The Next Generation of Data-Driven Demand Management...The Next Generation of Data-Driven Demand...

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AbstractWater utility executives are faced with new realities which require them to reassess the tools they use to support mid and long-term financial decisions. Emergent cloud-based data platforms, specifically designed for the challenges faced by water suppliers, represent a new, critical element to improve decision- making. Data insights applied to utility management strategies will help meet the challenges of demand management and revenue control when fully integrated with water supply and infrastructure replacement planning. Utility managers can achieve the sustainability and affordability objectives they desire through the practical application of data analytics.

The Next Generation of Data-Driven Demand ManagementLong-Range Planning for Revenue Stability

GREGORY M. BAIRD

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The Next Generation of Data-Driven Demand Management

IntroductionTHE U.S. WATER INDUSTRY

The U.S. Water industry is complex and diverse. Each organization and

management structure is relatively unique, ranging from municipalities

of single cities or counties, to private utilities and even water districts

encompassing entire interstate regions. Nationwide there are nearly

54,000 community water systems1. The industry does not employ standard

communication approaches with end-users, as each program is directed by

varying officials and managers. As one of the most capital intensive2 ($6.84 of

investment to earn one dollar of revenue)3 sectors of cities (with water related

services twice as capital intensive as electricity and three times as gas),4 and

historically low water prices and associated revenues, venture capital and

private equity has been reluctant to deploy dollars in the water industry.5

The industry is also facing a near-term future of growing demand. From 2015

to 2019, the U.S. is projected to have a population growth rate of 2.4%, with

just under half of the states with higher growth rates reaching up to 7.5%.6

Much of that growth is occurring in arid urban regions where the cost for

new water supplies is rapidly climbing as traditional supply sources have

already been tapped. For water utilities, that means more customers, more

water demand, and more infrastructure development needs.

In addition to new infrastructure, the nation is facing a different crisis: That

of replacing existing infrastructure. In 2002, the EPA projected a daunting

$335 billion gap to replace and update America’s entire aging drinking

water infrastructure in the next 15 years.7 Now the estimate for underground

water pipes replacement over the next 20 years including sewer and storm

systems is much larger. A recent U.S. Conference of Mayor’s estimate placed

a combined need for all assets including growth at up to $4.8 trillion8. With

over 240,000 water main breaks in 2013 and an engineering grade of D from

the American Society of Civil Engineers (ASCE)9, the U.S. wet infrastructure

is at a critical crossroads, requiring this hidden issue to become a public

discussion at all levels.

FIGURE 1. Current challenges in the U.S. water industry

GROWTH & URBANIZATION

---------

INFRASTRUCTURE DECAY

WATER STRESS

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The current situation is unsustainable and a different approach is needed immediately.

WATER EXECUTIVES FACING NEW REALITIES

Against a backdrop of decreasing supplies, growing demand, and the

need for massive infrastructure investment, the U.S. water industry also

finds itself at the dawn of a revolution in data-driven water management

practices, definitions, and applications. This transformation builds on the

tradition of water resource supply and protection planning while facing

new realities. Asset failure continues to occur due to deferred investments,

population shifts, unfunded environmental mandates, utility knowledge

loss and skill shortages, water supply variability, increased public scrutiny

on utility spending, changing financial markets, and continued cost

increases. The current situation is unsustainable, and a different approach

is needed immediately.

Misalignment of water supply and demand is one of the greatest

environmental concerns from coast to coast, from informed citizens

to finance managers to elected officials. Drivers of this distress include

climate change, population growth, regulations, demand variability

(complicated by changing weather patterns and water saving efforts),

ownership, and transfers. Water utility managers are expected to know

not only the per-capita demand of a growing and changing population

but also how to protect existing customers from water shortages due

to natural or man-made emergencies. In the past few years these have

included contamination, drought, earthquakes, and algae blooms.

Engineers are tasked with the evaluation of infrastructure needs including

replacement and repair schedules. They must assess asset and capacity

needs and, through master planning efforts, strive to achieve sustainability

goals while building more resilient water systems. Finance professionals are

expected to understand costs and how they will impact rates and revenues,

while simultaneously addressing the affordability concerns of the customer

base. Even wastewater utilities that have historically been unconcerned with

water supply issues are now forced to deal with the costly effects of lower

flows from water demand management efforts, the complexities of reuse

planning, and new regulatory water quality requirements.

It is unsurprising that, to utility finance professionals, conservation has been

synonymous with revenue loss, potential decreases in credit rating, and

higher capital costs. Revenue erosion has led to budget cuts that impair the

ability to invest in preventive maintenance programs to extend asset life.

Reduction in maintenance budgets has resulted in premature asset failure,

driving up capital costs. This downward fiscal cycle can result in the inability

to control or forecast revenue, and greater uncertainty concerning water

usage. In this context, conservation can distort the price elasticity of demand

A NEW TACTIC: DATA-DRIVEN DEMAND MANAGEMENT

Realigns supply and demand

Improves long-term financial and infrastructure planning

Reduces future rate increases

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and create pressure to rebalance the fixed and volumetric components of

water rates to help reduce revenue variability.

But that view of improved water-use efficiency is outdated. Better control

over water demand improves forecasting capabilities and moderates

variability. This creates greater financial control and improves both short

and long-term prospects for more efficient operations, greater customer

engagement, and reduced future capital requirements (Figure 2).

Changing the Paradigm of Demand ManagementDATA IS THE NEW GOLD

As the science of water demand management becomes a baseline

component of supply management, reliable and timely data emerges as

a key ingredient. The evolution of data collection and analysis is redefining

water efficiency, leading demand management to center stage.

