United States         Office Of Water        EPA 230-R-94-001
              Environmental Protection     (4102)            February 1994
«4EPA      Customer Incentives
              For Water Conservation
              A Guide
                                          Printed on paper that contains
                                          at least 50% recycled fiber


             A GUIDE TO:
               Prepared by:
            Gary S. Fiske, Principal
          Ronnie Ann Werner, Associate
    Partly funded by a grant from USEPA (X820683-01-1)

               February 1994


This document represents the collective knowledge of many individuals involved with
water conservation. The authors would particularly like to thank the members of our
Project Advisory Committee for their ongoing dedication and input to this project. We
would also like to thank the U.S. Environmental Protection Agency's Office of Policy,
Planning & Evaluation, California Urban Water Agencies (CUWA), and the California
Urban Water Conservation Council (CUWCC) for their support. Sincere thanks also go
to the staff of the Seattle Water Department, Seattle City Light, and Puget Power &
Light, as well as the staff of Los Angeles Department of Water & Power for their
assistance with developing the case studies on their incentive programs. Finally, we
would like to thank the many staff members of water agencies  around the country who
shared with us their knowledge of and experience with customer conservation
incentives. A list of these individuals is  included in Appendix A of this handbook.


 California Urban Water Agencies (CUWA) is an organization of the largest urban
 water providers in California, which serve water to metropolitan areas comprising
 about two-thirds of the state's 31 million population. CUWA was formed to work on
 water supply issues of concern to the large urban areas in California. Among those
 concerns is water use efficiency; in particular, urban water conservation.

 Cosponsor of this Guidebook is the California Urban Water Conservation Council
 (CUWCC). This council is a broad-based organization which administers the 1991
 Memorandum of Understanding Regarding Urban Water Conservation in California,
 the agreement that forms the basis of progressive conservation programs for the large
 majority of urban Californians.

 As urban water conservation programs grow and mature, there is strong interest in
 many communities in providing incentives, monetary and other types, to stimulate
 further involvement of consumers. But the questions of which types of incentives to
 offer, and how to manage and optimize incentive programs have remained largely

 CUWA and CUWCC decided it was time to provide solid information on a variety of
 water conservation incentive programs to help water agencies design and evaluate
 programs on a more rational, thoughtful  basis. U.S. EPA provided a grant (X820683-
 01-1) for the major  funding for this project. Obviously, none of these project sponsors
 recommend specific approaches, devices, or price levels.

We were pleased to obtain the services of Barakat & Chamberlin, a leading consultant
 to water and energy utilities, to conduct this work. We were also pleased to invite
representatives of water agencies, industry, and environmental and other public interest
organizations to serve on an active Project Advisory Committee. Their work is
acknowledged and appreciated.
                                      CALIFORNIA URBAN WATER AGENCIES

 Alameda County Water District
 Contra Costa Water District
 East Bay Municipal Utility District
 Los Angeles Department of Water & Power
 Metropolitan Water District of Southern California
 Municipal Water District of Orange County
 Orange County Water District
 San Diego County Water Authority
 San Diego Water Utilities Department
San Francisco Public,Utilities Commission
Santa Clara Valley Water District

Richard Bennett
East Bay Municipal Utilities District

Prof. Richard Berk
Department of Sociology, U.C.L.A.

Rosalie Bock
Alameda County Water District

Roberta Borgonovo
League of Women Voters of California

Larry Dale
Dornbusch & Company

John Farnkopf
Hilton, Farnkopf & Hobson

James Fryer
Marin Municipal Water District

David Fullerton
Natural Heritage Institute

David Hanson
Green Industries Council

Lyle Hoag, Ex Officio
California Urban Water Agencies
Bill Jacoby
San Diego County Water Authority

Steve Kasower
Department of Water Resources,
Division of Local Assistance

George Martin
L. A. Department of Water & Power

Michael Moynahan
Metropolitan Water District of Southern

Craig Perkins
City of Santa Monica

Larry Rohlfes
California Landscape Contractors

Barbara Sarkis
Contra Costa Water District

Peter Vorster
Consulting Hydrologist


Chapter 1.    INTRODUCTION	 .   1
             What This Handbook Is (And Isn't) . . . .	   2
             Handbook Organization  	   3

             Audits  	;	   1
                  Residential Audits	   2
                  Nonresidential Audits	 .   7
                  Program Participation and Implementation of
                      Recommended Measures	  13
             Training Programs	  16
                  Irrigation Workshops .	  17
                  Residential Water-Efficient Landscape Design
                      Workshops	  19
                •  Commercial/Industrial Water Conservation
                      Workshops	  20
                  Results of Training Programs	  22

             Device Distribution/Direct Installation  "	   1
                  Which Devices Are Included in the Program  .	   2
                  Distribution Mlethod	   3
                  Who Installs the Devices	   4
                  Installation and Retention Rates	 . .	   6
             Rebates to Builders, Developers, Manufacturers, and
                  Distributors	   8

Chapter 4.    CASH TRANSFERS	   1
             Direct Rebates	   1
                  Ultra-Low-Flush Toilets (ULFTs) :	   2
                  Efficient Landscape Rebates	   6
                  Efficient Irrigation Equipment	   7
                  Industrial HVAC and Process Modifications	: .   8
                  Rebate Program Administration	  10
             Grants	 .  .	  11
             Bill Modifications	  12
             Vouchers .  . .	  14

