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. End of WWII Suburban Explosion Height of Detroit Industrial Might EPAct 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.