In order to successfully reduce infrastructure costs via water demand

management, data must be collected, monitored, and analyzed at a sufficient

level of detail for engineering teams to modify assumptions concerning

pipe and facility capacity. These analyses must occur at both the customer

level and the utility operations level. Utilities need tools that enable dynamic

modeling and sensitivity analysis, based on large, real-world data sets. To

be most useful, these tools should be visual, intuitive, and support effective

communication with key stakeholders such as board members, regulators,

and end-use consumers.

FIGURE 2. Data Analytics and Behavioral Efficiency offer an opportunity to shift paradigms

Cost-effective, rapid data- driven demand-side solutions

Decoupled rate structure

Treat customers as partners

Targeted, personalizedcommunications

Demand managementslows rate increases

Expensive, slow,supply-side solutions

Volumetric rate structure

Silent provider of service

Mass communications

Reduced water deliveryerodes revenue

As the science of water demand management becomes a baseline component of supply management, reliable and timely data emerges as a key ingredient.

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New analytic software has increased the connectivity between system

information and service programs (Figure 3). However, data, as a utility

management input, is still plagued by disjointed sources that can be very

painful to integrate. Utilities can be swamped with data streams from

supervisory control and data acquisition (SCADA), meter data management

(MDM), customer billing, rebate programs, customer information systems

(CIS), global information systems (GIS), customer relationship management

(CRM), and more. Supply-side efforts have made use of various applications,

but the majority of utilities lack sophisticated tools for demand-side analyses.

Spreadsheets are subject to limitations and errors, lack data security, and

are time consuming to generate. This makes it difficult to visualize demand

patterns and credibly forecast future operational and capital budgets.

The Water Environment Research Foundation’s Blueprint vision10 for individual

water utilities states, “Successful users of state-of-the-art technology and

information use cost-effective advanced solutions to provide customers with

the best service possible.” These solutions support strategic imperatives that

allow “utilities to use technology to effectively meet challenges of efficient

operation, exceptional service, and meaningful public engagement.” This

data intelligence needs to empower customers while informing long-term

strategy for infrastructure planning and rate design.

Accurate and comprehensive data is also critical for benchmarking.

Benchmarking in the water industry has proven effective in comparing

reliability, sustainability, and program performance outcomes. “The tools

are important for documenting past performance, establishing baselines

FIGURE 3. WaterSmart Software’s Utility Analytics Dashboard

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for gauging productivity improvements, and making comparisons across

service providers. Rankings of the cost-effectiveness of various water utilities

can inform policymakers, those providing investment funds (multilateral

organizations and private investors), and customers. In addition, if managers

do not know how well their organization or division has performed (or is

performing), they cannot set reasonable targets for future performance.”11

“Benchmarking has become a key tool in the water industry to promote and

achieve performance targets for utilities. The use of this tool for performance

improvement through systematic search and adaptation of leading practices

has expanded globally during the past decade.”12 As with accurate demand

forecasting, water utilities that are better able to understand their baseline

will be able to make more effective decisions on investments and policies in

the future to ensure the utility’s ongoing success.

The challenge is to fully integrate demand management into long-term water

supply and infrastructure replacement planning. To meet this challenge, the

collection, analysis, and interpretation of data at the utility and customer

level needs to fundamentally change.

FOCUSING ON WATER DEMAND

Where do water utilities turn when faced with low aquifer levels and

precipitation variability? Historically, when utilities needed more water,

dams and reservoirs were constructed, and new wells were drilled. But

these approaches are no longer viable in many parts of the country: water

providers face historically low water levels in aquifers, as well as decreased

surface run-off.13 Recycled and desalinated water are increasingly being

pursued, but these projects take years to develop, are expensive, and only

address a modest portion of supply needs.

These factors push water providers out of their comfort zone and force

them to consider new approaches. This leads to more emphasis being placed

on the demand side of the equation (Figure 4).

Water demand is normally tracked at the utility, system-wide level. But to

better manage demand and improve forecasting capabilities the focus shifts

to where water is being consumed: at the customer level. New forecasting

models that include controlled demand management capture data

throughout the entire water value chain and incorporate all inputs, outputs,

and stakeholders’ water use actions. The long-term result includes a dynamic

and holistic data-driven picture that supports improved asset allocation

and decision-making. Such capabilities “help save energy, improve dynamic

pricing ability, monitor water quality, extend infrastructure longevity, and

reduce capital expenditures by managing peak demand.”5

THE CHALLENGE

Redefine the effects of conservation and water efficiency.

Collect, analyze, and interpret data at the utility and customer level in a fundamentally new way.

Integrate demand management into long-term water supply and infrastructure replacement planning.

FIGURE 4. An input-heavy water balance

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THE BENEFITS OF WATER DEMAND MANAGEMENT

When considering updating or replacing current water treatment plant

infrastructure, demand reduction is a high value alternative to procuring new

water supply resources. In addition to helping balance mismatches in supply

and demand, short-term benefits include:

• Lower operations and maintenance (O&M) costs

• Lower energy expenses

• Lower treatment costs

• Deferred or downsized capital projects

• Greater system reliability

• Reduced rate shock

• Higher credit ratings

• Lower interest rates for municipal bonds

Short-term demand reduction is usually associated with drought, natural

disasters and economic crises where real results are needed as quickly as

possible. Improved water-use efficiency moves beyond those conditions to

offer substantial long-term benefits. Water-use reductions over a 20-year

time horizon can help optimize demand management policies while creating

new virtual water supplies (Figure 5). These approaches have been shown

to significantly slow down rate hikes in some utilities14 and have yielded

substantial avoided operational and capital costs (Figure 6). Additionally,

investments in efficiency have improved demand forecasting and increased

revenue control.15

LONG-TERM BENEFITS OF WATER-USE EFFICIENCY

Demand management over a 20-year time horizon creates new virtual water supplies.

