Conservation Impacts on Water Rates

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

Who am I?

James BurtonAssociate – 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!

Who are you?

• System operators?• DPW superintendents?• Utility managers?

• Phase II permit agent?• Sprinkler police?• Local tree hugger?

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.

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?

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!

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

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

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

End of WWII

Suburban Explosion

Height of Detroit Industrial Might EPAct

Population Data from 7 County Membership of SEMCOG

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

Expense Components

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

Non – Rate Revenue

• Interest earnings• Hook up fees• System charges• Penalties• Contributions from the general fund

Cost of Water

• Riparian Law• Water rights

• Water in Michigan is FREE!• Paying for the service

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

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

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

Fire Protection

• Ask a resident with their house on fire?

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

Conservative Use vs Fire Flow

Family of 4 – 360 gpdUsed over 8 hours = <1 gpmUsed in 1 hour = <6gpmUsed in 1 minute = 360 gpmCut bill by 10%Compare to: 1,500-3,500 gpmDoes conservation impact cost

of service?- Assume 10% reduction in use

“Cost of Service”

• What is the true cost of providing water?

• Does the end user matter?• Does their consumption

matter?

Impact

CONSERVATION MEANS A BILLING UNIT USES LESS AND THEREFORE PAYS LESS

CONSERVATION DOES NOT MEAN IT COSTS LESS!

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.

Balancing Act

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

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)

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

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

New Rate Equation

Expenses – Non-Rate Revenue [ Vol (S) – Vol (L) – Vol (W) – Vol(E) ] x GP

Volume (S) = Average Sales VolumeVolume (L) = Average Annual Losses

Volume (W) = Weather FactorVolume (E) = Economic Factor

GP = Green Progressiveness Factor (1.0 – 0.80)1.0 = No conservation expected

0.80 = Ordinances, municipal controls, etc.

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.