know your customer - cwn-rce.ca

KNOW YOUR CUSTOMER: CANADIAN HOUSEHOLDS AND WATER

DIANE DUPONT, BROCK UNIVERSITY Published April 2014

RESEARCH BACKGROUNDWater is a key Canadian asset, however we know very little about the value or measurable contribution of water to the Canadian economy. There is a lack of information on which activities provide the most economic benefits per volume of water used, as well as shortcomings in our understanding of the myriad roles played by water in supporting ecosystem services crucial to our well-being. In terms of the importance of water at the municipal level, a major shortcoming is the absence of detailed information on household water consumption. Unlike other jurisdictions, household metering covers only 72% of customers living in single-family dwellings. Moreover, Canadians pay very little for the delivery of water to their homes and businesses, yet consume the second highest per capita amount of water in the world. In the past, supplying water to households and businesses was seen largely as an engineering task; provide low cost, reliable supplies of potable water. Today, the task of providing municipal drinking water has grown more difficult and complex. Municipalities must allocate scarce infrastructure funds, address distrustful/skeptical households, constrain tax increases, and preserve ecosystems, all while providing reliable, high quality potable water and keeping water agencies financially sustainable.

Part of the solution rests in recognizing that water is a scarce resource like other resources and must be used in such a way to maximize the welfare of Canadians.

Understanding how Canadian households make decisions about water use is a key, yet largely unknown, piece to the puzzle. It is fundamental to quantify Canadian’s attitudes towards pricing structures, quality of water and innovative water appliances. Only with this knowledge can municipal and provincial governments make informed decisions about rate-setting, the design of conservation programs, infrastructure renewal and expansion, and source water protection. Thus, the fundamental reason for carrying out this research was to bring to bear the tools of economic analysis in order to learn about the nature of Canadian households’ attitudes towards water and in turn, use this knowledge to assist public agencies entrusted with the delivery of water in meeting the significant challenges they face currently and in the future.

The research team included Steven Renzetti, Henning Bjornlund, Chandra Madramootoo and Diane Dupont. The overall goal for the project was to apply economic and engineering analyses to water use in agricultural, industrial and municipal sectors. Renzetti and Dupont focused upon the municipal and industrial sectors primarily while Bjornlund and Madramootoo examined water use in the agricultural sector. Given the intended audience, this note focuses on the team’s work in the municipal sector.

KNOW YOUR CUSTOMER: CANADIAN HOUSEHOLDS AND WATER

DIANE DUPONT, BROCK UNIVERSITY Published April 2014

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

(2002 $ thou

sand

s)

Year

Revenues and Expenditures of Canadian Municipal Water Agencies, 1988-2007

(200

2 $ th

ousa

nds)

Year

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

5000000

4500000

4000000

3500000

3000000

2500000

2000000

1500000

1000000

500000

Legend

Total Sales

Total Expenditures

Capital Expenditures

Canadian Water Network 1

RESEARCH METHODS A series of interconnected projects were undertaken with a unified goal of understanding how consumers use and think about water and applying this knowledge to water agency operations. All projects involved collecting data from individuals. These data were obtained from original surveys of Canadian households, municipal partners and federal agencies. Research projects can be categorized into three major subjects:

1. Conservation Oriented Water Pricing Two case studies, York Region and Victoria, were used to model the responsiveness of households to water price changes. Additionally, forecasting models were used to predict future water demands.

2. Households’ Values of Water Quality and Alternative Supplies Canadians were surveyed relating to their perceptions about health risks associated with water. The results measured the amount of money households are willing to pay to reduce these risks in two ways; their expenditures on bottled water, and secondly the acceptable size of an increase in their water bill. Respondents were further surveyed about the acceptability of reclaimed wastewater for alternative end uses.

3. Innovation in Water Use Modeled the role that water prices and billing structures play on households’ adoption of water conservation practices. Also investigated the efficacy of economic instruments to encourage manufacturing plants to innovate through enhanced reliance on internal water recirculation.

RESEARCH FINDINGS 1. Conservation Oriented Water Pricing

Conservation oriented pricing is a rate structure where costs are fully recovered and customers pay for the volume of water they use. The price charged is influential on customer behaviour and promotes more efficient use of water through behavioral choices, such as consuming less water and purchasing water-efficient appliances. It also offers potential for environmental and financial benefits to communities, as revenue generated from the new rate structure can be reinvested in the water supply system to repair aging infrastructure and protect water sources.