FIGURE 5. Reduce or delay capacity by reducing peak demand

Required capacity before reduced demand

5

10

15

20

25

2005 2010 2015 2020 2030

Peak D

em

an

d/C

ap

acit

y (

MG

D)

Existing capacity

DELAY

DOWNSIZING Cost savings

Source: AWWA Manual M-52

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Because of these benefits, utilities across the nation are increasingly

investing in demand management programs. Simultaneously, we see an

increase in the number of organizations calling for improved water efficiency

as a cost-effective source of supply such as the Alliance for Water Efficiency,

Waterwise, and the U.S. Water Alliance. Even when demand-reduction is

not a specific agency need, utility managers are increasingly honing in on

demand management best practices as an integral component of Integrated

Regional Water Management Plans.

INFRASTRUCTURE COST SAVINGS: A COLORADO CASE STUDY

Improved demand management helps reduce operational and capital costs

and allows utilities to more easily fund current and future projects without

rate shocks while mitigating affordability issues. According to a recent study

in Colorado, utilities were able to significantly downsize rate increases through

demand management practices.14 The study analyzed water use behavior

and utility policies since 1980, projecting utility costs to the present day, had

demand management never been introduced. The results were startling.

According to the City of Westminster’s findings, an additional 7,295 AF

would have been needed to meet rising demand. As new water sources in the

Colorado Front Range are priced at an astonishing $30,000 per acre-foot,

the council calculated savings in capital investments to be $218.85M. Demand

reductions particularly affected Peak Season water production, saving the city

approximately $130M in additional treatment costs. Wastewater treatment

savings of roughly $20M were realized.

FIGURE 6. Deferred capital costs for new supply and storage avoids significant interest expenses

Source: Capital investment estimates from 2002 EPA Drinking Water Infrastructure Needs Report

System Size(Connections)

Number of Systems

Estimated 20-Year Capital Need ($M)

Average Investment per System ($M)

Annual Interest on 20-Year Bond at 3.5% ($M)

> 100,000 426 $145,100 $340.61 $11.92

3,301–100,000 8,787 $161,800 $18.41 $0.64

< 3,300 42,322 $64,500 $1.52 $0.05

CITY OF WESTMINSTER SAVEDWITH DEMAND MANAGEMENT

$591 Min capital expenses

$1.2 M in operating costs

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Overall, through consistent demand management programs, the City of

Westminster was able to avoid over $591.85M in costs for new capital

investments in water source supply and infrastructure. The study also found

that the utility saved on average $1.24M in yearly operating costs. The study

also analyzes these costs and their repercussions on water and wastewater

rates, as well as tap fees. Combined water and sewer bills would be

91% higher than they are currently, jumping from $655 to $1,251 annually

had 1980 water usage levels continued without demand management.

Similar results were found for tap fees, whose rate would have increased

by 99% had conservation never been introduced.

The report admits, “Each water system is unique, so the results from

Westminster may not be applicable to everyone. Utilities could perform a

similar analysis to see the real value of conservation. However, the $590

million dollar cost associated with the additional 7,295 AF of demand reveals

the significant hardship associated with expanding water resources supply

and wastewater treatment infrastructure in today’s environment.”

It is a hardship for the utility, but also for the customer, to keep up with

rates that are increasing at an alarming rate. “Water and wastewater rates

have increased faster than the Consumer Price Index (CPI) over the past 15

years16 (Figure 7). Managing the public response to rate increases has taken

on growing significance in recent years as utilities grapple with the double

Utilities are increasingly adopting rate structures that place more weight on fixed costs rather than variable operating costs.

FIGURE 7. The increases in water costs continue to exceed the Consumer Price Index

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Water & sewer (1953)

Postage (1935)

Electricity (1913)

Natural gas (1935)

CPI (1913, 1983=100)

Tel. services (1997=100)

Source: IPU-MSU based on BLS data.

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edged sword of rising infrastructure costs and decreasing demands17.”

Although rates may still increase, they will do so significantly more slowly

when demand management programs are in place. Utilities are increasingly

adopting rate structures that place more weight on fixed costs rather

than variable operating costs. Demand management programs funded by

monthly fixed costs of utility water and wastewater rate structures allow

utilities to fully capitalize on avoided costs as well stabilize revenues by

emphasizing predictable fixed costs.

WATER AND ENERGY DEMAND MANAGEMENT

Much of the work on water demand management is built on earlier studies

relating to energy demand management.18 The gradual shift from simple to

complex technologies, from distributed to centralized systems, and from free

good to economic resource has typified both commodities.19

Over the past 20 years the energy industry has undergone a transformation.

A trend toward increased decoupling of electricity consumption and rates in

favor of fixed capital recovery margins has largely eliminated disincentives

toward improved efficiency. This has created a new industry for “energy

efficiency”, leading to a boom in technology innovation and yielding benefits

for utilities, industry vendors, and consumers. Utilities have transformed the

grid system, turning it into the “smart grid” equipped with GIS and smart

meters measuring real time data.

Developments in the water industry have begun to parallel energy market

trends with customer engagement programs leveraging the full benefits of

smart metering data technologies.20 With demand management a growing

priority in the water sector, increased control over water use is required

for predictable and sustainable revenue flows. As with the energy industry,

coupling advanced data analysis with customer engagement solutions

will allow the water industry to achieve similar results. Advanced Metering

Infrastructure (AMI) promises time and use rate charging with near perfect

allocations of peaking and energy costs by water source. With ingenuity and

drive, the water industry can make significant headway in efficiency, return

on investment, and transparency.