                         CONTENTS (continued)
             Low-Interest Loans .........................              i
             Shared Savings ..............................           2
             Leasing ......................... ; ................  4
             Other Types of Programs  ..........................       5
                  Low-Income Programs ......................          5
                  New Construction ............................      6

             Introduction  ..... ..................                      ,
             Perspectives of Water Conservation Cost Effectiveness  .........   2
                  Program Participants .... .....................        3
                  The Water Utility  .................. '.'.'.'.'.'.'.'.'.'.'.'.'.   3
                  The Water Supply System  .......................      7
                  Society ............................                o
             Using the Cost-Effectiveness Perspectives to Calculate
                  Appropriate Incentive Levels  ....................       g
                  Use of the Participant Perspective  ....................   9
                  Use of the Water Utility Perspective  ..................  11
             Extensions of the Cost-Effectiveness Framework . .............  13

Chapter 7.    CASE STUDIES  .......................                   j
             Los Angeles Department of Water and Power: Ultra Low
             Flush Toilet Rebate Program ....................            2
                 Program Description  .........................        2
                 Program Goals  ............................         3
                 Target Market ..........................            3
                 Incentive Structure  ........................          4
                 Implementation Methods  ........................     5
                 Marketing Approaches  .................. .........    g
                 Participation Levels and Water Savings ................  10
                 Application of Cost-Effectiveness Tests ................  10

                        CONTENTS (continued)
             Seattle Water Department:  Home Water Savers Program	  15
                  Program Background and Description  	  15
                  Program Goals .	  18
                  Target Market	 . .	  18
                  Incentive Structure	  18
                  Implementation Methods	  19
                  Marketing Approaches	  19
                  Program Budget	  20
                  Program Evaluation	  20
                  Installation Rates and Water Savings	 .  21
                  Application of Cost-Effectiveness Tests	  23
             Hypothetical Industrial Incentive Program 	  27
                  Program Description	  27
                  Target Market	  27
                  Incentive Structure	  28
                  Marketing Approaches	  28
                  Implementation Methods  	  28
                  Water Savings .	  29
                  Application of Cost-Effectiveness Tests .	  29

             DESIGN  		   1
             Introduction	   1
             Potential Market Research Components	   3
                  How Do Customers Use Water?  	   3
                  Customer Attitudes Toward and Knowledge of
                     Water Use and Conservation	   5
                  How Do Customers Make Appliance/Equipment
                     Purchase and Use Decisions?	   7
                  How Do Water Needs, Preferences  and Attitudes
                     Differ Among Customer Subgroups?	   9
                  Which Incentive Program Designs are Most Likely
                     to Encourage Customer Participation? 	  13
             General Survey Issues	  15
             Conclusion	  16

                      CONTENTS (continued)
APPENDIX A:    List of Water Agencies that Responded to Survey of Conservation
                Customer Incentives
APPENDIX B:    Matrices of Incentive Applicability to BMPs, By Customer Class

                                  Chapter 1
       Incentive—Something that incites or has the tendency to incite to
       determination or action. (Webster's Ninth New Collegiate Dictionary,

As a result of the political, economic, and  environmental barriers to procuring new
sources of supply, water agencies are increasingly turning to conservation to achieve
permanent reductions in demand. The focus on demand-side management (DSM) as a
reliable resource poses a plethora of new challenges for water agencies. One of these
challenges is to motivate customer participation in conservation programs. While
acquiring supply-side resources is predominantly the responsibility of the water
agency, conservation requires customer action.

Customers choose to participate or not to participate in conservation programs for
many reasons. Customers may perceive barriers to adopting conservation technologies
or behaviors. These barriers can take a variety of forms, including economic or
financial impediments, insufficient knowledge or skills, interference with established
lifestyles, mistrust of conservation technologies, or difficulty in procuring water-
efficient appliances  or equipment. A water agency can offer a variety of incentives to
customers to overcome these barriers. For the purposes of this handbook, we define an
incentive as follows:

       Any  transfer of something of value from an agency to a customer for
       the express purpose of encouraging participation in a conservation
       measure or program.

For many water agencies,  convincing customers to adopt water-efficient technologies
and behaviors is an unfamiliar responsibility. The U.S. Environmental Protection
Agency (EPA), California Urban Water Agencies (CUWA), and California Urban
Water Conservation Council (CUWCC), recognizing the novelty of this task for many
water agencies, commissioned this handbook to assist water agencies with the  selection
and design of appropriate, cost-effective customer conservation incentives.

CUWA and the CUWCC have another reason for supporting this project: The
Memorandum of Understanding Regarding Urban Water Conservation in California
(MOU), which links water utilities serving 25 million Californians in the largest water
conservation program ever undertaken, requires signatories to evaluate  financial

  incentives to encourage customer participation in conservation programs. This
  handbook will assist California water agencies in meeting their commitments under the
  MOU. The applicability of the various incentives in this handbook to the Best
  Management Practices (BMPs) required by the MOU is illustrated in a series of
  matrices contained in appendix B of this handbook.

  The information presented in this handbook comes from extensive research, including:

         •    A literature review;

         •    A mail survey and follow-up interviews with staff members from
             approximately 40 water agencies (a list of responding agencies is found in
             Appendix A);

        •    Several in-depth case studies; and

        •   Development and application  of a cost-effectiveness framework.

 All program costs  and savings estimates presented in this handbook are from agency
 reports and were not verified by the authors of this handbook.

