually assigned to the local governing board.

Trying to introduce a useful mechanism to this market sounds like an attractive option, but the barriers that have impeded other market innovations may be too much.

“What are public benefits of conveyance?” presented to the California Water Commission

Maven’s Notebook posted a summary of presentations to the California Water Commission by Richard McCann of M.Cubed, Steve Hatchett of Era Economics, and David Sunding of the Brattle Group. Many of my slides are included.

The Commission is developing a framework that might be used to identify how shares of conveyance costs might be funded by the state of California. The Commission previously awarded almost $3 billion in bond financing for a dozen projects under the Proposition 1B Water Storage Investment Program (WSIP). That process used a prescribed method including a Technical Guide that determined the eligible public benefits for financing by the state. M.Cubed supported the application by Irvine Ranch Water District and Rio Bravo-Rosedale Water Storage District for the Kern Fan water bank.

How to choose a water system model

The California Water & Environmental Modeling Forum (CWEMF) has proposed to update its water modeling protocol guidance, last issued in 2000. This modeling protocol applies to many other settings, including electricity production and planning (which I am familiar with). I led the review of electricity system simulation models for the California Energy Commission, and asked many of these questions then.

Questions that should be addressed in water system modeling include:

  • Models can be used for either short-term operational or long term planning purposes—models rarely can serve both masters. The model should be chosen for its analytic focus is on predicting with accuracy and/or precision a particular outcome (usually for short term operations) or identifying resilience and sustainability.
  • There can be a trade off between accuracy and precision. And focusing overly so on precision in one aspect of a model is unlikely to improve the overall accuracy of the model due to the lack of precision elsewhere. In addition, increased precision also increases processing time, thus slowing output and flexibility.
  • A model should be able to produce multiple outcomes quickly as a “scenario generator” for analyzing uncertainty, risk and vulnerability. The model should be tested for accuracy when relaxing key constraints that increase processing time. For example, in an electricity production model, relaxing the unit commitment algorithm increased processing speed twelve fold while losing only 7 percent in accuracy, mostly in the extreme tail cases.
  • Water models should be able to use different water condition sequences rather than relying on historic traces. In the latter case, models may operate as though the future is known with certainty.
  • Water management models should include the full set of opportunity costs for water supply, power generation, flood protection and groundwater pumping. This implies that some type of linkage should exist between these types of models.

Davis Should Set Its Utility Reserve Targets with a Transparent and Rigorous Method

The City of Davis Utilities Commission is considering on February 19 whether to disregard the preliminary recommendations of the Commission’s Enterprise Fund Reserve Policies subcommittee to establish a transparent, relatively rigorous and consistent method for setting City reserves. The Staff Report, written by the now-departed finance director, ignored the stated objectives of both the Utilities and Finance and Budget Commissions to develop a consistent set of policies that did not rely on the undocumented and opaque practices of other communities. Those practices had no linkage whatsoever to risk assessment, and the American Water Works Association’s report that the Staff relied on again to reject the Commission’s recommendation again fails to provide any documentation on how the proposed targets reflect risk mitigation—they are simply drawn from past practices.[1]

The City’s Finance & Budget Committee raised the question of whether the City held too much in reserves over five years ago, and the Utilities Commission agreed in 2017 to evaluate the status of the reserves for the four City enterprise funds—water, sanitation/waste disposal, sewer/wastewater, and stormwater. A Utilities Commission subcommittee reviewed the current reserve policies and what is being done by other cities. (I was on that subcommittee.) First, the subcommittee found that the City was using different methods for each fund, and that other cities had not conducted risk analyses to set their targets either. The subcommittee conducted a statistical analysis that allows the City to adjust its reserve targets for changing conditions rather than just relying on the heuristic values provided by consultants.