Emerging customer engagement programs leverage the full benefits of smart metering data technologies.

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POPULATION DEMANDS ON WATER SOURCES

Population growth compounds water utility constraints, driving them

to search out alternative water sources. As urbanization continues,

metropolitan areas seeing the greatest increase in population tend to be in

regions of the world with the least amount of potable water. While per capita

water consumption has continued to decline in most parts of the world,

demands on limited supply sources in the most populous cities leads utilities

to search for new solutions to the growing supply-demand imbalance.

Mother nature plays a role in declining precipitation rates and rising

temperatures directly affecting the volume of snowpack that normally melts

into our sources of surface water.21 Groundwater accounts for 25% of total

water needs in the domestic, agricultural, and industrial sectors in the US.22

Over half the population relies on groundwater as a primary drinking water

source.23 Decades of poor management of groundwater sources (much due

to agricultural usage) have depleted reserves while climate change patterns

are resulting in alarming declines of groundwater recharge rates.

Recent discussion related to water stress, particularly in the Western United

States, has focused on drought. However, what we’re experiencing is not

primarily a drought problem. It’s a growth problem.

INCREASING COSTS OF NEW WATER SOURCES

What other options exist when current sources are depleted or unavailable?

Many utilities are buying raw water from other water providers, but at very

high cost. Other options include recycled or reclaimed water that requires

additional treatment depending on the initial quality and its targeted end

use. Desalination is yet another option. California’s coastline recently saw

construction of the nation’s largest desalination plant in Carlsbad, after

almost 6 years of government permit negotiating. Customers will be paying

up to $2,257 an acre-foot for the water. An agency which provides water to

3.1 million people in San Diego County, signed a 30-year contract agreeing

to buy at least 48,000 acre feet a year. This affects everyone’s water bill, not

just those receiving water directly from the plant. Average customer bills in

the county will go up $5 to $7 to pay for the $1 billion project.24 For context,

the project is projected to provide 7% of demand for San Diego County.

WHY REDUCE DEMAND?

Reduces cost of• new water supplies• energy• treatment• capital projects• rate increases

While improving• revenue predictability• system reliability• credit ratings• capacity for local growth

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THE COST OF REDUCING WATER DEMAND VS. NEW WATER SOURCES

California’s updated 2014 Water Plan discusses how to maximize

investments in data collection through utility and customer side analytics

technologies, which is identified as a best practice.

“In addition to using conservation rate structures to incentivize water conservation, some water suppliers are using a new behavioral approach to affect demand management. Based on insights from psychological research, behavioral water efficiency programs inform consumers of prevailing social norms, such as the average water use of neighbors, to drive conformity to a more efficient standard. This comparison creates a social framework in which water conservation is seen as highly valued by residents of a community.

The effectiveness of behavioral water efficiency programs has been tested in several communities, including in an East Bay Municipal Utility District pilot project. In this pilot, residents received Water Reports with information about their water consumption, the consumption of similar households, and personalized recommendations on ways to save. The yearlong pilot project involved 10,000 homes and a randomized control group.

Households that received Water Reports reduced their water use from 4.6% to 6.6%, were more likely to participate in utility audit and rebate programs, and reported higher levels of customer satisfaction.

The unit cost of saved water was between $250 and $590 per acre-foot, with a mid-point cost of $380 per acre-foot.”25

As outlined by AWWA in their Water Resource Manual, industry best

practices for Water Use Efficiency have included water surveys, residential

plumbing retrofits, system water audits, leak detection and repair,

metering with commodity rates, native plant landscaping, high efficiency

washing machines, low flush toilets, and school education programs. These

“water efficiency programs” costs range from $465 to $980 per acre-foot but

are only utilized by a small percentage of customers. (Figure 8)

Demand management has a cost and a yield like any potential water

resource, so a cost-benefit analysis should be performed before

implementing programs. The AWWA offers a 10-step development process

to do so. Integrating a demand management program as part of a larger

Water Management Plan can provide the best perspective on potential

savings, avoided costs, and appropriate measures to benefit all stakeholders.

In 2010, The Water Research Foundation (WRF) published a report based

on utility surveys called Water Conservation: Customer Behavior and

Effective Communications. The objective of the study was to evaluate the

BEHAVIORAL EFFICIENCY

Informs consumers of social norms, such as average water use

Proven to reduce demand 4.6%–6.6%

Doubled program participation in audit and rebates

Improves customer satisfactionwith the utility

COST-BENEFIT ANALYSIS

Demand management has a cost and a yield like any potential water resource.

Low costA portfolio approach featuring demand management to address marginal supply requirements has repeatedly proven the least expensive option.

ROIIt can avoid, delay, or downsize investment in costlier sources of water.

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relationship between water efficiency behavior of residential customers and

communication approaches that seek to influence that behavior.

Forecasting demand management results can be very difficult. Changes

in precipitation patterns, household size, landscaped area, and other

variables can lead to wide-ranging estimates. The WRF survey results26

identified a number of important factors that influence per-capita water

demand. Different conservation programs yield various results: equipment

and fixture changes provide long-term savings; demand impacts of

low-water use landscaping and managed irrigation are more difficult to

predict; and consumption changes tied to rate design depend on a variety

of factors unrelated to price, such as household income, number and age

of occupants, and irrigable land area. Of course all of these factors impact

revenue forecasts.

The use of data can help utilities to better target customers who will benefit

the most from demand management programs. As benchmarking is used to

inform utility planning and decision making, the same approach has proven

effective in influencing customer consumption behavior. Customers require

household-based comparison information to make informed decisions and

persistently reinforce behavior change.

