Shadi Eskaf is a Senior Project Director for the Environmental Finance Center at the University of North Carolina.
Imagine yourself to be the C.E.O. of a company that produces a high quality product. That product doesn’t really face competition from other substitutes in your local market. You meet with your staff and your Board, and scratch your head over this perplexing fact: your customers are buying less of your product. In fact, they’ve been buying a little less of it each year.
In the business world, this is very troubling. In the water industry, it’s actually supposed to be a good thing, except that it hurts your revenues as well. We will be exploring this challenge for water utilities in future blog posts. For now, let’s start by asking the first question: are customers using less water?
There is evidence that average residential water use is declining in many areas of the country. In North Carolina, average residential water use has been declining steadily in the past decade. The chart below tracks the same 217 water systems in North Carolina that have self-reported their residential customers’ water use levels to the NC Division of Water Resources in 1997, 2002, and 2007 through 2010. The bars reflect the range of average residential water use between the 10th and 90th percentiles of the 217 water systems, with the horizontal line in the middle reflecting the median across the systems. The median decreased from 5,083 gallons/month in 1997 to 4,292 gallons/month in 2010. On the low end, 38% of these systems’ average residential use was lower than 4,000 gallons/month in 2010, up from 19% in 1997.
The extent of recent declines in average water use for 275 NC water systems is shown in the next graph. Two thirds of the water systems reported lower average residential water use in 2010 compared to 2007. In fact, 21% of the water systems reported that average residential water use declined by more than 20% in that short three year period. One factor that might have influenced this decline is a severe drought that occurred in 2007-2008 during which many utilities initiated water conservation programs. A recent study by the Environmental Finance Center at the University of North Carolina investigated how 316,000 households in North Carolina changed their water use patterns between 2007-2010 and found that 10-15% of households more than halved their water use in those three years.
In a way, this is a very good development. Declining demands put less stress on existing water resources, lowers power and chemical costs, delays expensive infrastructure expansion projects, frees up water to be used by ever-growing populations, and maintains or protects environmental uses of water. So why should you, the C.E.O., be concerned at all? Just like in any business, if customers buy less of your product, you collect less revenue from which you must pay off all of your high (fixed) costs. The only factors that counter-balance this effect is increasing your customer base and adjusting your rates. At the very least, and to stay on the safe side, you should continue to predict declining average residential demand into the future.