Case studies in York Region, ON and Victoria, BC outline the responsiveness of year round consumption of water to changes in price. The results can be used to forecast future water demand and are displayed in the graphs. Analysis of the model of year round water demand found consumers to be relatively insensitive to changes in price, reducing water demand by small amounts as prices increase. This emphasizes the expectation that for most of the year water is used mainly for necessary purposes, such as cooking and

cleaning, and thus it is difficult for consumers to reduce their usage by a significant amount in response to price changes. However, when consumer’s demand is divided by season it is clear that consumers are substantially more sensitive and responsive to changes in water price throughout the summer season; presumably due to the fact that outdoor watering practices are discretionary in nature and can add as much as 50% to a household’s overall water consumption.

Victoria Case Study: Projected Growth in Total Water Demand Assuming Medium Elasticity

260000

240000

220000

200000

180000

160000

140000

2008

2012

2016

2020

2024

2028

2032

2036

2040

2044

2048

2052

2056

2060

Legend

No Annual Increase1.5% Annual Price Increase3% Annual Price Increase9% Annual Price Increase

York Region Case Study: Projected Growth in Total Water Demand Assuming Medium Elasticity

220000000

200000000

180000000

160000000

140000000

120000000

100000000

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

Scenario

No PriceBase CaseAggressive WaterMedium Water

Total

Wate

r Dem

and

Year

KNOW YOUR CUSTOMER: CANADIAN HOUSEHOLDS AND WATERDiane Dupont, Brock University, Published April 2014


2. Households’ Values of Water Quality and Alternative Supplies

A number of Canadians have demonstrated willingness to pay to reduce the public risks for several different water-related health conditions. The acceptable size of an increase in Canadian water bills was examined in the context of a new municipal water treatment program that involved a reduction in some or all health risks stemming from drinking water quality. Results revealed that Canadians were willing to increase water bills by $211 annually to yield a reduction of 15,500 fewer microbial illness and 10 fewer microbial deaths. Respondents were also willing to increase water bills by $157 annually to yield a reduction of 50 fewer cancer illnesses and 10 fewer cancer deaths.

Over the past decade some Canadians have chosen to purchase bottled water or in house filtration devices to use with or in substitution of municipally supplied tap water. While some reasons for purchase include convenience or taste, there are a proportion of individuals that purchase water defensively, in order to reduce their perceived health risks from tap water consumption.

Percentage of Respondents Using Multiple Water Sources, Only Untreated Tap Water, Only Treated Tap Water (Filtered) and Only Purchased Water (Bottled)

YEAR USE MULTIPLE SOURCES

ONLY USE UNTREATED TAP WATER

ONLY USE TREATED TAP WATER

ONLY USE PURCHASED WATER

2004 71.59% 14.64% 10.29% 3.49%

2009 69.33% 17.79% 4.83% 8.05%

2012 66.94% 25.23% 6.51% 1.32%

Social acceptability is the primary challenge for the use of alternative supplies of water as consumers often view the practice with fear and/or disgust. However, survey results found that Canadians find the use of reclaimed wastewater acceptable in some circumstances, such as flushing toilets and outdoor watering, in order to augment the water supply and reduce the presence of summer water restrictions. Very few people were in favor of using reclaimed water for potable tap water. Major deterrents of the respondents’ willingness to use reclaimed water stemmed from lack of trust of the water utilities’ abilities to handle the potential health risks. 55% of respondents strongly agreed that they trusted their water supplier to manage any risks associated with using reclaimed water for toilet flushing.

A number of Canadians have demonstrated willingness to pay to reduce the public risks for several different water-related health conditions.

Survey results found that the total annual defensive expenditures on bottled water alone in Canada are approximately $251 million per year (2010 US$).

Total out of pocket spending made by Canadians to avoid health risks perceived to be present in tap water is estimated to be $590 million a year, which is approximately $48 per household per year.

$590MILLION

$251MILLION



Strongly Disagree – %6

Somewhat Disagree – %5

Neither Agree or Disagree – %13

Somewhat Agree – %21

Strongly Agree – %55

3. Innovation in Water Use

The presence of metering and volumetric pricing are found to encourage households to adopt water-saving innovations (low-volume toilets, and low-flow showerheads) since they are expected to provide higher future savings to households using these devices, offsetting the one time purchase expenditure. The presence of higher marginal prices increases the likelihood of the presence of a low-volume toilet but conversely decreases the likelihood of low-flow showerheads. However, the decisions relating to retrofitting low-flush toilets and low-flow showers are correlated, suggesting homeowners may see greater benefits from adopting both types of innovations. Prices appear to play a more significant role at influencing decision making regarding indoor water conservation than outdoor water conservation choices, yet higher marginal prices are nevertheless associated with greater likelihood of less frequent garden watering.

