Conservation Impacts on Water Rates

1. Conservation Impacts on Water Rates “Water, taken in moderation, cannot hurt anyone.” - Mark Twain “But will it cost more?”

2. Who am I? James Burton Associate – Environmental Engineering Department Hubbell, Roth & Clark, Inc. Involved with environmental projects and utility rate setting, contracts, financing, public education, conservation initiatives, green building, etc. Walking Contradiction!

3. Who are you? • System operators? • DPW superintendents? • Utility managers? • Phase II permit agent? • Sprinkler police? • Local tree hugger?

4. Concepts • Water rates are based on a unit of volume. • Volumes are decreasing due in part to conservation. • Reduced volume demands ≠ a proportional reduction in cost of service → rates go up. • But rates are always going up? • Water utilities in Michigan should be concerned with conservation.

5. Critical Questions? • How much does the first gallon of water produced and delivered cost? The last gallon? • Who is paid on commission? • Who sets their O&M budget after determining volume? • What costs are fixed versus variable in a water system? • What is the cost difference to serve two neighbors? • How green is infrastructure? • How come engineers think they know everything? • Is 8:00 am on Friday, a good time to talk water rates?

6. Evolution of Conservation • Source limitations • Availability of supply • Mandates - Rationing • Higher production/delivery costs • Resource preservation • Energy, new materials, carbon footprint, social responsibility = green movement!

7. Conservation in Michigan • Source – 20% of worlds fresh water • Relatively inexpensive, high quality, local, replenished, part of the fabric of Michigan • “When the well is dry, we will know the worth of water.” Ben Franklin • Stewardship of resources – Great Lakes Compact • Cost reduction • Peak demand management • Resident bills go down (in theory) • Public education – future leaders • Green building ordinances

8. The ‘Official’ Start of the End • Conservation laws written and/or followed for local systems and population centers • U.S. Energy Policy Act of 1992 (EPAct) – extended to all • Regulated fixture flows • Estimated 6-9 BGD reduction of US water use by 2020 • $166-231 million savings deferring/avoiding additional capital investments!!! • Most water systems will have been built decades before 2020. How do you pay for existing investments? Source: Handbook of Water Use and Conservation

9. Conservation • Low flush toilets • Low flow shower heads • High efficiency washers • Rain water harvesting • Gray water recycling • Xerioscape landscaping • Reduction of water volume for same household operation/use

10. Height of Detroit Industrial Might EPAct Suburban Explosion End of WWII Population Data from 7 County Membership of SEMCOG

11. Sustainable Rate Expenses – Non-Rate Revenue Volume Rate generates sufficient revenue to cover expenses, maintain minimum cash reserves, meet debt coverage ratios, and fund long term capital needs

12. Expense Components • Supply • Treatment • Delivery • Debt Service • Capital Improvements • O,M,R,& A • Contributions to the general fund

13. Non – Rate Revenue • Interest earnings • Hook up fees • System charges • Penalties • Contributions from the general fund

14. Cost of Water • Riparian Law • Water rights • Water in Michigan is FREE! • Paying for the service

15. Customer Service • Readiness to serve • Variable demand • Customers want you to: • deliver whatever they want, • at whatever pressure they want, • whenever they want, • pay what they want and • complain when they don’t get it

16. Fire Protection • No legal requirement to provide fire flows • Socially required in urban-suburban communities • Community requirements • Insurance rating system = impact on premiums • ISO, IITRI, ISU standards and recommendations

17. Fire Protection • ISO Calculation NFFi=(Ci)(Oi)(X+P)I • Variable per size of building, construction materials, distances to adjacent structures, occupancy, etc. • Practical requirements = 1,500 to 3,000 gpm • Ask a fireman = 2,500 to 3,500 gpm

18. Fire Protection • Ask a resident with their house on fire?

19. Volume • ~67% of non-conserving household water usage is indoors. • Remainder is outdoor uses, primarily irrigation. • Family of 4 – 400 gpd • Used over 8 hours = <1 gpm • Used in 1 hour = <7gpm • Used in 1 minute = 400 gpm

20. Conservative Use vs Fire Flow Family of 4 – 360 gpd Used over 8 hours = <1 gpm Used in 1 hour = <6gpm Used in 1 minute = 360 gpm Cut bill by 10% Compare to: 1,500-3,500 gpm Does conservation impact cost of service? - Assume 10% reduction in use

21. “Cost of Service” • What is the true cost of providing water? • Does the end user matter? • Does their consumption matter?

25. Impact • CONSERVATION MEANS A BILLING UNIT USES LESS AND THEREFORE PAYS LESS • CONSERVATION DOES NOT MEAN IT COSTS LESS!

26. Down the Drain • Price elasticity of water demand measures the sensitivity of water use relative to changes in the price of water. • Sensitivity increases as rates increase • -0.1 to -0.3 is typical • 10% increase in rates would decrease use by 1-3% • So if volumes are reduced by conservation, and conservation increases rates, and increasing rates reduce use, and reduced use create higher rates -- this does not end.

27. Balancing Act • Resource vs. commodity • Use vs. smart use • Conservation vs. sustainability • Capacity vs. actual use • Public confidence vs. revenue recovery

28. Utility Ideas • Leak Detection • Improve volume used for end product • Proactive/preventative maintenance • Reduce need for new materials • Improve efficiencies • Pressure Right-Sizing • Deliver what is needed • Reduce energy costs • Rate structure changes (whole other topic)

29. Non-Conservation Satisfaction • Make other aspects of water system sustainable or green • Energy efficiency • Energy mining • Water reuse • Green energy • Certified facilities • Establish the utility as a credible and responsible resource steward

30. Existing Systems • Existing systems are green systems • No new materials • No impacts of installation • Ex energy systems sized right • In-fill on existing water systems needs to be promoted • Refurbishing systems to improve efficiencies

32. New Rate Equation Expenses – Non-Rate Revenue [ Vol (S) – Vol (L) – Vol (W) – Vol(E) ] x GP Volume (S) = Average Sales Volume Volume (L) = Average Annual Losses Volume (W) = Weather Factor Volume (E) = Economic Factor GP = Green Progressiveness Factor (1.0 – 0.80) 1.0 = No conservation expected 0.80 = Ordinances, municipal controls, etc.

33. Conclusion • Reduced use will increase rates until structural cost changes have time to develop. • Conservation will magnify over capacity issues. • Balance is needed to offset rate increases. • Can affect sewer side if bill on water use. • Be environmentally sensitive in alternative ways. Conservation is here to stay. Embrace it or get run over by it.