United State*
Environmental Protection
Agency
Office of Water
(WH5SO)
September 1889
Self-Assessment
for Small
Privately Owned
Water Systems
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Dear Water System Manager:
As an official of a small, privately owned water system, you are responsible for providing
a safe water supply to local residents. New drinking water regulations will put an increased
burden oh systems such as yours. This self-assessment package is designed to help you
determine your financial and management needs. Using the enclosed materials now and
taking appropriate action will help you to avoid fines and unnecessary costs in the future.
In 1986 Congress amended the Safe Drinking Water Act to require water systems to control
many drinking water contaminants that were not previously regulated. Depending on your
system's problems and characteristics, you may have to comply with some or all of these
new regulations in the near future:
• filtration of water drawn from surface sources,
• treatment to remove heavy metals and organic chemicals,
• extensive monitoring for chemical and microbiological contaminants, and
• corrosion controls to reduce concentrations of lead and other heavy metals.
;
Although these regulations have not yet been issued, it is important for small systems such
as yours to examine their finances and management systems now. This is especially true
if you are having trouble complying with drinking water regulations that are already in effect.
EPA has found that only sound systems can provide safe water.
This package will help you identify financial and managerial problems that you may now
have. It also suggests steps you can take to improve your situation. To get the most
benefit, you and anyone else who helps you manage your system should give this self-
assessment your direct attention. Participants should include people with expertise in
operations, construction, finance, and government relations.
The package is divided into two parts. A short pamphlet contains questions and
worksheets that will let you check whether you need help with planning, financing or
operations. A separate booklet, the "Resource Guide for Small Drinking Water Systems,"
describes organizations and programs that provide assistance to systems such as yours.
This package is for your.use only; you don't have to show it to anyone outside your system.
Even if you think you understand your operation, you should answer the questions and fill
out the worksheets. It is a good idea to go through the materials with all of the people who
help manage the system, such as your operator or bookkeeper.
You are likely to learn things that will help you put your system on a better financial and
managerial footing. You may be surprised at the results.
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Acknowledgements
This manual was prepared for the U.S. Environmental
Protection Agency, Office of Drinking Water, by The Cadmus
Group, Inc. under Contract No. 68-03-3348. The EPA Work
Assignment Manager was Brian Rourke; he was assisted by Dr.
David W. Schnare and Jane Ephremides. The Cadmus Project
Director was Gene E. Fax. Contributing authors were Vidya
Ganesan, Matthew Pierce, and Laura Paradise. Gini Egan-
McKenna directed the field test, and Kenneth Mayo, Robert
John, and Cheryl Secor typeset and produced the manuals.
The authors wish to thank the many people who assisted them
with information and advice, and particularly those who
participated in the field test. They are too numerous to name
individually, but they constitute a cross-section of the nation's
drinking-water community. The organizations with which they
are associated include many small drinking water systems, the
National Rural Water Association, the American Water Works
Association, the Farmers Home Administration, several Rural
Community Assistance Programs, the National Regulatory
Research Institute, EPA Regional Offices, and State regulatory
agencies. In offering their advice they spoke, of course, as
individuals and not as official representatives of their organiza-
tions. Their help is gratefully acknowledged.
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Self-Assessment
for
Small Privately-OwnedWater Systems
Can You Answer These Questions?
• Does your water system comply with federal and state safe drinking water
regulations?
• Do the rates you charge for water cover the cost of water system
operations and improvements?
• Do you know where and how to get help financing the costs of water
system improvements and water quality monitoring?
• Do you know where and how to improve your water system's operations
and management?
If you answered "No" one or more of these questions, you probably need help.
This pamphlet can provide it. It is divided into four sections:
A. Planning for Safe Water (page 3)
B. Pricing Your Water (page 5)
C. Getting Financial Help (page 21)
D. Improving Your Operations and Management (page 25)
Some sections contain worksheets to help you gauge your system's financial
condition. These worksheets give only a general idea of how your system is doing. They
are not a substitute for a careful review of your system's condition by an accountant or
other qualified professional.
