ABSTRACT
As discussed in Chapter 1 of this book, a common word used in the financial media, particularly over the past several years, is “uncertainty.” Whether in reference to the implications of the recent financial crisis, political gridlock, or what the world is to be in the years to come, everyone seems to agree that heightened uncertainty adds to the challenges of the water and wastewater industry. But the fact is, there will always be uncertainty. Although movies might suggest otherwise, no one has a crystal ball or time machine to predict the future. Rather, in various forms, whether related to business, sports, or other aspects of society, we have developed strategies and techniques to help predict the future and prepare for the variety of potential outcomes. This concept of uncertainty, prediction, and preparedness, in totality, is the essence of evaluating risk, and it is extremely applicable in the world of utility finance and pricing. It has not been until recently that the water and wastewater industry has focused on analyzing the quantification and mitigation of risk in its financial planning and pricing. This chapter defines risk and discusses components of a risk profile, and it explores various aspects of risk and risk management in water and wastewater utility finance, rate setting, and capital planning.