 This handbook is intended as a guide to help water agencies through the process of
 selecting incentives that are appropriate and cost-effective for their jurisdiction It
 is not  intended to be a "cookbook" for incentive programs.  Each agency will have to
 go through the process of determining how water is used in its service territory and
 identifying appropriate conservation measures. For example, this handbook will not
 help an agency determine whether it should have an ultra-low-flush toilet (ULFT)
 retrofit program. Rather, if an agency decides to have a ULFT retrofit program this
 handbook discusses the range of incentives available—including rebates, direct'
 installation programs, low-interest loans, and others—to encourage customers to
 participate in that program. It also provides a cost-effectiveness framework to help the
 agency determine how much of an incentive customers  need to participate in the
program and how much of an incentive  the agency can  afford to offer.

In selecting appropriate incentives, each agency will have to consider carefully its
water supply situation and the needs of its customers. This handbook  is  intended to

help structure and guide that process. No incentive is appropriate for all jurisdictions.
No handbook can substitute for careful thought and analysis.

For each of the incentives discussed in the following chapters, there may be local
political or institutional constraints that preclude or limit the use of that incentive.
Some of the incentives are controversial for a variety of reasons, including impact on
established industries or lifestyles. As they select incentive mechanisms, water
agencies must consider these issues as well as the issues that are raised in this

Regardless which type of incentive an agency offers, three points should be kept in
mind. Each of these will help keep overall incentive costs down.

       •   Flexibility is valuable.  It is important to reevaluate incentives as
           conditions change. Many of the most successful programs are those that
           were reevaluated as situations changed—for example, as droughts
           ended—and were redesigned accordingly. Adaptive management can
           enable programs to remain effective over time.

       •   Program implementation affects water savings.  The type and level of
           incentive is only one feature of program design. All elements of program
           design and implementation affect the level of water savings the program
           will achieve. For example, extensive follow-up will enable an audit
           program to achieve greater water savings, albeit at greater program
           implementation cost.

       •   Program marketing is key.  A good marketing campaign may enable an
           agency to offer a lower level of incentive. In addition, marketing
           requirements may change over time. For example, during a drought,
           customer awareness of the need for conservation may be higher, and thus
           programs may not require as much marketing.

The incentives discussed in this handbook fall into four categories:

       •   Information incentives
       •   Access to conservation technologies

        •   Cash transfers
        •   Financing

 Within each of these broad categories there is a variety of different incentives and they
 can be combined within and across categories.

 This handbook is structured as follows:

        •   Chapters 2 through 5, which are based on the experiences of water
            agencies across the U.S.,  provide a summary of the types of water
            conservation customer incentives,  the advantages and disadvantages of
            each, and the costs and water savings associated with these  incentives.
            Examples of incentive programs offered by water agencies are cited
            whenever possible. However, some incentives are still relatively untested in
            the water industry but have been used extensively in the energy industry;
            examples of these are drawn from energy utilities.

       «    Chapter 6 presents a comprehensive cost-effectiveness framework and
            shows how it can  be used to help  determine the appropriate level of an

       •    Chapter 7 presents three in-depth case studies—two actual and one
            hypothetical—to provide a better understanding of incentive design and
            implementation issues and to illustrate the application of the cost-
            effectiveness framework.

       •    Chapter 8 describes market research that water agencies can conduct to
            help them design more effective incentive programs.

                                                           INFORMATION INCENTIVES
                                   Chapter 2
                        INFORMATION INCENTIVES
 Lack of information about water-conserving technologies and behaviors may prevent
 customers from using water efficiently. Utilities can provide customers with
 information about conservation in many different ways, including guidebooks,
 brochures, hotlines, and other media approaches. These materials may focus on
 particular conservation measures or on the need for conservation in general.

 Public education about the benefits of water conservation is critical for raising
 customer awareness and generating community support for conservation. In fact, many
 water agency staff members involved with incentive programs claim that creating
 general awareness of the importance of water conservation is a key factor in
 encouraging program participation. In some cases, public education is the driving force
 behind an inclusive program. However, in this handbook we distinguish between
 public information/education programs and informational incentives. We define the
 latter as the provision of information for which customers would otherwise have to
 pay.  Specifically, this  section reviews the use of indoor and outdoor audits to provide
 site-specific information and seminars and workshops to provide specialized training
 and skills.

 Audits provide potentially valuable information to customers on conservation
 technologies and behaviors, sometimes including estimates of how much money
 customers could save on their water bills by adopting these measures. The receipt of
 such information could encourage the installation of water-efficient technologies or the
 adoption of conservation behaviors by some customers.

 For purposes of our discussion, an audit has two components: (1) a systematic
 customer-specific on-site survey of water usage patterns and needs; and  (2) specific
 recommendations on ways for that customer to increase the efficiency of water use.

 Audit results presented to the customer might, for instance, identify and  recommend
 installation of cost-effective water conservation measures that have a specified payback
 (e.g., two years or less). Audits may focus on indoor and/or outdoor water use for
residential or nonresidential customers. Residential and nonresidential audits have
different components and will be discussed separately.

  Residential Audits

  Residential audits involve sending trained agency staff or outside contractors to
  evaluate indoor or outdoor water uses (or both). Some water agencies offer audits to
  all residential customers, while others target subsets of customers based on housing
  type (e.g., all single-family residences or pre-1980 multifamily buildings) or on
  quantity of water use (e.g., top 20% of users). Many residential audit programs include
  direct installation of conservation  devices.