1
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NOTES
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A. PLANNING FOR SAFE WATER
1. Do you know where to get free information about public drinking water regulations?
Information on public drinking water regulations is available from Regional EPA
offices and state environmental or public health agencies. The attached Resource Guide
contains the names and phone numbers of organizations to contact for up-to-date
regulatory information.
2 Does your water meet current federal and state drinking water standards?
If you don't know whether your water meets current standards, ask your state's
regulatory officials. They will tell you how to find out They will also tell you what you
need to do to meet the regulations.
If your water already complies with current standards, you need to plan for
changes required by the 1986 Safe Drinking Water Act (SDWA) amendments. Under
the new requirements you may see an increase in your operating costs. Worksheet #1
(page 11) and Worksheet #2 (page 15). They will tell you if you will have to raise your
water charges or get financial help to meet operating expenses. Worksheet #3 (page
19) will help you to prepare a cash flow budget.
If your water does not meet current drinking water standards, call or write your
state regulatory office and find out what you must do to comply. (Also, see Question 3
below.) They will help you estimate the costs of needed improvements. Then use
Worksheets #1, #2, and #3 to find out whether you need to raise water charges or get
financial help.
3. Do you know how to improve your water's quality to meet current standards?
Water treatment is a complicated subject. New equipment is not always the
answer; hooking up to a new water source or changing your operating practices may be
cheaper or more effective. It may take a trained engineer to tell what treatments will
work best or cost least.
Many state drinking water programs employ technicians who can advise.small
systems like yours on how to improve their water quality. Many of these programs are
listed in the accompanying Resource Guide. Often, state personnel will conduct a "sani-
tary survey" at your request, to spot system problems and suggest solutions. They can
also advise you on how to comply with state design and operating standards for water
systems.
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If your system needs a lot of work, you may have to hire a consulting engineer.
Before you contract with an engineering firm, you may want to check with similar
systems that have contracted with engineers for similar work. It's a good idea to check
the firm's references and make sure it has experience working with small water systems.
Also make sure that the firm will consider all possible alternatives, including new water
sources and better operating practices, not just new treatment equipment.
You need to make sure that the engineer considers all of the costs involved. For
example, treatment equipment will need to be maintained by a qualified operator.
Finding a new water supply-such as a new well-requires exploration and testing.
Buying water from other systems may require you to build an interconnection line.
The engineer should give you a detailed report listing all improvements your
system needs to bring it up to current standards. The report should include an estimate
of each item's cost and on-going operational and maintenance costs.
4. Do you keep records of water quality test results?
Monitoring results for contaminants regulated under the Safe Drinking Water Act
must be saved for 10 years. Keeping a notebook of test results will help you determine
if water quality has changed over time. Good records will also let you know whether
your treatment practices are working and may be useful if you apply for a variance from
the regulations. A public health consultant can help you interpret the test results.
5. Do you receive information or support on water system management from your state
environmental or public health agencies, your local section of the American Water
Works Association (AWWA), state Rural Water Association, or similar group?
There are several agencies and associations that can provide information on how
other small community water systems comply with drinking water regulations. Many
associations work with state environmental agencies on problems of small water systems.
For Further Information See:
Water Utility Management Practices (M5), American Water Works Association,
1980.
Design and Construction of Small Water Systems - A Guide for Managers, American
Water Works Association, 1984.
See also your state's minimum standards for design, construction, and operation
of private water systems.
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B. PRICING YOUR WATER
L Do you know what your water system's operating expenses are?
You need to know how much you collect in water charges and what it costs you
to operate the system. This is best done by creating an Income Statement, which shows
the difference between revenues and expenses. This difference represents how much
you need to make up in rate increases. If you have not calculated an Income Statement
for your system before, use-Worksheet #1. It may show that your system is losing
money right now without your knowing it.
2. Do you know whether the number of customers you serve is increasing, decreasing, or
staying the same?