In nearly every case, demand management results in lower costs to utilities

and end-use customers than procuring new marginal supply sources.

While managed demand never entirely substitutes for new water supplies,

a portfolio approach featuring demand management to address marginal

supply requirements has repeatedly proven the least expensive option.

FIGURE 8. Behavioral efficiency is the least expensive source of new water supply

APPROXIMATE MARGINAL COST OF WATER PER ACRE FOOT$0 $500 $1,000 $1,500 $2,000 $2,500

$250–590 Behavioral e�ciency

Non-potable reuse $310–1,960

Water-use e�ciency $465–980

$820–2,000 Direct potable re-use

$820–2,000 Indirect potable re-use

$850–1,300 Imported water

$930–1,290 Brackish ground desalination

$1,500–2,330 Seawater desalination

$1,600–2,200 Water transfers

KEY FACTORS IN PER-CAPITA

WATER DEMAND26 27

• Ratio of SFR to MFR units• Number of bathrooms per

household (proxy for home values)

• Number of residents per household

• Income per household• Distribution of in-ground

irrigation

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Forecasting the FutureTHE INFRASTRUCTURE INVESTMENT GAP

In a two-part Water Research Foundation study, a forum of utility managers

discussed key trends impacting the industry. The primary study28 researched

and analyzed four categories of environmental, technological, economic,

and societal/political trends with topic areas ranging from climate change, to

rate of technological adoption, to customer and community relationships.

One of the trends projected to influence utility sustainability is the nation’s

aging water infrastructure and overall capital needs. As stated earlier,

estimates for investment in water infrastructure are projected to be as

much as $4.8 trillion dollars nationwide through 20288. Of the twenty utility

managers surveyed, most commented that this daunting capital need had

“gotten the best of them these past 5 years.” The strategy development

discussion called for aggressive capital improvement plans highlighting the

importance of incorporating the following practices:

1. Careful coordination between the utility and all stakeholders

2. Creating and adhering to a methodology in prioritizing projects, and

3. Greater coordination between engineering and finance departments.

Yet even with strict adherence to coordination practices, it is still unclear

how utilities will finance infrastructure improvements over the next

two to three decades. New sources of capital in addition to traditional

municipal bond financing are needed, and concerns over financial

stability in the face of uncertain future demand and revenue makes that

prospect even more challenging.

SHIFTING WATER DEMAND

Demand for water across different socio-economic segments of the country

is changing over the next two decades. Residential demand for water is

expected to decline due to changes in utility, stakeholder, and individual

behavior. Industrial water use will also likely see a decline due to improved

efficiency practices and technologies, along with migration of large

industries to non-U.S. markets. Conversely, increases in water demand are

likely in the energy industry due to expansion of thermo-electric power and

fracking activity.28

The USGS recently released a study confirming that water use estimates for

2010 reported withdrawals at the lowest levels since 1970. 2010 estimates

were also 13% less than 2005 usage rates, which is curious in light of a 4%

population increase during the same period.29 Water demand is also affected

by social changes, such as a heightened concern over water quality, and

REACTING VS. PLANNING

In order to set a proactive agenda, utility managers need a clear picture of future revenue and demand trends.

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geographic population shifts. Population shifts to the Southern and Western

regions of the country leads to excess capacity in the North and East while

challenging current capacity of the utilities in the nation’s western half.

The most successful efforts to deal with these changes in consumption

patterns have focused on better understanding trends and developing

proactive strategies to address future challenges. “The main challenge with

this trend appears to relate more to uncertainty in predicting usage than

the actual decline.” There is a prevailing concern of an “unknown bottom.”

This trend has influenced what utilities are requiring of their customers

and has “dominated the utility-customer relationship.” Water suppliers are

attempting to recover lost revenue by adding decoupled surcharges to bills,

and customers are increasingly dissatisfied with paying more for less water.30

OUTDATED FORECASTING MODELS

These changes in water consumption patterns have an impact on the

business model of utilities. Due to revenue uncertainty from unpredictable

customer consumption, many utilities are revamping their rate design

to increase fixed charges and reduce the volatility of variable volumetric

charges. This approach effectively decouples revenues from water

consumption charges. Accurate demand forecasting models are necessary

for decoupled rate structures to succeed, and help utilities optimize system

operations, plan for future water purchases or system expansion, and predict

future revenue.

There are several ways to forecast demand; one particularly basic and

popular method31 is to simply multiply current per capita water consumption

(GPCD) by expected future population. However, as indicated by the USGS

statistic, this is a highly inaccurate forecasting model. According to a study

by the Pacific Institute32, although water demand forecasting accuracy is

improving, utilities have traditionally over-estimated water use, leading

to a tendency to build excess system capacity. Utilities must consider a

wide range of variables when predicting customer behavior such as new

legislation, conservation programs, media messages, climate change,

changes in cultural values, and demographic shifts. By considering a more

comprehensive set of factors when forecasting demand, utilities are able

to improve financial stability and protect favorable bond ratings.

OVERCOMING UNCERTAINTY

These trends can be summarized by one word: Uncertainty. “In fact, the new

threat to fiscal performance may lie in uncertainty. These uncertainties will

likely require a suite of strategies to mitigate and master the most probable

and consequential trends and their associated risks. Utility responses to

Utilities have traditionally over-estimated water use, leading to a tendency to build excess system capacity.

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uncertainties, risks, costs, and innovative opportunities will help shape public

perceptions of water utilities and their leaders and in turn, shape the state

of the industry.”33 But modern data analytics technologies can be used to

address areas of uncertainty.