  Residential audits are further divided into indoor and outdoor (landscape).  The surveys
  reported the following audit components.
 Residential Indoor Audits

        •   Perform meter test for leaks (i.e., turn off all water-using equipment and
            see if meter still registers use);

        •   Perform dye tablet leak detection tests in toilets;

        •   Adjust toilet floats;

        "   Check toilet flapper valves;

        •   Test shower flow rate;

        •   Check for faucet leaks;

        •   Check water level settings on dishwashers and washing machines;

        •   Calculate water savings for various water level settings on appliances;

        •   Check cycles for water softeners;

        •   Check toilet flush volume; and

        •   Identify opportunities to replace standard toilets, faucets, etc., with water-
            conserving models.

                                                            INFORMATION INCENTIVES
 Residential Outdoor Audits1

        •   Provide basic information on soil, water, and plant relationships;

        •   Gather information about:

                Landscape size
                Irrigation equipment
                Plant mixes                      •      _  ..
                Environmental factors (shade, slope,  etc.)
                Soil type
                Pool, spa, fountain, other water features
                Overall appearance of landscape

        •   Locate meter; show customer how to read it;

        •   Turn on irrigation system; identify leaks,  overspray, and runoff;

        •   Perform soil tests;

        •   Evaluate irrigation  system:

                Check controller station settings
                Check for matched precipitation rates
                Check sprinkler heads for damage, misalignment
            •    Check that landscape manager knows how to program controller
                Conduct a precipitation test of the sprinkler or irrigation system

       •   Examine drip irrigation systems for emitter size and spacing;

       •   Prepare an irrigation schedule; assist in resetting of controller;

       •   Check for faucet leaks; and

       •   Suggest additional water-saving  opportunities where appropriate—e.g., pool
           and  spa coverings, appropriate plant selection and grouping, irrigation
           equipment upgrade.
'Some of these landscape measures may only be applicable for large landscapes.

         Contra Costa Water District (CCWD), California. CCWD has a residential
         water audit program that targets high water users. Auditors check toilets and
         faucets for leaks, install low-flow showerheads and toilet dams, perform a lawn
         irrigation system audit, and prepare a lawn watering schedule for the customer.
         Each audit lasts approximately one hour. CCWD estimates that the cost of each
         audit, including equipment, labor, and management, averages $39.

         North Marin Water District, California. North Marin conducted a pilot
         home water audit program in  1988, offering a free audit and direct installation
         of conservation devices to  the upper quartile of single-family water users. The
         initial mailing was sent to  1,276 randomly selected single-family upper quartile
         water users; approximately 19% responded. The cost of performing an audit
         was $45 per single-family home.

 Several survey respondents  described combined water and energy audits offered in
 collaboration with local energy utilities.

        City of Mountain View, California.  Mountain View conducted a residential
        audit program jointly with the local energy utility, Pacific Gas & Electric
        (PG&E). Mountain View scheduled the audits with their customers and PG&E
        contractors performed the audits. In this case, Mountain View joined an already
        operating PG&E audit program by providing the water devices and some
        additional training for the auditors regarding water conservation. Once the
        interest in the audits  died down, it no longer made sense to give the PG&E
        auditors special training for a few audits per year. Therefore, the water audits
        are currently performed by City staff.

        City of Anaheim, California.  Anaheim also offers single-family and
        multifamily customers combined water/energy audits. Auditors are sent to a
        Metropolitan Water District of Southern California (MWD) training program
        for water audit skills, as well as an Edison Electric Institute program on energy
        audit skills. The Anaheim auditors install showerheads, toilet dams, and
        compact fluorescent lightbulbs  during the audit.

        City of Pasadena, California. Pasadena has offered two versions of
       residential water audits: the  LITE Bill program and the Home Water Survey.
       The LITE Bill program, offered from November 1989 through October  1990,
       was an  elaborate program that featured door-to-door canvassing of all city

                                                           INFORMATION INCENTIVES
       residents and offered a combined water and energy audit and direct installation
       of conservation devices. The program included an Energy Eaters survey, which
       presented a detailed analysis of the customer's electric bill, by appliance.
       Survey information was run through a computer program, which generated a
       report that was sent to the participant.

       The Home Water Survey began in August 1988 (although multifamily units
       were not included until August 1990) and is still being offered. The Home
       Water Survey is a simpler and less expensive program for the agency than the
       LITE Bill program. Each survey includes an indoor and outdoor component
       and lasts one to two hours. Participants receive free devices and direct
       installation of low-flow showerheads, toilet dams, faucet aerators, hose bib
       timers, moisture meters, and soil enhancers. The audit also includes leak
       detection, soil analysis, irrigation system check-up, and a lawn watering
       schedule. Customers receive written recommendations at the end of the audit,
       but the analysis is less sophisticated than the one performed for the LITE bill
       program. For the Home Water Survey, Pasadena has successively targeted (by
       mail) tiers of water users, beginning with customers using 55% above  average,
       then customers using 40% above average, until they targeted all customers
       using at least 10% above average.

       The cost of the LITE bill program was approximately $75 per audit, while the
       Home Water Survey costs approximately $50 per audit.

Audits can be performed by utility staff or by outside contractors, community groups,
or students. All of these approaches have been used successfully. However, water
agency staff members involved with residential water audits stressed the customer
educational component of the audits and the need for well-trained auditors to
accomplish this.

Cost of a residential audit depends on the services provided. A one-hour indoor-only
residential audit costs approximately $25 to $40. When an outdoor audit is included,
costs range from $45 to $75/audit.