If your customer base or water use is increasing, your Income Statement should
include the amount of additional revenue to be generated by the expanded service, as
well as the additional costs. If the number of customers or their water use is decreasing,
estimate the lost revenue and use the Income Statement to determine whether continued
operations are affordable. It may be a good idea, in this case, to look into a joint
management arrangement with a larger, more stable system.
3. Are some of your customers not paying their bills?
You should not increase rates to make up for customers who regularly do not pay
their water bills. If you have customers who are not paying their bills, figure out how
much money each of them owes. Consider setting up a payment schedule for these
customers or sending them a shut-off notice. Before you shut off service, however,
check with your state's Public Utility Commission about conditions and procedures you
need to follow.
i
4. Do you use meters to monitor each customer's water use?
Water meters will let you know how much each customer uses. Once you have
that information, you can set up a rate schedule based on actual water use. Rates based
on use may help you increase the amount of money you collect in water charges. You
may also find that meters save you money because they can help you determine if there
are leaks in the system.
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5. Have your customers been able to pay any recent increases in water charges?
If you are concerned that customers will not be able to afford the necessary rate
increases, consider raising the rates gradually—say, every two years—to give them time to
include the raises in their budgets.
Ask similar small privately-owned systems hi your area how much they charge for
water. Your state's drinking water office or Public Utility Commission may be able to
refer you to systems that have already faced this issue. You can also ask the regional
office of the Farmers Home Administration or your state's Water Works Association or
your state Rural Water Association. When you apply for a rate increase or answer
customers' questions about the rate change, it will help if you know whether your rates
are similar to others in the area.
In most states, privately owned water utilities must apply to the Public Utility
Commission or Public Service Commission for a rate change. The Commission will
review your financial condition and ask for information that supports the need for a rate
increase. The attached Resource Guide includes addresses and phone numbers for rate
reviewing agencies.
For Further Information See:
Institutional Alternatives for Small Water Systems, Prepared by Robert G. McCall
for American Water Works Association Research Foundation, 1986.
Managing Water Rates and Finances, American Water Works Association, 1979.
Water Rate: Criteria, Types, Pros, Cons, National Rural Water Association, 1987
(to be revised in 1989).
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IS YOUR WATER SYSTEM MAKING OR LOSING MONEY?
FIND OUT FOR YOURSELF USING WORKSHEET #1
Instructions for Using Worksheet #1:
Water charges are the main source of revenue for operating and maintaining
your system. You should collect enough in water charges to meet your operating
expenses. If you cant meet your expenses, you may need to raise rates or look at
ways to reduce operating expenses that won't harm water quality. '
Worksheet #1 is an Income Statement. It shows income and expenses related
to running the system. Use it if your water system does not produce its own annual
Income Statement already. If you expect no major changes in your customer base, use
information from the past year's financial records to fill out the form. If you expect
significant increases or decreases in your service, estimate the changes you expect in
income and expenses and use those figures. This Worksheet gives only a rough picture
of your system's financial condition; see an accountant for more accurate information.
You should copy this Worksheet (and the others, also) from the manual and
work on the copies, not the originals.
I. Operating Revenue;
Water Sales include all money you received for supplying water service, whether
you charged at a flat rate or for water actually used.
Operating Grants include any funds received from public or private agencies to
support current operations. Do not include money received for improving or
expanding plant and equipment.
Fees and Services include all other fees you charge your customers.
II. Operating and Maintenance Expenses:
These items are self-explanatory, except for payments to a reserve fund:
Payments to reserve fund are made in order to build up a cash reserve for
dealing with extraordinary events. Examples of such events might include
repairing serious damage or meeting unforeseen regulatory requirements. A
cash account separate from your normal checking account should be set up to
accumulate these funds.
General and Administrative Expenses:
Most of the items are self-explanatory,, but depreciation needs some explanation.
Depreciation refers to the loss in value of property, plant, and equipment over
time. The depreciation used in this Income Statement is what accountants call
"book" depreciation. It is often different from the depreciation used for
calculating your income tax, so don't use your old tax returns as a guide.