The University of Twente in the Netherlands published a study reporting

on each country in the world and their unique water footprint. U.S. water

consumption was calculated to be 1,053 billion cubic meters in 2014.34 This

amount of water was produced and distributed by over 50,000 different

non-transient water systems across the nation. It is interesting to note

that, according to the EPA, only 8% of water utilities service over 82%35 of

U.S. population. This is yet another indication of ongoing trends toward

urbanization that stress the relatively few systems serving a vast majority

of the population.

In the face of these challenges, water industry professionals are seeking out

innovative practices to increase sustainability and productivity. Demand

management as an effective new source of marginal supply is topping the

list of best practices in many regions.

IMPROVING REVENUE CONTROL

Water supply planners are not able to make prudent and cost effective

estimates unless customer water demand becomes more consistent. Price

elasticity of demand is distorted by conservation messaging which leads

to further revenue uncertainty. Revenue projections use billing information

derived from meter consumption data and water rates. Improved data

reliability and sophisticated interpretation is critical to improving forecasts

and capturing cost savings. This is done by avoiding high peaking factors

and pipe sizes from engineering assumptions. Infrastructure replacement

planning activities that incorporate an integrated investment planning

process with more accurate demand projections inevitably lead to lower

long-term system costs.

An integrated approach grounded in data analytics and customer engagement

takes the short-term revenue gap from demand management programs and

leverages it for longer-term, cost saving.

DEMAND MANAGEMENT VIA CUSTOMER ENGAGEMENT: A CALIFORNIA STUDY

We have already established the beneficial cost of behavioral efficiency

programs in the context of other marginal water supply options, but there

are additional advantages to managing water consumption by directly

engaging end-users.

DATA-DRIVEN DEMAND MANAGEMENTREDUCES UNCERTAINTY

An integrated approach grounded in data analytics and customer engagement takes the short-term revenue gap from demand management programs and leverages it for longer-term, cost saving investment strategies.

17 of 23


As discussed earlier, East Bay Municipal Utility District (EBMUD) tested

behavioral efficiency in a pilot program of residential Water Reports

developed by WaterSmart Software. An independent study30 found a

4.6%–6.6% decrease in water use in the treatment group compared with the

control group. Personalized information on the Reports encouraged high

users to cut back, while nudging already-efficient homes to maintain their

current level of use. The study found that households with water usage in the

top quartile saved the most, while the lowest water users’ consumption did

not increase in response to social norms. These findings indicate that Water

Reports can be used as an effective tool to target the most volatile segments

of demand, thereby stabilizing revenue.

Empowering customers to take action improved the utility-customer

relationship. Water Reports were found to be statistically significant in their

ability to influence customers to take part in utility programs such as audits

and rebates. Customers who received reports were 2.3 times more likely to

participate and up to 80% more likely to score EBMUD as “Excellent” in “giving

useful tips and tools needed to use water efficiently.” These findings have

been further supported by WaterSmart’s own surveys, which have seen a 36%

increase in customer satisfaction from Water Reports.36

DEMAND MANAGEMENT AND ASSET MANAGEMENT PLANNING

According to a study by the California Urban Water Conservation Council,37

all utilities should consider demand management in an overall water asset

management plan because of its substantial financial benefits. Based on the

study’s findings, utilities implementing demand management practices are

reaping extensive avoided costs and saving hundreds of thousands of dollars

per year. The study characterized direct avoided costs into four categories:

short run, long run, non-water, and total avoided costs. Short run avoided

costs are primarily marginal costs such as expenses for purchased water,

energy, and treatment chemicals.

Long-run avoided costs are fixed costs such as big capital investments in

water distribution infrastructure, treatment plants, and other upfront startup

systems. Most long-run avoided costs derive from infrastructure investments

that can be deferred and/or downsized through demand management.

Costs were further analyzed by assignable vs. joint costs (i.e. costs that are

incurred by a single system element vs. several elements combined).

While numerical projections vary depending on data quality and accounting,

the overall trend in avoided cost savings through improved demand

management is clear.

18 of 23


DIRECT AVOIDED COSTS OF IMPROVED EFFICIENCY

The CUWCC study suggests that costs projected by the accounting

approach often underestimate the actual price tag of investments and

operating expenses due to three key factors:

1. Projections are done using depreciated historical costs instead of

current replacement cost

2. Retained earnings and system development changes in the rate base

are usually excluded

3. Projections on water scarcity are often unrealistic

To overcome these shortcomings, the Council suggests more accurate

estimates of direct avoided costs for utility demand management practices.

“The estimation of a water utility’s avoided supply costs begins with baseline

assumptions about the future supply and infrastructure investments that

would be made and the manner in which the system would be operated in

the absence of conservation.”

The question that must be answered is how these factors might change

due to demand reductions. “Over a specific time horizon, expenditures are

projected using proven demand forecasting methods taking into account

population growth, industrial sector development, weather patterns and

other factors. The rate at which different prices will increase over time must

also be accounted for.” Existing system components are assessed and new

additions are planned.

Next, over the same time horizon, expenditures are calculated incorporating

estimated demand changes. System components whose costs are expected

to decrease because of the demand reduction are said to be operating “on

the margin.” This second cost projection is said to be the marginal operating

and capacity cost. Direct avoided costs are separated for peak and off-peak

seasons. Utilities will save the most money and water during the peak-season

affected by demand management; however, other short-term avoided costs

can be seen during off-peak season. System simulations that try to more

closely predict system response are most accurate in estimating marginal

costs. The study offers specific formulas and input charts for utilities to

accurately estimate their individual direct avoided costs to determine the

economic benefit of demand management programs.