Very few agencies in our survey have completed evaluations or studies  of water
savings associated with  their residential audit programs. The few that have done so
report savings ranging from 25 to 40 gallons per household-day. All of these programs
included audits of both indoor and outdoor water use. The evaluated programs all
included other incentives—such as free  devices, discount coupons, and direct
installation—so water savings cannot be attributed solely to the audit.

  There is no consensus among agencies about the value of landscape audits for single-
  family residential customers. The landscape audit is typically the most time-consuming
  component of residential audits, and water savings are disputable. Because most of the
  changes are behavioral, the persistence of any savings is uncertain. Also, an MWD
  study showed that many customers under-irrigate their landscapes.2 Another problem
  cited with the outdoor component of the residential water audit is that auditors cannot
  rectify  most of the bigger problems that they identify. Even if they are able to
  diagnose major problems, those problems are likely to be systemic and beyond the
  skills of the typical residential auditor. In general, residential auditors receive  minimal
  landscape training and apparently have little prior experience with irrigation systems.
  In some cases, respondents noted, auditors  do not know how to program the
  controllers. Furthermore, some of the information provided to customers is not
 practical—for example, some auditors told  customers to water their lawns for  10
 minutes twice a day, but the customers' controllers could not be programmed  to do
 this. The North Marin Water District in California attributes only 1.8 gallons per
 capita daily out of a total estimated savings of 8.5 gallons per capita daily to the
 outdoor component of the pilot home water audit program.

 Other respondents, in contrast, said that overwatering of landscapes was the most
 common source of residential excess use, and that residential landscape audits  were
 very useful to customers. In support of this view, the evaluation of the Contra  Costa
 Water District audit program in California attributed three times more savings  to the
 outdoor component of the  audit (29.1 gallons/household-day) than to the indoor
 component (8.9 gallons/household-day).3 Evaluations of several other residential audit
 programs are under way and may help establish the level of savings achievable with
 this incentive.  Aside from  water savings, residential  audits tend to be popular among
 water retailers as  a service that they can offer to then- customers.
 Planning and Management Consultants, Ltd. Analysis of Residential Landscape Irrigation in Southern
California (Metropolitan Water District of Southern California, Planning Division, December 1991).

 John B. Whitcomb, Measuring the Water Reduction from Contra Costa Water District's 1989
Residential Water Audit Program (Brown and Caldwell: May 1991).

                                                           INFORMATION INCENTIVES
Nonresidentia! Audits

Industrial Audits

Industrial audits are highly site specific and require specialized training and skills. In
these audits the auditor generally tabulates and diagrams how and why water is used
throughout the facility. Once this is established, the auditor can look for inefficient
uses and identify potential efficiency improvements. Industrial audits may include the
following measures:

       •   Perform all of the indoor residential audit components;

       •   Record hours of operations for each water-using process or piece of

       •   Identify water needs for each use;

       •   Measure amount of water and verify flow rates (this may involve installing
           temporary or permanent meters on major processes or flows);

       •   Identify flow and quality of wastewater resulting from each use;

       •   Evaluate heating, ventilation,  and air conditioning (HVAC) systems;

       •   Evaluate water-using process  equipment (e.g., check on/off valves for
           spray  equipment); and

       •   Prepare a water balance diagram to illustrate all water uses from the supply
           source through the on-site processes, machines, and buildings, and on to
           evaporation and waste discharge.

       Metropolitan Water District of Southern California, California (MWD).
       MWD has recently begun an industrial  audit program. Potential audit
       participants receive a walk-through survey  to evaluate the potential for water
       savings. If this scoping visit indicates that  a full-scale audit is warranted, a
       detailed water management study is performed. Each  of these studies typically
       cost $5,000 to $15,000. Program costs are  split between MWD (a wholesale
       water provider) and the participating member agency  in an innovative way:
       MWD and the member agency are responsible for auditing facilities with
       equivalent daily water use. For example, if MWD audits a facility that uses

         20,000 gallons daily, the member agency can meet its responsibilities by
         auditing five facilities that each use 4,000 gallons daily. This program design
         addresses the fact that large industrial sites can be extremely complex and that
         small water agencies may not have the technical capability to conduct those
         audits or the resources to hire outside contractors.

         City of Phoenix, Arizona.  Since 1987, Phoenix has offered audits to large
         commercial, industrial, and  institutional customers using over 50,000
         ccf/month. There have been approximately 100 participants to date. The city
         staff consider the free audit to be effective at encouraging participation, but
         would like to create an arrangement whereby customers agree to maintain
         contact with the city regarding implementation of the recommendations from
         the audit.

         City of Mountain View, California.  Mountain View offers  audits to their
         large users,  which include commercial, industrial, and multifamily customers.
         The audits include three  elements:

                An analysis of domestic water use (conducted by the city's water
                conservation coordinator);

                An analysis of process, cooling, and other indoor water uses
                (conducted by an engineering consultant); and

                An  analysis of landscape irrigation (conducted by an  irrigation

        Twenty of Mountain View's largest users were offered the opportunity to
        participate, and seven of them eventually did. These included research and
        development firms, silicon chip manufacturers, and business office parks. The
        audits identified ways the participants could save a total of 50% of their current
        water use. Most of these savings could be made by improvements in production
        processes. The types of improvements identified include: reusing process water,
        recycling the final deionized  rinse water, updating deionization systems, and
        repairing or adjusting cooling towers. All of the recommendations had an  18-
        month or better payback on the initial investment.  Participants have agreed to
        implement at least 50% of the recommended measures with an 18-month or
        better payback or reimburse the City for the cost of the audit. These measures

                                                            INFORMATION INCENTIVES
        must be implemented within one year of the presentation of the water analysis

 The cost of an industrial audit to a water agency depends on many factors, including
 the type of facility, what services are provided, and who performs the audit. Most
 agencies use outside contractors to conduct industrial audits.

