DEQ-CFW_00050843

* Utilities that depend on raw water from the Cape Fear have made enormous investments in
infrastructure to treat and delivery water, but relatively |h1|e investment in watershed oriented
preventive efforts tomaintain orimprove raw water quality.
w While accurately modeling short-term financial impacts of water quality improvements is
difficult, there is clear evidence that water quality problems have led to significant incremental
treatment expenditures primarily due to the added cost incurred by algae blooms.
* Raw water quality improvements have the potential to reduce chemical costs, investment in
new technology, sludge removal, labor costs, energy costs, and other resource costs. Actual
costs savings vary utility by utility and by specific watershed initiative. Narrowing in on the
actual expenditure impact at a particular utility requires identifying specific initiatives to be
undertaken and additional research on what the water quality impact will be for those
initiatives.
* The largest quantifiable financial benefit of watershed protection to water utilities in the Lower
Cape Fear River Basin is likely to result from the reduction of activated carbon use in the
Brunswick County Northwest Treatment Plant.
Water and sewer utilities in North Carolina collect upwards of $2 billion of water customer fees each
year to cover the cost of a wide variety of initiatives ranging from capital outlays for major new facilities
to chemical purchases and staff training. Justifying a major new utility investment requires
understanding the approach a particular utility uses for evaluating operational expenditure increases
(budget expansions) and new capital investments. Given the resource constraints facing water utilities,
there has been a trend to study new (often referred to as "expansion" budget requests)from a business
case perspective tofully examine the financial impacts ofnew investments. Utilities vary in how/they
evaluate requests for increased expenditures — some have specific forms and processes, while others set
caps for divisions and departments and allow staff to shift resources and reduce expenditures in one
area in order to increase expenditures in another area that they feel will improve operations.
The business case process for capital investments typically takes alonger time horizon perspective and
takes into account non -financial drivers ranging from community priorities to regulatory requirements.
Neverthe|ess,mostconvendona|capita|projectfinancia|eva|uationprocessessbUre|yona"sin8|e
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a new pump is weighed against the short term energy and maintenance cost savings much more that
society's benefits from producing less air pollution linked to energy production. There are some utilities
and private companies that have begun incorporating "triple bottom line" analyses (financial/budget,
environmental, and societal) in their budget expansion requests. For example, Seattle Public Utilities
employees several staff economists that assign values to risk costs and societal costs that have little
direct impact on utility budget. This approach helps weed out projects that don't provide benefits but it
does not guarantee that all projects with positive economic impact will be funded. Ultimately funding a
project even among utilities that employ triple bottom line analysis still ultimately depends on available
existing revenue and/or the political will to increase rates to generate increased revenue.
A brief summary of how several utilities in the Lower Cape Fear Basin evaluate expansion requests is
described below:
Cape Fear Public Utility Authority(CFPUA)
As with many utilities, the Cape Fear Public Utility Authority (CFPUA) uses different techniques for
evaluating operating expenditure increases and expenditure increases linked to capital investments. For
capital investments, [FPUArequires utility leaders tocomplete a capital improvement request that
often includes reference to cost impacts or relates to the utility's ability to maintain service. [[FPUA
budget calendar leading up to the 2014 adopted budget is included in appendix]. Capital requests from
throughout the organization are evaluated and wrapped into a capital budget that is part of the annual
budget and a long-term ten year rolling capital improvement program (CIP). The 2014 budget includes
$24,338,007 in approved capital expenditures for water and wastewater projects. The overall project
cost of all the water and wastewater projects presented in the 10 year CIP is $ $404,656,071z
Over three-quarters of CFPUA's CIP is dedicated to wastewater projects. The 2014 CIP budget includes
$5.2 million for water projects, most of which are oriented to water distribution rehabilitation There are
multiple projects related to raw water supply including $400,000 budgeted in 2014fur a ch|oraminatiun
project linked to changing the method in which the utility disinfects water that can be tied to decreases
inwater quality and stricter disinfection byproduct regulations. There are no major watershed
improvement projects presented inthe ten year [|P. "Secure long term raw water supp|y" is a stated
priority in the ten year C|Pwith multiple construction projects valued atapproximately $SO million
included in the CIP. To put this value in context, the operating budget for the water treatment division
that includes water plant operation for JO14isnearly $7million.