19 of 23


On average, utilities can save up to $684/AF by engaging in demand

management programs that lead to lower operational costs as well as

deferred and downsized capital projects. As can be seen in Figure 9, when

a new additional water source is required (year 2024), the avoided costs

almost double.

Cost projections will multiply in the year a new source is introduced. This

projection varies according to the price of the new water source. Many

traditional sources of water are no longer available and thus prices for

incremental water sources are often extremely high.

How does a utility begin to capitalize on such savings? Implementation

of the proper demand management program is required. Most Best

Management Practices found in the demand management category

cost between $465-$980/AF to implement and maintain, which makes a

behavioral water efficiency program leveraging Water Reports an extremely

competitive investment at $250-$590/AF.

LEAK DETECTION: A UTAH EXAMPLE

The methodology of the CUWCC study also accounts for regular water system

losses when calculating marginal costs and direct avoided costs. Therefore,

mitigating demand-side losses is a strategy to increase savings. Utility

officials in Park City, Utah reported38 a favorable statistic for WaterSmart

Software’s automated leak resolution system. “In the first three months

of the program, the platform delivered over 150 leak alerts to residents,

70% of which were closed within ten days of the notification.”

Figure 9. Every gallon saved avoids marginal operating costs and long-term capital costs

$1,000

$2,000

$3,000

$4,000

$5,000A

void

ed D

olla

rs p

er M

G

20402035203020252020201520102005

Peak Season

Off-Peak Season

TOTAL DIRECT AVOIDED COSTS: NOMINAL DOLLARS

Source: California Urban Water Conservation Council

On average, utilities realize a net savings of $215–$390/AF when implementing behavioral efficiency over other demand reduction programs.

20 of 23


A New FutureThe application of data analytics to demand management, integrated with

financial and infrastructure planning is an emerging framework for water

utility executives. From this new perspective, utility managers can engage

stakeholders by providing a data-rich communications environment. This

data translates into insight and increasingly transparent board and council

meetings, more informed rate approval processes, and empowered customers.

A more robust data environment means increasingly credible consumption

and financial forecasts, greater stability of financial resources, and less

costly access to capital. Utilities are able to realize direct avoided costs while

creating data-driven justifications for new projects that align with actual

consumption needs, informed through controlled demand management.

Data rich communication tools for demand management offer an effective

way to reach out to individual customers. This approach ultimately helps the

utility of the future build a partnership with customers that yields greater

consumption management through information technologies, data insights,

and behavioral science that communicates the true value of water.

FOR MORE INFORMATION

415.366.8622

[email protected]

21 of 23


Endnotes1 USEPA. Information about Public Water Systems. http://water.epa.gov/infrastructure/

drinkingwater/pws/factoids.cfm.

2 Baird, G.M. (2010). A Game Plan for Aging Water Infrastructure. American Water Works

Association Journal, 102(4), 74.

3 Mumm, J. (2015). Real Water Industry Financial Benchmarks. LinkedIn Pulse. https://www.

linkedin.com/pulse/real-water-industry-financial-benchmarks-jason-mumm?trk=prof-post.

4 Wolff, Gary and Eric Hallstein. (2005). Beyond Privatization: Restructuring water systems to

improve performance. (December). http://www.pacinst.org/reports/beyond_privatization/.

5 EY. (2013). The US water sector on the verge of transformation: Global Cleantech

Center white paper. http://www.ey.com/Publication/vwLUAssets/Cleantech_Water_

Whitepaper/$FILE/Cleantech-Water-Whitepaper.pdf.

6 List of U.S. states by population growth rate. Wikipedia. http://en.wikipedia.org/wiki/List_

of_U.S._states_by_population_growth_rate.

7 USEPA. (2009). 2007 Drinking Water Infrastructure Needs Survey and Assessment. (March).

http://www.epa.gov/ogwdw000/needssurvey/index.html.

8 Anderson, Richard F. (2010). Trends in Local Government Expenditures on Public Water and

Wastewater Services and Infrastructure: Past, Present and Future. The U.S. Conference Of

Mayors – Mayors Water Council. (February). http://www.usmayors.org/publications/201002-

mwc-trends.pdf.

9 2013 Report Card for America’s Infrastructure. http://www.infrastructurereportcard.org/

a/#p/drinking-water/overview.

10 National Association of Clean Water Agencies, Water Environment Research Foundation,

and Water Environment Federation (2013). The Utility of the Future: A Blueprint for Action.

http://www.nacwa.org/images/stories/public/2013-01-31waterresourcesutilityofthefuture-

final.pdf.

11 Berg, S., Padowksi, J. C. Overview of Water Utility Benchmarking Methodologies: From

Indicators to Incentives. Public Utility Research Center. University of Florida.

12 International Water Association. (2001). Benchmarking Water Services. http://www.

iwapublishing.com/books/9781843391982/benchmarking-water-services.

13 The National Ground Water Association. (2004). Ground Water: A Critical Component

of the Nation’s Water Resources. http://www.ngwa.org/documents/positionpapers/

sustainwhitepaper.pdf

14 Alliance for Water Efficiency. (2013). Conservation Limits Rate Increases for a Colorado

Utility: Demand Reductions Over 30 Years Have Dramatically Reduced Capital Costs.

(November). http://www.allianceforwaterefficiency.org/WorkArea/DownloadAsset.

aspx?id=8671.

15 AWWA. (2007). M50 Water Resources Planning, Second Edition. http://www.awwa.org/

store/productdetail.aspx?productid=39312060

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16 Beecher, J. (2013). Trends in Consumer Prices for Utilities through 2012. IPU Research Note.

Michigan State University. East Lansing, Michigan.

17 Goetz, M. (2013). Invisible peril: Managing rate issues through public involvement. American

Water Works Association Journal, 105(8), 34-37.