 In our survey, industrial audit costs to the agency ranged widely, from a few hundred
 to several thousand dollars. For example, the City of Phoenix estimates that, depending
 on the facility, the costs of their commercial/industrial audits range from $1,000 to
 $7,000. In the City of Mountain View program, process audits cost approximately
 $2,000. MWD estimates that its water management studies typically cost $5,000 to
 $15,000. These costs are rough estimates of the price that customers would have to
 pay for similar audits.

 Due to the highly site-specific nature of industrial processes, it is difficult to evaluate
 the savings associated with industrial audit programs. None of the programs included
 in our study has yet completed such an evaluation. An MWD staff member involved
 with industrial audits estimates that approximately 15% to 20% efficiency
 improvements  are possible at industrial sites. The same staff member estimated that
 just through  the MWD audit program and follow-up, approximately 25% of the
 recommended measures are implemented. He believes that additional economic
 incentives would be necessary to increase that percentage.

 The Mountain  View audit program identified savings of approximately 50% for the
 program participants. A study of industrial water conservation in San Jose, California
 found average  savings of 30% to 40%.4
 Commercial and Institutional Audits

All of the water agencies in our survey that offer audits to commercial and
institutional customers include these customers in their industrial audit programs,
rather than offering a separate program. Commercial and institutional audits typically
include the following components:
"Brown and Caldwell Consultants, Case Studies of Industrial Water Conservation in the San Jose Area
(San Jose: February 1990).

         •   Perform all of the residential audit components; and
         »   Evaluate heating, ventilation, and air conditioning (HVAC) systems.

  Institutional customers are often considered to be high visibility customers, serving
  many people, and are frequently on very limited budgets. Institutional audits of federal
  facilities are supported by the Energy Policy Act of 1992, which requires federal
  facilities—including military bases, government office building, courts, post offices
  and social security offices—to implement all water and energy conservation measures
  that have a payback of ten years or less. When adhered to, this law boosts the cost-
  effectiveness  of institutional audits at governmental facilities by guaranteeing
  implementation of the recommended measures. Also, this law  allows savings from
  conservation to be reinvested through the same federal facility's program budget.

        San Diego County Water Authority, California (SDCWA).  The SDCWA
        targets large  users, such as the U.S. Navy and San Diego State University, in
        its commercial/industrial/institutional audit program. The SDCWA  audit of a
        Navy base identified many cost-effective measures. The SDCWA is also
        assisting with project funding; until recently, federal facilities were not allowed
        to accept funds for water conservation projects.

        Contra Costa Water District, California (CCWD). CCWD has a
        commercial audit program that targets indoor uses for commercial, institutional
        and industrial customers. This program also includes direct installation of
        showerheads  and toilet tank displacement devices, when appropriate.

        City of Portland, Oregon. Portland has a new water evaluation program for
        commercial, institutional, and industrial customers. This program, which is
        targeted at peak season high-volume users, focuses on single-pass cooling
        systems, rinse water in process industries, and large turf irrigation.

Large Landscape Audits

Large landscape audits contain the same components as described in the residential
outdoor audit description above. Some agencies limit participation to customers with
designated landscape  meters or with a specified minimum irrigated acreage- others
target public institutions, including schools and parks.  The cost of a landscape audit is
in the $200 per acre range. Usually outside expertise or training is required for an
agency to conduct irrigation or large landscape audits. Texas A&M University and the

                                                          INFORMATION INCENTIVES
Lower Colorado River Authority train San Antonio Water Service staff to conduct
landscape audits. The San Diego County Water Authority offers landscape audits
cooperatively with Resource Conservation Districts and the University of California
Agricultural Extension Service.

       City of Tucson, Arizona. Tucson Water offers large landscape audits
       cooperatively with the University of Arizona Agricultural Extension Service,
       and has entered into an intergovernmental agreement (IGA) for this purpose.

       The Tucson program began in 1990  and targets large multifamily complexes.
       The program includes continual follow-up: participants are contacted by
       telephone every three to six months to determine whether they have
       implemented the recommended measures or whether any additional assistance
       is needed. From this follow-up the agency has learned that there is a
       tremendous amount of turnover among landscape managers at these properties,
       creating a continual need for reeducation. There is also a great deal of mistrust
       of new irrigation technologies, particularly because the landscape maintenance
       personnel perceive their primary responsibility to be ensuring that the grass is
       as green as  possible. For these reasons, Tucson has shifted the  emphasis of its
       landscape program to training management personnel and landscapers on
       irrigation  techniques.  For additional information on this and other landscape
       personnel training programs, see page 17 of this chapter.