Given the size of[FPUA'u [|P and relatively flat water sales trend , the utility has had limited resources
avai|ab|eforoperadngexpansionrequeststhatcannot"payforthemue|ves"re|adve|yquick|y.
Department leaders operate under a budget environment where the default assumption is that their
allowable budget will be based on the previous year with minor adjustments for inflation or
circumstances beyond their control such as increased electricity or chemical costs. When asked about
recent budget expansions that have gone through, staff cited specific initiatives that led to short term
zCape Fear Public Utility Authority 2O14Approved Budget downloaded from:
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dollar for dollar balances (e.g. expenditure in a new software system in exchange for not replacing a
staff member that retired).^
Brunswick County
Brunswick County sxvaterand wastewater utility budget is integrated into the overall county budget.
The water system continues to be in agrowth phase and, as result, isable toaccommodate some
budget expansions. According to staff members of the utility, the board is receptive to investments that
provide return but that documentation of that return is critical? Brunswick County uses a five-year
horizon for their OP,with $58,UO5,O00included for water projects and $19,756,615for wastewater
projects. Over half of the value of their water projects relate to improvements at their Northwest
treatment plant and the Cape Fear River raw water lines that serve the plant. The 2014 operating
budget for the Northwest treatment plant is$4,346,6O4.4
As with Brunswick Countythe Fender County water and sewer utility budget is integrated into the
overall County budget. It is divided into divisions that include separate distribution systems service
different regions of the county and a water treatment plant that treats Cape Fear River water and
supplies portions of the county. The 2 MGD water treatment plant and 13 mile transmission line was put
into service in2U1Iatacost of$33million. The operating expenditures included inthe budget for the
plant in 2014 include approximately $750,000 in salaries and supplies and $120,000 for the purchase of
raw water. Pender County mentions the impact of the recent economic downturn in their budget
documents and this clearly has made small communities such as Pender County cautious about
spending increases, however at the same time the County cites the importance of the water system in
fostering economic deve|opment.s
It is not difficult to make the general case that improving raw water quality will positively impact the
drinking water treatment process. Many components of the treatment process including chemicals,
treatment capital facilities, staff time, electricity, and sludge removal relate directly to the quality of raw
water to be treated. There are anecdotal stories of individual communities reaping huge benefits over
time byinvesting inwatershed protection efforts. There are also multi -utility studies that have found
aggregate long-term benefits for specific water improvements or have shown the adverse financial
impacts of dealing with water of poor quality. Economists and ecologists interested in understanding the
economic benefit of the services from the natural environment ("eco-system services") have employed
advance economic techniques for valuing these services.
zPersonal Communications with Cheryl 5pivey, Cape Fear Public Utility Authority Chief Financial Officer.
'Penmna|Communiosdnnwkh]enyPierce,8mnswickCountyDinectornfPub|icUti|idesDecpmber3,2Ol3.
+ All budget information taken from Z013-20l4Approved Budget available at:
'PenderCounty Managers 2Ol3-2O14Budget Message available at:
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While valuable in making a general case for watershed protection, it is difficult to use the results to
accurately estimate the financial impact of watershed protection for budgeting purposes for a specific
utility. For example, an analysis ofdata and past studies within the Neuse River Basin found that 30Y6
improvement in raw water quality would lead to a savings of between $2.6 and $16.7 million over 30
years across the entire region. A single utility within the basin with a five -(sometimes one -)-year
financial forecast will have a difficult time extrapolating and incorporating this type of aggregate data. 6
There have been studies designed to determine the incremental impact of water quality improvement
at the utility level. For example, a Texas study published in 1998 calculated that a 1% reduction in
turbidity leads to a very modest $0.20 chemical cost reduction per million gallon S7. |nthe Texas case,
this equated to a chemical reduction cost of only $534 for the average plant. For illustrative purposes
»,
this type of chemical reduction cost applied to the amount of raw water purchased from the Lower Cape
Fear Water and Sewer Authority would generate $1,614 in savings based on 2013 purchases.