The subcommittee’s proposal adopted initially by the Utilities Commission achieved three objectives that had been missing from the previous informal reserves policy. Two of these would still be missing under the Staff’s proposal:

  1. Clearly defining and documenting the reserves held for debt coverage. While these amounts were shown in previous rate studies, the documented source of those amounts generally not included and the subcommittee’s requests brought those to the fore. The Staff method appears to accept continuance of that practice. The Staff proposes to keep those separate, which differs from past practice which rolled all reserves together.
  2. Reserve targets are first set based on the historic volatility of enterprise net income. In other words, the reserves would be determined transparently with a rigorous method on the basis of the need for those reserves. The method uses a target that is statistically beyond the 99th percentile in the probability distribution. And this target can be readily updated for new information each year. The Staff report rejects this method to adopt a target that refers to the practice of other communities, and none of those practices appear to be based on analytic methods from research done by the subcommittee.
  3. Reserve targets are then adjusted to cover the largest single year capital improvement/replacement investment made historically to ensure enough cash for non-debt expenditures. Because the net income volatility is a joint function of revenues, operating expenditures and non-debt capital expenditures, the latter category is not separated out of the analysis. However, an added margin can be incorporated. That said, the data set for the fiscal years of 2008/2009 to 2016/2017 used by the subcommittee found that setting the target based on the volatility has been sufficient to date. The Staff report appears to call for a separate, unnecessary reserve fund for this purpose based on annual depreciation that has no relationship to risk exposure, and implicitly duplicates the debt payments already being made on these utility systems. This would be a wasteful duplication that sets the reserves too high.

The Finance and Budget raised at least two important issues in its review:

  1. Water and sewer usage and revenues may be correlated so that the reserves may be shared between the two funds. However, further review shows that the funds have a slight negative correlation, indicating that the reserves should be held separately.
  2. The water fund already has an implicit reserve source when a drought emergency is declared because a surcharge of 25% is added to water utility charges. I agree that this should be accounted for in the historic volatility analysis. This reduces the volatility in fiscal years 2014/2015 and 2015/2016, and reduces the water fund volatility reserve from 26% to 21%.
  3. Working cash reserves are unnecessary because the utility funds are already well established (not needing a start up reserve), and that the volatility reserves already cover any significant lags in the revenues that may occur. This observation is valid, and I agree that the working cash reserves are duplicative of the other reserve requirements. The working cash reserves should be eliminated from the reserve targets for this reason.

Finally, the Staff proposal raises an issue about the appropriate basis for determining the sanitation/waste removal reserve target. The Staff proposes to base it solely on direct City expenses. However, the enterprise fund balance shows a deficit that includes the revenues and expenses incurred by the contractor, first Davis Waste Removal and then Recology. We need more specificity on which party is bearing the risk of these shortfalls before determining the appropriate reserve target. Given the current City accounting stance that incorporates those shortfalls, I propose using the Utility Commission’s proposed method for now.

Based the analysis done by Utilities Commission subcommittee and the recommendations of the Finance & Budget Committee, the chart above shows the target % reserves for each fund without the debt coverage target. It also shows the % reserve targets implied by the Staff’s proposed method.[2] The chart also shows corresponding dollar amount for the proposed total target reserves, including the debt reserves, and the cash assets held for those funds in fiscal year 2016/2017. Importantly, this new reserve target shows that the City held about $30 million of excess reserves in 2016/2017.

[1] It appears the Staff may have misread the Utilities Commission’s recommendation memorandum and confused the proposed targets policies with the inferred existing policies. This makes it uncertain as to whether the Staff fully considered what had been proposed by the Utilities Commission.

[2] The amounts shown in the October 16, 2019 Staff Report on Item 6B do not appear to be consistent with the methodology shown in Table 1 of that report.

Moving forward on Flood-MAR with pilots

The progress on implementing floodwater managed aquifer recharge programs (Flood-MAR) reminds me of the economist’s joke, “sure it works in practice, but does it work in theory?” A lot of focus seems to be on trying to refine the technical understanding of recharge, without going with what we already know about aquifer replenishment from decades of applications.

The Department of Water Resources Flood-MAR program recently held a public forum to discuss its research program. I presented a poster (shown above) on the findings of a series of studies we conducted for Sustainable Conservation on the economic and financial considerations for establishing these programs. (I posted about this last February.)