       City of Tampa, Florida. Tampa offers landscape audits for multifamily,
       commercial, and institutional customers. The agency staff does not  consider
       this program to be particularly effective. The biggest barrier seems  to be that
       water is very inexpensive and not a major component of operating costs. The
       agency staff members noted that when customers do participate it is usually
       because they have already budgeted funds for landscape improvement for that
       fiscal year. Therefore, the agency believes that is important to be out working
       with customers significantly in advance of inviting them to participate in an
       audit program. The staff members felt that at a minimum it is important to
       begin contacting the customers  six to eight months  in advance, so that
       landscape improvements can be put into the budget. At the same time, it is
       important to work with professional associations to build support for this type
       of program.

       For customers who have participated in the Tampa program, audits identified as
       much as 65% residential savings. The most popular changes made by

          participants are revising irrigation schedules and installing rain-activated shut-
          off devices. The agency also found that there is a much greater likelihood of
          measure implementation if the property manager, maintenance staff, or
          landscape contractor accompanies the auditor. However, because it 'is a
          voluntary program, the agency feels that requiring one of those individuals
          accompany the auditor is too much of a barrier to participation.

         The Tampa program was initiated as a pilot. The agency will continue to offer
         these audits on a request basis, but will not do extensive marketing. Instead,
         emphasis is shifting to a newly initiated residential landscape audit program'.

         City of Pasadena, California.  Pasadena has recently instituted a large turf
         audit pilot program. Customers with over 2,500 sq. ft. of landscaping qualify
         for the program, but participants  have typically been much larger (e.g., one
         industrial park, three golf courses, one college).  Although the program'has  not
         been formally evaluated, the Pasadena water conservation staff keep close track
         of implementation. The program  appears to be quite successful. All participants
         have  at least changed their watering schedules, and many have implemented
         other recommended measures as well.

        The pilot ends in September 1993, and Pasadena will move into full-scale
        implementation. The city is considering the addition of financial incentives
        such as rebates or shared savings. Potentially the city will require installation
        of recommended measures with payback of less than two years, or may require
        some  copayment for audits if the  recommended measures are not implemented.

        North Marin Water District, California.  North Marin conducted a pilot
        large landscape audit program. All commercial/government customers with
        annual water consumption of 400  ccf or greater were included in an initial site
        selection screening.  An initial site audit was performed to assess the irrigation
        system's operating condition and design configuration, and to determine if an
        audit and subsequent irrigation scheduling changes could result in significant
        reductions in water use. Customers chosen for participation included one
        private park, as  well as city parks  and schools. A total  of 86 acres were

Few of these large landscape audit programs have been formally evaluated. An
analysis of the North Marin pilot program found savings ranging from 7% to 16% of
expected water use. The.San Diego County Water Authority program also provides

                                                            INFORMATION INCENTIVES
 some indication of potential savings. In fiscal year 1992, the SDCWA completed 155
 audits, covering 2,116 acres. The program costs for the year were $176,614 and
 estimated potential savings for the year were 300 acre-feet. These savings are just for
 the current year; there should be continued savings over the following years for any  .
 measures that are implemented. However, these savings are potential savings, as
 identified by the audit. An evaluation of actual savings was hindered by the recent
 drought, but renewed evaluation efforts are under way.

 The SDCWA landscape audit program also offers interesting information regarding
 potential  savings from different site types.  Overall,  the greatest potential savings came
 from homeowners associations,  which represented 44.5% of the sites audited and
 yielded 58.7% of potential savings. Proportionally, the greatest potential savings came
 from commercial/industrial  sites, which represented only 7% of the sites audited but
 yielded 25% of all potential water savings. Lowest potential savings came from
 schools (14% of sites, 4% of savings) and parks (30% of sites, 12% of savings)
 because they frequently did not have  the budget or staff to make the recommended
 changes. Interestingly, although small sites (less than three acres)  represented only 7%
 of sites audits and only 3% of the acreage audited, those sites  yielded at least 21% of
 all potential water savings. SDCWA staff members  noted that  these smaller sites
 frequently do not have full-time landscape staff, and were thus less likely to be  using.
 water efficiently prior to the audit.
Program Participation and Implementation of Recommended Measures

The ultimate success of an audit program must be judged by the amount of
conservation that occurs as a result (perhaps a partial result) of the audits. There are
two prerequisites to achieving a positive result:

       •   Customers must participate in the audit program in sufficient numbers; and

       •   Customers must follow audit recommendations (technological and/or

Even if audits are provided free of charge, survey respondents described  several
reasons why customers may not take advantage of them. First, there are issues of
confidentiality, particularly for industrial customers who may not want outside auditors
inspecting proprietary production processes. Second, there is a time commitment
required of the participant. This commitment can be as little as one hour or less or as
extensive  as several days,  depending  on the customer being audited and the depth of

  the audit. Related to this are potential scheduling difficulties—particularly if audits are
  only offered during standard working hours—as well as other administrative
  difficulties of signing up for an audit. Third, certain types of sites may present
  particularly complex institutional challenges, which require cooperation from various
  parties (e.g., homeowners associations, property management services, and landscape

  To obtain participation from the more reluctant customers it may be necessary to
  combine a free audit with other customer incentives. Many of the agencies in our
  survey offered free devices or free installation at the time of the audit; they found that
  this was an important factor in encouraging participation. (See Chapter 3  for additional
  discussion of these'incentives.) However, another respondent noted that including
  direct installation as an incentive made installation, rather than education, the
 measurable task. As a result attention may become focused on achieving high
 installation rates—even in inappropriate locations where the devices might not save
 significant amounts of water—and education opportunities may be lost.