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If you have never included depreciation on your books before, figure your
depreciation expense by taking the following steps:
(1) For each building and piece of equipment the system uses:
Find out (from your records) how much it originally cost, including
installation;
Estimate how many years of useful life it has left; and
Divide the original cost by the years of useful life left to get the
depreciation expense for each item.
Do not include the value of any land in this calculation.
Example: Your system has three items: a pump with attached piping, a
pumphouse, and a distribution network. The pump cost $4,000 installed
and has 10 years of life left. Its annual depreciation expense is $400.
The pumphouse cost $12,000 to build and has 20 years left. Its annual
depreciation expense is $600. The distribution system cost $15,000 to
install, and has 30 years left. Its depreciation expense is $500.
(2) Add the annual depreciation expenses of all the Items to get the total for
the year.
Example; For the items in the system described above,
Pump and piping: $400
Pumphouse: 600
Distribution system: 500
TOTAL depreciation expense: $1500
If you have included book depreciation in the past, follow the same
steps but with the following change. For each building and piece of
equipment, subtract accumulated depreciation from the original installed
cost before you divide by the years of life remaining.
IV. Total Operating Expenses:
Add Operating and Maintenance Expenses (total from Section II) and General
and Administrative Expenses (total from Section III).
V. Income from Operations:
Subtract Total Operating Expenses-(total from Section IV) from Total Operating
Revenue (total from Section I).
VI. Other Revenues and Expenses:
Interest Income includes, for example, interest on any deposits that you make in
bank accounts.
8
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Interest Expense refers to interest payments on loans or merchant credit
accounts. Do not include payments of principal on loans; these get entered on
Worksheet #3.
Miscellaneous Expense includes any expense item not already accounted for.
(Again, do not include payment of principal on loans.)
Subtract the expense items from the interest income. Depending on whether
income is greater than expenses, you may get a net gain or a net loss.
VII. Net Income:
If Total Other Revenues and Expenses (total from Section VI) shows a net gain,
add it to Income from Operations (Section V). If it is a net loss, subtract it from Income
from Operations. The result is your system's net income.
If revenues are less than expenses, your Net Income is negative and you
are losing money on your water system. You should consider increasing your
water charges to meet your operating expenses. If your Net Income is positive, the
water system is operating at a profit '
To keep it as simple as possible, the Worksheet shows Net Income before
income taxes. This does not affect about whether your profits are positive or negative.
Vila. Adjustments to Net Income
The Net Income shown above does not include any expenditures for meeting
drinking water standards. If you already meet current standards, this cost will be zero.
If you do not meet current standards, you should have a state technical assistance
person or a consulting engineer estimate the annual cost of these improvements and
use that number here (see Question 3 on page 3). Subtract this amount from Net
Income (Item VII) to obtain Adjusted Net Income.
You should consider raising your rates to cover any needed compliance
measures as well as current operating expenses.
As new standards are proposed in the future, you should have your engineer
estimate their annual costs to you. You can then insert these annual costs in this line to
determine their effects on your Net Income.
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NOTES
10
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Worksheet #1
Small Privately-Owned Water System
Income Statement
For the year ending , 19
Operating Revenue
Water Sales .
Fees and Services
Total Operating Revenue
II. Operating and Maintenance (O&M) Expenses
Salaries, Wages, and
Benefits (Operator)
Power and Other Utilities
Chemicals and Supplies
Transportation
Repairs/Parts
Payments to Reserve Fund
Total O&M Expenses
General and Administrative (G&A) Expenses
Administrative Salaries
and Benefits
Office Supplies and Postage
Insurance
Legal and Accounting
Property Taxes
Depreciation
Total G&A Expenses
IV. Total Operating Expenses (Total O&M plus Total G&A)
V. Income from Operations (Op. Revenue minus Op. Expense)
VI. Other Revenues and Expenses
Interest Income
Interest Expense .
Miscellaneous Expense ___________
Total Other Revenues and Expenses
VII. Net Income
Vila. Adjustments to Net Income _,
Vllb. Adjusted Net Income
11
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NOTES
12
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IS YOUR WATER SYSTEM FINANCIALLY VIABLE?
