Depending on who you may ask, the number one expense for utilities is either personnel or capital investment. Personnel costs are something most utilities can plan for as work force requirements are generally consistent from year to year. Capital investment, on the other hand, can be much harder to incorporate into a sustainable financial plan. A thorough capital improvement plan (CIP) that incorporates regular repair and rehabilitation can help ensure a utility is planning for future capital (re)investments while maintaining solid financial footing. While not exhaustive, four key items to address in your CIP are:
- Routine inspection and maintenance;
- Prioritized list of projects;
- Large capital expenditures; and
- Clear funding plans.
Routine Inspection & Maintenance
While often included as a standard operations and management line item found on the non-capital budget, a thorough CIP ensures routine inspections occur and lead to the proper amount of repair and rehabilitation funding for a utility’s capital needs. Whether it is included in a capital budget or not, setting the funding amount next to the overall capital spend and system valuations can help throughout the planning process to avoid budgeting oversights. As you evaluate your system needs, a few guidelines for various infrastructure pieces include:
| Asset | Inspection Frequency |
| Pipelines | 5-10 years |
| Pumps | Monthly for regularly used items, annually for less frequently used items |
| Valves | Annual inspection and exercising |
| Hydrants | Annual inspection and valve exercise |
| Tanks | External inspection every 2 years, internal inspection every 3-5 years |
Prioritized List of Projects
Creating a prioritized list of projects based on system deficiencies that have been identified through a master plan and local knowledge is important. The project list should identify rehabilitation or replacement strategies as well as detailed cost estimates for use in budgeting and funding. Typical considerations include pipe age, common breaks in infrastructure, and service issues that prevent the system from supplying the intended level of service to customers.
Large Capital Expenditures
Setting the timeframe of your CIP to include the large capital expenditures that are on the horizon will prevent unidentified costs from negatively impacting a utility. If a water treatment plant expansion is needed in the next seven years, it would be prudent to set the CIP to a 10-year timeframe and use placeholder values to build in the financial need. Alternatively, systems can establish an annual reserve amount on the capital plan for expenditures beyond the preferred timeframe. Whether your reserve strategy includes fully funding the project, or offsetting the costs, represents a policy decision for utility leadership.
Identified Funding Plan
Finally, identifying the funding plan for your projects directly on the CIP helps maintain utility finances in a strong position. Whether using annual revenues each year, funding from the reserves established over a longer period, or using debt to fund projects, having it clearly identified assists utilities in minimizing surprises to your rate payers. While plans can change as needs change, having a starting point establishes a baseline to navigate the process.
If you have any additional strategies that help your utility manage looming capital expenditures, please send them to Ryan Graf, Nexus Senior Consultant, for consideration in future articles.