Rather than focusing on incremental financial impacts of incremental improvements, many utilities
justify their overall modest watershed investments in terms ofprotecting their investments and
reducing risk. Not every utility investment can clearly betracked to a do||arsaved—some investments
are done to reduce risk, improve service, orprovide external benefits. In most cases, watershed
investments are a fraction of the costs that utilities spend on pipes and plants. The City of Raleigh
invests approximately $1.5 million dollars each year in acquiring critical land in the Fall's Lake
Watershed. The Orange Water and Sewer Authority has spent millions acquiring land around its
reservoirs. None of the water utilities in the Lower Cape Fear appear to have dedicated watershed
protection programs of scale anywhere near the investment they have in moving and treating raw
water.
Fs=- MOET-J���pecific Watershed Protection Initiatives
Some utility initiatives lend themselves to the development of very detailed and accurate quantitative
business cases. For example, a utility considering replacing an older pump with a new energy efficient
pump can use engineering data, maintenance records, and electricity costs to develop a fairly reliable
financial impact assessment of the initiative. While the financial impacts of watershed improvements
may not be as easy to predict as a new pump, there are undeniable financial impacts of water quality
that should be tracked and studied when considering increased investment in watershed protection.
Examples of direct budget expenditures impacted by raw water quality include:
Chemical Costs. The specific relationship between chemical costs and raw water quality are highly
dependent on the facility's water treatment process. The two facilities that treat the vast majority of
water from the cape fear, Brunswick County's Northwest Water Treatment Plant and [ape Fear
Public Utility Authority's Sweeney Plant employ different processes. Some specific examples of
chemicals that are influenced bywater quality include:
6 Elsin, Y. K., Kramer, R. A., & Jenkins, W. A. (2010). Valuing Drinking Water Provision as an Ecosystem Service in the
NeuseRiver Basin. Journal ofWater Resources Planning and Management, l36(4),474-482.
dni:10.1061/(ASCE)VVR.1943-5452.0000058
7 Dearmont, D., B. A. McCarl, and D. A. Tolman (1998), Costs of water treatment due to diminished water quality: A
case study inTexas, Water ResourRes,34(4),849-853,doi
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Activated Carbon. This material is used bywater treatment plants to eliminate the taste and
odor problems associated with algae blooms and other water quality problems. Brunswick
County's Northwest Water Treatment Plant depends on activated carbon to manage the
adverse impacts of algae blooms and has used the chemically extensively over the last few
years. Activated carbon is an expensive chemical and according to the Plant Superintendent
represents the biggest opportunity for cost savings if raw water quality can be improved.9
Chlorine Dioxide. An oxidant used by some plants, including the Brunswick NW plant, to address
color, taste, and odor issues on a recurring basis. Increased pollutants requires an increased
dosage.
Aluminum Sulfate. Alum is used to settle out turbidity in raw water and as turbidity increases,
water treatment operators will increase the amount of alum added to water.
Instead ofactivated carbon, the [FPUASweeney treatment plant relies on
ozonation as part of their disinfection process and as an oxidant to address pollutants. Ozone is
created by running electricity through liquid oxygen. The amount of oxygen and electricity
required totreat water is impacted bythe total organic carbon (T]C) in raw water. According to
the CFPUA, ozonation is extremely effective at addressing the water quality issues historically
experienced at the plant and events such as algae blooms, while requiring some increased
oxygen dosing and electricity, do not lead to the same type of incremental cost outlays that
facilities that use activated carbon incur.'o The initial capital costs associated with installing
ozonation equipment and the operating and maintenance is significant but once the investment
has been made, annual expenditures donot fluctuate that much.
New Technology Investment Costs. Aswater quality degrades orregulations become more
stringent, utilities sometimes must invest in new oradditional technologies. For example, new
disinfection by-product regulations have led many utilities to change their disinfection processes to
meet lower limits. CFPUA is currently evaluating whether they will have to invest in switching to a
modified disinfection process (referred to as chloramination) and have included $400,000 in their
capital improvement plan to cover the installation if necessary. Based on the bmeframefor the
decision, it is unlikely that modest short-term watershed improvement initiatives would impact the
ultimate decision, but it does illustrate the linkages between capital investments and water quality.