FIND OUT USING WORKSHEET #2
Instructions for Using Worksheet #2:
Worksheet #2 is a Balance Sheet. A Balance Sheet shows the financial
standing of your water system. Use it if your system does not produce its own annual
Balance Sheet already. It is used to answer two questions:
1. Does your system owe more than H owns? Businesses that have more
liabilities than assets often go bankrupt.
2. Can you afford to replace your plant and equipment when they wear
out?
Banks and government funding agencies will want to know the answers to both of these
questions when you ask them for loans.
t
The Balance Sheet Is divided into three categories: Assets, Liabilities, and Net
Worth. Using information from your financial records, fill in your Assets (what you own
or what you are owed) and your Liabilities (what you owe). The difference is the Net
Worth of the system. Balance Sheets are reviewed by loan officers when they make
lending decisions and by regulatory agencies when they decide on rate Increases.
Some of the items on the Balance Sheet are self-explanatory. Others are
explained briefly below.
Current Assets are those that are likely to turn into cash within a year. Fixed
Assets are long-lived items that are used to produce water (or other goods) for
use or sale.
Accounts Receivable are water charges or other bills that you are owed.
Prepaid Expenses include insurance, permit fees, and any other expenses paid
in advance.
Plant and Equipment includes the pumping station, distribution pipes, storage
tanks, treatment plant, and other buildings and equipment valued at their original
installed cost.
Accumulated Depreciation accounts for the reduction in value of plant and
equipment over time. If you have never included depreciation on your books
before, this number is zero. If you have included book depreciation, this
number is the sum of the annual depreciation amounts over all previous years.
Land and Water Rights should be valued at the price originally paid, without any
depreciation. Also, do not include any appreciation in their value, even if they
are worth much more now than when you paid for them. Banks or other lenders
will make their own adjustments to account for such appreciation when you
apply for credit. Note that accounting for water rights can be very complex. If
13
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these are a major asset of your system, you should consult an accountant
familiar with local law and practice.
A Reserve Fund should be maintained to cover the cost of equipment
replacement, system repairs, and other emergencies.
Liabilities:
Accounts Payable are bills that you have received but not yet paid.
Accrued Payroll and Payroll Taxes are what you owe your employees plus PICA,
withholding, and other payroll taxes.
Short-term Debt includes the principal on any loans that must be paid back
within one year or less.
Long-term Debt includes the principal of any loans that can be paid back more
than one year In the future.
Net Worth:
t
This is the difference between Assets and Liabilities. If Assets are less than
Liabilities, your Net Worth is negative and your water system may go bankrupt.
You should consider raising your rates or trying some of the suggestions in Parts
C and D of this pamphlet. You may also wish to look into a joint management
arrangement with a larger, more stable water system. As a last resort, it may be
necessary to sell the water system to someone who has the resources to operate it
effectively.
If your Assets are greater than your Liabilities, your Net Worth is positive, and
the water system is financially viable or solvent. The larger your Net Worth, the more
likely it is that you will be able to get bank or government loans to help with system
improvements.
14
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Worksheet #2
Small Privately-Owned Water System
Balance Sheet
For the year ending , 19
Assets
Currant Assets:
Cash
Accounts Receivable
Materials and Supplies on Hand
Prepaid Expenses
Total Current Assets
Fixed Assets:
Plant and Equipment
less Accumulated Depreciation
Land
Water Rights
Other Assets:
Reserve Fund
Total Fixed Assets
Total Assets
II. Liabilities
Current Liabilities:
Accounts Payable
Accrued Payroll & Payroll Taxes
Accrued Rnes or Penalties
Short-term Debt
Total Current Liabilities
Long-term Debt
Total Liabilities
III. Net Worth
Total Assets minus Total Liabilities
15
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NOTES
16
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WILL YOUR SYSTEM HAVE ENOUGH CASH TO OPERATE?
FIND OUT USING WORKSHEET #3
Instructions for using Worksheet #3:
Worksheet #3 is a Cash Row Budget. A Cash Row Budget tells you when you will
need extra cash and how much you will need.