The introduction of economic instruments is important to alter firms’ perceptions of the costs of water use by compelling them to confront the full external costs of its use. Evidence has been found that industrial firms’ water demands are relatively more price-sensitive then residential water demands. Survey results show that almost all manufacturing sectors undertake some water recirculation and that the cost of recycling is often lower than that of water intake. Provincial fees for direct water withdrawals, as well as municipal water prices, could be effective instruments for confronting industrial water users with the social opportunity costs of their water-related decisions and, as a result, promoting innovation (recirculation) and more efficient water use. It is estimated that adding a commodity charge of eight to fifty cents per cubic meter of water to the current average cost of 13.5 cents per cubic meter of gross water use could reduce water intake across industrial sectors from 20 to 40 percent relative to base case forecasts.

Evidence has been found that industrial firms’ water demands are relatively more price-sensitive then residential water demands.

Reclaimed Water Used for Toilet Flushing



REPORT AUTHORED BY JOURDAN BIRD, BROCK UNIVERSITY

RESEARCH TEAM

DIANE DUPONT, Brock University, [email protected] RENZETTI, Brock University, [email protected]

CHANDRA MADRAMOOTOO, McGill University, [email protected] BJORNLUND, University of Lethbridge, [email protected]

PARTNERS

AGRICULTURE AND AGRI-FOOD CANADAALBERTA RESEARCH COUNCILCANADIAN WATER AND WASTEWATER ASSOCIATIONCAPITAL REGIONAL DISTRICT (VICTORIA, BC)CITY OF GUELPHENVIRONMENT CANADA

FUSE FORWARDONTARIO MINISTRY OF THE ENVIRONMENTONTARIO MINISTRY OF AGRICULTURE, FOOD AND RURAL AFFAIRSUTILITIES KINGSTONWATERSMART NIAGARA

REFERENCES

RENZETTI, DUPONT, WOOD (2011) Running Through Our Fingers. For Blue Economy Initiative. http://www.blue-economy.ca/report/running-through-our-fingers-0BRANDES, RENZETTI, STINCHCOMBE (2010) “Worth Every Penny: A Primer on Conservation-Oriented Water Pricing” POLIS Project, Victoria. http://www.cwn-rce.ca/assets/uploads-2/Reports/Worth-Every-Penny.pdfBJORNLUND (2010) “The Competition for Water: Striking a Balance among Social, Environmental and Economic Needs” C.D. Howe, Toronto.DUPONT (2010) “Bottle Matters” Water Canada, November/December. http://www.cwn-rce.ca/assets/Uploads/bottle-by-the-numbers-diane-dupont.pdfRENZETTI (2009) “Wave of the Future: The Case for Smarter Water Pricing” C.D. Howe, Toronto. Recognized in BDO Dunwoody Weekly CEO/Business Leader Poll.RENZETTI, S. AND DUPONT, D.P. 2013 “Household behaviour related to water conservation” Water Resources & Economics. 4:22-37.

ZHANG, J., ADAMOWICZ, W., DUPONT, D.P. AND KRUPNICK, A. 2013 “Assessing the Extent of Altruism in the Valuation of Community Drinking Water Quality Improvements” Water Resources Research. 49:6286-6297.BRUNEAU, J., DUPONT, D.P. AND RENZETTI, S. 2013 “Economic Instruments, Innovation and Efficient Water Use” Canadian Public Policy. 39(S2): 11-22.DUPONT, D. P. 2013 “Water Use Restrictions Or Wastewater Recycling? A Canadian Willingness To Pay Study For Reclaimed Wastewater” Water Resources & Economics. 1(1): 61-74.DUPONT, D.P. AND JAHAN, N. 2012 “Defensive Spending On Tap Water Substitutes: The Value of Reducing Perceived Health Risks” Journal of Water and Health. 10(1): 56-68.

MEANING FOR MUNICIPALITIES Overall this research provides valuable insight to various consumer behaviours with respect to water conservation practices and how water service providers can better achieve efficiencies. Key actionable implications of this research are:

p Models can be used to investigate application of summer surcharges to curb peak water demands. Access to these models can be granted by the research team and demonstrated through the case study found in the paper “Using Demand Elasticity as an Alternative Approach to Modelling Future Community Water Demand under a Conservation Oriented Pricing System: An Exploratory Investigation.”

p Results suggest that municipalities need to incorporate households’ attitudes towards the riskiness of water of differing quality and their behavioural responses into long-run capital planning. (This is currently under investigation by the researchers under the auspices of a CWN Evolving Opportunities for Knowledge Applications grant.)

p It is important for municipalities to understand the complex nature of households’ values and address key issues about water scarcity and quality in communications and education campaigns.

FOR MORE INFORMATION, PLEASE CONTACT DIANE DUPONT, BROCK UNIVERSITY, [email protected].



know your customer - cwn-rce.ca

Documents