18 Brooks, D. (2004). Beyond Greater Efficiency: The Concept of Water Soft Paths. Canadian

Water Resources Journal, 30(1), 83–92. http://www.tandfonline.com/doi/pdf/10.4296/

cwrj300183.

19 Brooks, D. (2006). An Operational Definition of Water Demand Management. International

Journal of Water Resources Development, 22(4), 521-528. https://www.researchgate.net/

publication/248997567_An_Operational_Definition_of_Water_Demand_Management.

20 Wesoff, E. (2011). WaterSmart: The OPower of the Water World. Greentech Media. http://

www.greentechmedia.com/articles/read/water-smart-the-opower-of-the-water-world.

21 U.S. Department of Agriculture. Precipitation Declines in Pacific Northwest Mountains.

http://www.fs.fed.us/rmrs/news/releases/content/?id=13-11-28.

22 U.S. Geological Survey. Trends in Water Use in the United States, 1950 to 2010. http://water.

usgs.gov/edu/wateruse-trends.html.

23 The National Ground Water Association (2015). Facts About Global Groundwater Usage.

http://www.ngwa.org/Fundamentals/use/Documents/global-groundwater-use-fact-sheet.pdf.

24 Rogers, P. (2014). Nation’s largest ocean desalination plant goes up near San Diego; Future

of the California coast? San Jose Mercury News. http://www.mercurynews.com/science/

ci_25859513/nations-largest-ocean-desalination-plant-goes-up-near.

25 (2013). Urban Water Use Efficiency. California Water Plan. (Vol. 3 - Resource Management

Strategies, Chapter 3). http://www.waterplan.water.ca.gov/docs/cwpu2013/Final/Vol3_

Ch03_UrbanWUE.pdf.

26 Water Research Foundation. (2010). Water Conservation: Customer Behavior and Effective

Communications http://www.waterrf.org/publicreportlibrary/4012.pdf.

27 Aquacraft, Inc. (2008). Water Use in New and Existing Homes – Update on EPA

Benchmarking Study. Presented at AWWA Water Sources Conference. Reno, Nev.

28 Water Research Foundation. Forecasting the Future: Progress, Change, and Predictions for

the Water Sector [Project #4232]. Water Research Foundation. http://www.waterrf.org/

ExecutiveSummaryLibrary/4232_ProjectSummary.pdf.

29 Maupin, M.A., Kenny, J.F., Hutson, S.S., Lovelace, J.K., Barber, N.L., and Linsey, K.S. (2014).

Estimated use of water in the United States in 2010. U.S. Geological Survey Circular, 1405,

p. 56. http://dx.doi.org/10.3133/cir1405.

30 Mitchell, D. L., & Chesnutt, T. W. (2013). Evaluation of East Bay Municipal Utility District’s pilot

of WaterSmart Home Water Reports. Report prepared for the California Water Foundation

and East Bay Municipal Utility District. (December). http://californiawaterfoundation.org/

uploads/1389391749-Watersmart_evaluation_report_FINAL_12-12-13(00238356).pdf.

31 AWWA, 2008 survey. http://www.awwa.org/store/productdetail.aspx?ProductId=6395

23 of 23


32 Pacific Institute & Alliance for Water Efficiency. Water Rates: Water Demand Forecasting.

http://www.pacinst.org/wp-content/uploads/2013/01/water_rates_water_demand_

forecasting.pdf.

33 Steering Innovation in Water Utility Finance and Management: A Water Research Foundation

Leadership Forum - 4506. Water Research Foundation. http://www.waterrf.org/Pages/

Projects.aspx?PID=4506.

34 Fischetti, M. (2012). How Much Water Do Nations Consume? Scientific American. http://www.

scientificamerican.com/article/graphic-science-how-much-water-nations-consume/.

35 USEPA. Envirofacts. http://www3.epa.gov/enviro/facts/sdwis/search.html.

36 WaterSmart Software. Survey Reveals WaterSmart Software Increases Utility Satisfaction

Ratings by 36%. http://www.watersmart.com/press-release/survey-reveals-watersmart-

software-increases-utility-satisfaction-ratings-by-36/.

37 A & N Technical Services, Inc. & Gary Fiske and Associates (2006). Water Utility Direct

Avoided Costs From Water Use Efficiency. Report prepared for the California Urban Water

Conservation Council. (November). http://www.water.ca.gov/calendar/materials/cuwcc_

avoid_cost_model_user’s_guide_16296.pdf.

38 WaterSmart Software. Powering Leak Alerts with AMI. http://www.watersmart.com/partner-

story/park-city-utah-leveraging-ami-real-time-leak-alerts/.

ABOUT THE AUTHOR

Gregory M. Baird is president of The Water Finance Research Foundation

and specializes in long-term financial planning, infrastructure asset

management and capital funding strategies for municipal water utilities.

He served as a municipal finance officer in California and as the CFO of

Colorado’s third largest utility—overseeing all financial aspects of a $150

million water, wastewater and storm drain operation and $2 billion capital

program. Mr. Baird has issued more than $1 billion in municipal debt and

has had county treasury oversight responsibilities of over $900 million.

Mr. Baird serves on the AWWA Sustainable Infrastructure, Rates and Charges

and Asset Management committees. He founded the Utility Finance Forum

(UFF) for the Government Finance Officers Association (GFOA) and advises

the GFOA Economic Development and Capital Planning Committee on water

utility and asset management issues. He is widely published and presents on

utility infrastructure asset management and integrated finance issues for the

U.S. and Canadian water and wastewater industry.

FOR MORE INFORMATION

415.366.8622

[email protected]

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