To do a Cash Row Budget, start with the Cash Balance on the first day or the
current month. ("Cash" means the contents of all checking accounts, savings accounts,
and cashboxes.) Then estimate all cash receipts and payments for the month. Combine
them to get the Total Cash Generated (net gain) or Used (net loss) in the month. Then
add the gain to (or subtract the loss from) the Beginning Balance to get the Ending
Balance for the month. This Ending Balance then becomes the Beginning Balance for
the next month, and the whole process repeats. It is a good idea to do a Cash Row
Budget for several years into the future.
If the Ending Balance for any future month is negative, you will not have enough
cash to operate in that month. There are several ways to address this problem. You
can step up collections in earlier months to build up cash. You can ask your vendors to
let you delay payments to months when cash will be more available. You may take a
short-term loan, as long as the budget shows you will be able to pay it back (with
interest). If the budget shows that you will usually be short of cash, however, you
should raise your water charges to compensate.
The Cash Row Budget counts all cash transactions. The terms in Worksheet #3
are defined just as they were in Worksheet #1, except that General and Administrative
Expenses must not include depreciation, because that is not a cash transaction.
In the example below, the system operator plans to pay $2,500 for a new piece of
equipment in April, which would drive the system's cash balance negative by $1,066.
The operator may want to take a short-term loan for $1,500, so as not to draw cash
completely down to zero in April. The proceeds from this loan would be entered in April
under "New Borrowings". Each future month's principal repayment would be entered
under "Payments of Debt Principal". Interest payments would be subtracted from "Net
Cash from Other Revenues and Expenses". Note that the Ending Balance at the bottom
of each month's column is entered as the Beginning Balance at the top of the next
month's column.
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Beginning Cash Balance
Collections from Water
Sales, etc.
Payments for O&M and
G&A Expenses
Net Cash from Other
Revenues and Expense
Payments of Debt
Principal
Payments for Capital
Assets
Other Balance Sheet Cash
(prepaid expenses,
customers' deposits,
payments to reserve
funds)
Total Cash Generated
. or (Used) for Month
New Borrowings
Ending Cash Balance
Monthly Cash
March
1.082
988
( 8411
128
( 1221
( Q)
63
216
Q
1.298
Flow Budget:
April
1.298
801
( 4981
( SZ)
( 1221
f 2.5001
42
( 2.3641
a
M.0661
EXAMPLE
May June
( 1.0661 ( 3751
1.025
( 5251 (_ )
208
( 1??) ( )
( Q) ( )
105
691
Q
( 3751
18
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Worksheet #3
Small Privately Owned Water System
Monthly Cash Flow Budget
For the year beginning ^_, 19
Month • Month Month Month Month Month Month Month Month Month Month Month
1 2345 67 8 9 10 11 12
Beginning Cash Balance ______
Collections from Water . . ________
Sales, etc.
Payments for OiM and ( \ [ I [ 1 J \ ( ]_ [ I ( 1 j \ [ \ ( \ ( \ (
G&A Expenses
Net Cash from Other
Revenues and Expenses
Payments of Debt f i ( ) ] ) ( ( \ [ \ j \ [ \ ( i j ) ] J |_
Principal
Payments for Capital i ) ] 1 I \ [ I J ) ( \ J ) ( \ ( \_ ( \ [ \ (_
Assets
Other Balance Sheet
Cash (Prepaid expenses,
customer'* deposits)
Total Cash Generated
(Used) for Month
Net Borrowings
Ending Cash Balance
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NOTES
20
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C. GETTING FINANCIAL HELP
1. Do you know how much it will cost to make necessary water system improvements?
Determine how much it will cost to meet current drinking water standards.
Estimate the cost by contacting similar water systems and state technical assistance staff,
or by hiring a consulting engineer (see Question 3 on page 3).
Find out which activities must be done first. You may find that work needed to
meet the regulations cannot be done before you have upgraded the water system. Get
help from regulators or technical assistance programs to develop a priority list for system
improvements.