My conclusion from the presentations and the other publications we’ve followed is that the next step is to set up pilots using different institutional set ups and economic incentives. The scientists and engineers can further refine their findings, but we generally know where the soils are better for percolation versus others, and we know that crop productivity won’t fall too much where fields are flooded. The real issues fall into five categories, of which we’ve delved into four in our Floodwater Recharge Memos.

Benefits Diagrams_Page_5

The first is identifying the beneficiaries and the potential magnitude of those benefits. As can be seen in the flow chart above, there many more potential beneficiaries than just the local groundwater users. Some of these benefits require forecast informed reservoir operations (FIRO) to realize those gains through reduced flood control space, increased water supply storage and greater summertime hydropower output. Flood-MAR programs can provide the needed margin of error to lower the risk from FIRO.

FloodMAR Poster - Financing

The second is finding the funding mechanisms to compensate growers or to build dedicated recharge basins. We prepared a list of potential financing mechanisms linked to the potential beneficiaries. (This list grew out of another study that we prepared for the Delta Protection Commission on feasible options for beneficiary-pays financing.)

FloodMAR Poster Incentives

The third is determining what type of market incentive transactions mechanisms would work best at attracting the most preferred operations and acreage. I have explored the issues of establishing unusual new markets for a couple of decades, including for water rights transfer and air quality permit trading. It is not a simple case of “declaring markets exist” and then walking away. Managing institutions have important roles in setting up, running and funding any market, and most particularly for those that manage what were “public goods” that individuals and firms were able to use for free. The table above lists the most important considerations in establishing those markets.

The fourth assessing what type of infrastructure investment will produce the most cost-effective recharge. Construction costs (which we evaluated) is one aspect, and impacts on agricultural operations and financial feasibility are other considerations. The chart at the top summarizes the results from comparing several case studies. These will vary by situation, but remarkably, these options appear to cost substantially less than any surface storage projects currently being proposed.

The final institutional issue to be addressed, but not the least important, is determining the extent of rights over floodwaters and aquifers. California state law and regulations are just beginning to grapple with these issues. Certain areas are beginning to assert protection of their existing rights. This issue probably represents the single biggest impediment to these programs before attracting growers to participate.

All of these issues can be addressed in a range of pilot programs which use different variables to test which are likely to be more successful. Scientists and engineers can use these pilots to test for the impacts of different types of water diversion and application. Statistical regression analysis can provide us much of what we know without having to understand the hydrological dynamics. Legal rights can be assessed by providing temporary permits that might be modified as we learn more from the pilots.

Is it time to move forward with local pilot programs? Do we know enough that we can demonstrate the likely benefits? What other aspects should we explore before moving to widespread adoption and implementation?

A transparent municipal utility’s reserve target

Reserves chart

As one of my civic activities, I sat on the City of Davis Utility Rates Advisory Commission. In my final action with that commission, along with Elaine Roberts-Musser and Lorenzo Kristov, we prepared what might be a first-of-its kind enterprise fund reserve policy for the four utilities managed by the city. Up to this point, the URAC had been presented with rates development reports that appeared to use somewhat arbitrary, and inconsistent, methods of setting reserve targets. The city also appeared to be holding tens of millions of dollars in those funds that might be unneeded to meet expected reserve requirements.

With the City Council’s approval and support from the staff and the Finance and Budget Commission, we identified the elements that needed to be covered by reserves, including working capital, debt covenants, unanticipated capital replacements, and revenue-expense volatility. The first two elements were fairly straightforward to calculate, and unanticipated replacements didn’t appear to be significant. It was the analysis of the relationship of revenue and expense volatility where the report innovates. Previous studies had used some variation of a percentage of capital assets with no underlying explanation. Our solution was to derive an estimate of the outerbound of an annual revenue shortfall for a utility as buffer to allow rate or management adjustments.

In the end, the target reserves generally didn’t change much, but the City now has a transparent target that it can use to determine when it has excess funds that might be used in different fashions instead.