Sludge Disposal. Water treatment plants generate amodest amount ofwaste solids (dudge).The
amount of sludge can be influenced bywater quality and chemical additions. In the case of
Brunswick County, their reliance on activated carbon leads to a measurable increase in sludge and
sludge disposal costs.
Water. Some treatment processes require treated water and as water quality deteriorates, more
treated water must be used for treatment purposes. For example, Brunswick County uses 35 gallons
a minute of treated water to introduce activated carbon into raw water. Over a 24 hour period, that
isequivalent toSO,UUUgallons ofwater.
oPersonal communications with Glenn Walker, Brunswick County Water Resources Superintendent.
—Penmnu|communicudons*ith[WikeRichardson'CFPUAVVuterResourcesyWanager
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Labor costs. Water utilities donot generally have tohire additional staff specifically todeal with
water quality issues, but existing staff are often diverted from other important tasks when water
quality issues arise.
Electricity Costs. An increase in chemical feed doses increases the use of energy resulting in higher
electricity bills, although inmost cases the increase isnominal. The production ofozone from liquid
oxygen is more electricity intensive, and ozone facilities such as CFPLJA will see more significant
electricity costs as ozone concentrations are increased however even these increases are still
relatively modest because ozone is so powerful, relatively small dosage increases can address
relatively large water quality problems.
Linking budgetary inputs to water quality improvements poses a number of nexus challenges including:
Uncertainty related to impact on pollution drivers. Watershed improvement initiatives including land
acquisition, storm water management, and improved agricultural practices lead to reduction in water
pollutants including nutrients, suspended solids, organic chemicals, yet improvements are often difficult
to monitor and the diversity in modeling approaches and outcomes makes it difficult to accurately link
predict the actual level of pollutant reduction resulting from a specific initiative.
Uncertainty related to the cause of water supply problems. Algae blooms orincreased turbidity in
surface water can be linked to watershed contaminants but reducing one source of contaminants may
'.`....`.~...~.....`..`.^..
improvements and may lead toatemptation to
"over promise" the ultimate water quality
outcomes. This isparticularly challenging inthe
lower reaches ofriver systems that have large �
upstream drainage basins. (Figure lshows a
schematic ofthe rivers that ultimately flow into
the Lower [ape Fear Water and Sewer
Authority's raw water intake.)
~
Figure 1Rivers f.hatore upstroomofrow ww/er inf.okf?.
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Despite the challenges outlined above, there bsufficient data toquantify some ofthe potential
expenditures that could be influenced by improved water quality. While all three utilities employ
treatment systems whose operating costs are linked to raw water quality, the most significant and
measurable short term expenditure impact appears to be at the Brunswick Northwest treatment plant.
There is clear evidence that that water quality induced algal blooms have caused Brunswick County to
incur significant expenditures over the last few years and are likely to continue to pose a problem in the
future. While the abundant rains of 2013 appeared to have contributed to reducing algal blooms, in
2012, the utility experienced multiple blooms. Once elevated levels of blue green algae cells are
detected by the plant operators, they take steps to introduce powdered activated carbon at the plant.
This material reduces the taste and odor problems but leads to increase chemical costs, electricity costs,
sludge management costs, and labor costs. Operators estimate that the last major bloom inthe
summerofZU1I|astedSOdayuandoostapproximate|y$4O'SO,OUUincouts.Therevveretwoother
events that year with slightly less cost impacts. In consultation with the plant superintendent, a financial
impact model was created that suggests moderate algal blooms will cost the county approximately $8DD
to$1,3DOper day. [Appendix includes anexample ofthe model output]
Modeling direct expenditure increases at the CFPUA facility is more challenging based on their
processes. The two primary expenditures linked towater quality (chemical purchases and electricity)
represent significant annual outlays ($1 million budgeted for chemical costs and just under a $1 million
for electricity in 2014). Even relatively modest reductions in these inputs due towater quality
improvements would translate tosignificant annual savings.
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"T TOO =21 0
1. Cape Fear Budget Calendar (see separate attachment)
2. Excerpt from Impact Model
Days of Algae Blooms 75
Total Estimated Impact $100,575
81 P
DEQ-CFW-00050850