Can you raise the money you need from private sources?
As a first step, see whether your customers can afford a one-time assessment to
raise the funds needed for system improvements. Alternatively, you may be able to sell
additional stock to present or new investors.
3. Do you know that you may be able to get financial help from government agencies?
Privately owned systems such as yours are eligible for funding assistance from
some government programs.
Small Business Administration. The SBA provides two types of loan assistance to
small businesses. It guarantees loans made by local banks, thus providing a
reduced, interest rate to the borrower. It'also provides direct loans to businesses
that are unable to get an SBA-guaranteed loan through a bank. Funds for direct
.loans are limited, and are often available only to firms owned by or serving
disadvantaged groups.
Community Development Block Grants. These grants, which are given by the U.S.
Department of Housing and Urban Development, must be applied for and
administered by the town in which your system is located. The funds, however,
may be used to make improvements in private water systems.
More details of these programs are given in the accompanying Resource Guide.
Banks and government funding agencies usually provide money for "hardware
costs" such as treatment facilities, distribution lines, and water source development.
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Other costs, such as operation, maintenance, and water quality monitoring, must be paid
for out of water charges. Remember that if you get a loan, you may have to increase
water charges to meet the loan payments.
Before you apply for funding, find out what each source will pay for and what
information they will need to consider your application. Most lending and granting
agencies will want to see financial statements similar to the three Worksheets in this
manual.
4. Do you have a history of loan repayment?
Bank and government lending agencies will look at:
- Your repayment ability (your assets and water charges)
- Your "creditworthiness" (your balance sheet and the current value of your
assets)
- Your credit history (your record of loan repayment and current debt)
Banks and other private lenders will look at ratios of various items on your system's
financial statements. Two of the most important of these are:
Pretax interest coverage. This measures your system's ability to meet its debt
costs. It is calculated by adding depreciation (next to last line in Item III of
Worksheet #1) to Income from Operations (Item V in Worksheet #1) and
dividing the sum by Interest Expense (second line in Item VI of Worksheet #1).
The resulting value should be at least 1.3.
Return on equity. This measures your system's basic profitability. It is computed
by subtracting federal and state taxes (not shown on the Worksheets) from Net
Income (Item VII on Worksheet #1) and dividing the result by Net Worth (Item
III on Worksheet #2). Two percent is generally considered an acceptable
minimum for small water systems.
It is a good idea to calculate these ratios for yourself, as a general index of whether your
system is in good financial health.
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5. Is your system regulated by your state's Public Utility Commission?
Some states may require small privately owned water systems, such as yours, to
notify the Public Utility Commission when applying for a loan. Check with your state's
environmental or public health agency to find out if this applies to you. If it does, the
Commission will review your financial records to determine whether your current water
charges can cover loan payments or a rate increase is needed. Bank officers are often in
communication with the PUC. If you have applied for a rate increase to cover loan
payments, the bank may approve your loan based on the expected change in rates.
For Further Information See:
Barry R. Sagraves, John H. Peterson, and Paul C. Williams, Financing Strategies
for Small Systems, AWWA Journal, August 1988, pp. 40-43.
Water Utility Capital Financing, American Water Works Association, Manual M29,
First Edition, 1988.
See your state's PUC or PSC rules and regulations for small private water
systems.
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NOTES
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D. IMPROVING YOUR OPERATIONS AND MANAGEMENT
Operation, maintenance, and management of a water system are complex topics.
This section covers only a few ideas you may wish to consider. For more detailed
information, see the sources cited below.
1. Do you have an accurate map of the system, including distribution mains, service
connections, valves, and shutoffs?
Get your water system records together: a map of the system, including dis-
tribution mains, service connections, valves, and shut-offs; equipment records (including
the names and phone numbers of equipment manufacturers); records of repairs and
replacements; and financial books. Set up a filing system for these items. Being able to
reach them when you need them will help you plan your system's improvements and
apply for the funding you need. If you do not have records for your system, you may
wish to hire a consulting engineer to conduct a survey of the system.
