Financial Planning Model and Its Application

This paper reports on the development of a financial planning model for publicly‐owned water and sewer utilities. It was developed for and used by the Orange Water and Sewer Authority, which serves Chapel Hill and Carrboro, North Carolina. The model was formulated as a linear programming problem, whose solution generates a set of effective prices and bond issues over multiple time periods. Constraints include minimum annual balances, minimum annual net revenues, limits on arbitrage, controls on price variations, and limits on borrowing. Several possible objective functions are discussed. Projections of demands and a capital improvement program are required as exogenous inputs. However, as demonstrated in the application, the model can be used to evaluate effects of uncertainties in demand on prices and borrowing requirements. Estimating similar effects of changes in the mix and timing of capital projects are also possible. Results given in the paper were used in the formulation of a financial strategy for a utility of moderate size, but heavily impacted by rapid growth in the Research Triangle area of North Carolina.