2. Do you know whether your system is losing water?
If your system has meters at the customers' locations, you should compare the
gallons billed with the gallons pumped. This will tell you if you have water leaks.
Besides wasting water, leaks can damage pipes and nearby structures. Industry groups
such as the American Water Works Association and the National Rural Water
Association have developed booklets and training courses on how to find and fix water
leaks. In addition, the Rural Community Assistance Programs (RCAPs) have
sophisticated water audit programs to assist you in finding Teaks.
3. Do you follow a regular timetable for maintenance, repair, and replacement of
equipment and pipe?
Set up a schedule for regular maintenance to prevent problems before they occur.
Review your repair schedule and find out which repairs and replacements need to be
done now.
It is important that your schedule include all the activities that are part of taking
care of your water system. As you think about what needs to be done to meet drinking
water regulations, you need to consider how the regulations will affect your operations
and management responsibilities. If you have an operator, you should discuss with him
how the regulations will affect his work.
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4. Is the operator of your system properly trained and/or certified?
Find out about the different levels of operator training and certification. Make
sure that the person in charge of your system is qualified. If you have to upgrade or
install new treatment equipment, find out what operator certification is required to run
and maintain that equipment and when training for certification will be available.
5. Is your operator qualified to handle new treatments that might be required in the
future?
You and your system operator must understand what current and future state and
federal drinking water regulations require. Talking with state officials or attending
workshops on new procedures or programs is a good way to learn about new develop-
ments in drinking water regulations.
6. Do you discuss your water system's needs with other water system managers?
It is likely that similar water systems in your area face problems similar to yours.
Talking with their managers may uncover solutions you hadn't thought about There are
many kinds of inter-system cooperation. At a basic level, it may be .possible to share
equipment or staff if both systems have similar needs.
You can set up a water management authority with one or several other systems.
The authority takes over the administrative functions, relieving its members of the
expense and inconvenience. This can be done by incorporating an association or author-
ity, or by setting up a county-wide district to manage several small water systems.
You can also become a satellite of a larger water system having more staff and
financial resources. You can keep your water system physically separate and contract
with the larger system for operations and management services. Alternatively, you can
build interconnection lines and merge the two systems. You should consider these
options if the cost of water system management and compliance is otherwise unaffordable.
Many private and public organizations put on training programs for water system
operators. Contact your state drinking water office, local chapter of the American Water
Works Association (AWWA), or the state Rural Water Association for information on
training in your area.
7. Do you take monthly water samples to test for bacteriological contamination?
All public water systems are required to test monthly for bacteriological con-
tamination. You should make sure that one person is responsible for taking samples and
having them tested by a certified laboratory. If you have had problems with
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bacteriological contamination, be sure that the person taking samples has been trained in
water quality monitoring. Call a water testing laboratory or your state regulatory office to
find out how and where to take water samples.
& Have you discussed water system operation and costs with your customers?
If you are having difficulty covering your costs, and if your customers cannot afford
water rate increases, you may want to meet with your customers to discuss your concerns.
Some states offer financial and technical assistance programs to help low-income residents
buy out private water systems and set up a homeowner's cooperative. It may be possible
to work with your customers to file the legal papers needed to form a water district or
other publicly-owned management group.
9. Do you share physical plant, staff, or other items with other water systems to reduce
costs?
You may be able to share costs and staff with other water systems. For example, a
treatment plant operator might be able to serve more than one system. Buying
equipment in cooperation with other utilities may yield cost savings. Review your needs
and talk with other system managers. If your contamination problems are serious, it may
be best to buy some or all of your water from another source.
For Further Information See:
Basic Management Principles for Small Water Systems, American Water Works
Association, Data Processing Department, 1982.
Decision Makers Guide in Water Supply Management, U.S. EPA, Office of Drinking
Water, EPA Number 570/9-80-003.
Regionalization Options for Small Water Systems, U.S. EPA, Office of Drinking
Water."
Water and Revenue Losses: Unaccounted for Water, American Water Works
Association, 1987.
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NOTES
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