 Some water agencies make audits a prerequisite for rebate or financing programs. For

       East Bay Municipal Utility District, California (EBMUD).  EBMUD
       requires customers to submit to an audit, as well as to sign an agreement to
       install the recommended equipment, in order to qualify  for an irrigation rebate.
       EBMUD considers this a very effective incentive program design. The San
       Diego County Water Authority is  in the process of implementing a similar

 In another approach to increasing participation, some California water agencies
 encourage or  require audits  for customers who apply  for variances from drought
 allocations. Once the audit has been performed, customers must take the recommended
 steps in order for savings to occur. There are several  reasons why they may not
 implement the recommendations:

       «   Up-front cost of purchasing and installing the measures;
       •   Time required to locate, purchase, and install the measures;
       •   Inconvenience of changing behavior patterns;
       •   Lack of technical knowledge required to install the measures; or
       «   Mistrust of the recommended  measures.

                                                           INFORMATION INCENTIVES
Survey respondents address these barriers in different ways. Some have required
participants to implement particular measures (e.g., those with no more than a
specified payback period) or to reimburse the agency for the cost of the audit.

       City of Mountain View, California.  Mountain View requires participants in
       the Large User Water Analysis Program to implement measures that will
       achieve at least half of the savings with an 18-month or better payback period,
       or to reimburse the  City for the cost of the audit (usually approximately
       $2,000). Participants have one year to implement these measures.

Other agencies have combined their audit programs with other customer incentives,
such as free device distribution, direct installations, leak repairs, rebates, or vouchers.
For example:

       City of Tampa, Florida.  Tampa offers a rebate of 50% of the cost of
       implementing recommended measures in their landscape audit program.
       However, because of relatively low water rates, program staff do not find this
       program particularly effective at encouraging participation.
Notes on Audit Program Design

The following suggestions were made by survey respondents based on their
experiences with audit programs:

       •   Devote sufficient resources to selecting and training auditors.

       •   Offer audits at times that are convenient for participants.

       •   Encourage customers to accompany the auditor so that the auditor can
           educate the participant on water conservation.

       •   Present results to the participant in oral and written form.

       •   Look for opportunities to cooperate with other water agencies. For certain
           types of audits it may be most cost-effective to have one program that
           provides  services to many districts.

        •   Consider collaborating with the local energy utility to offer joint energy
            and water audits.

        •   Perform a pre-audit site survey for commercial and industrial customers to
            gather base information prior to the actual audit.

        •   Include a follow-up visit to ensure proper installation of recommended
            measures and to evaluate persistence  of savings.

        •   Provide customers with information on implementation and costs of
            recommended measures.

        •   In calculating payback period of conservation measures, include energy
            savings and avoided wastewater costs, if appropriate.

        •   Utilize residential energy audit experience.

Many customers are not aware of actions they can take to conserve water or do not
have the necessary technical expertise to implement conservation measures. Training
programs or workshops that provide the necessary information or skills may encourage
customers to undertake or expand then- conservation efforts.

Workshops or training courses can be offered or sponsored by the utility for specific
groups of customers. Most of the training programs currently offered by water
agencies target landscape/irrigation or commercial, industrial, and institutional water
use. Some of the survey respondents noted that these classes and workshops offer a
good opportunity to create partnerships with universities, horticultural societies,
community groups, or other organizations that have the required technical expertise
and have  well-established reputations in providing community education.

Survey respondents described three types of workshops: irrigation, residential
landscape design, and commercial/industrial water conservation.
Irrigation Workshops

                                                          INFORMATION INCENTIVES
       Seattle Water Department, Washington. Seattle offers a three-day landscape
       auditor training course, which is a prerequisite for the Irrigation Association
       certification exam. The class is open to commercial and institutional customers
       and is targeted at large irrigators, such as parks and schools.

Some agencies offer irrigation workshops at no charge; others require participants to
pay some portion of the costs. The Seattle Water Department charges participants $45
for its three-day landscape irrigation auditor training course, while the  course has a
$250 value. The agency found that requiring participant contributions made customers
more likely to actually attend the course, because people believe that they get what
they pay for and that a "free" training will not be worthwhile. However, requiring
customers to pay a portion of the costs may discourage some people from attending. A
City of Phoenix staff member noted that offering classes for free increases the
likelihood that field staff may be able to attend; particularly for landscape, these are
often the people with the most direct opportunity to change water use practices.

If an agency does require participants to pay a portion of the workshop cost, the actual
incentive is then the difference between what the utility charges and what participants
would have to pay to receive comparable training or information on their own.
Residential Water-Efficient Landscape Design Workshops

The focus of residential landscape workshops is to teach customers to use creative
landscaping techniques and low-water-use plants to develop practical and attractive
landscapes that use little water. These workshops can also include information on
efficient irrigation.systems and techniques, as described in the earlier discussion of
irrigation workshops.

       San Diego County Water Authority, California (SDCWA). The SDCWA
       offers a four-hour water-efficient landscape class for which participants are
       charged $10. The agency estimates that comparable classes at nurseries and
       community colleges cost up to $50 or more.

       City of Phoenix, Arizona,  Phoenix has  conducted introductory residential
       water-efficient landscape workshops for the past four years, offering 14 two-
       hour workshops annually, with an  average of 40 participants per workshop.
       Phoenix has  recently expanded its  program to include more advanced water-
       efficient landscape design workshops to be conducted by two different

        landscape consulting firms. One firm offers a weekend (12-hour) workshop
        utilizing site/use analysis techniques and computer imaging systems to develop
        conceptual landscape plans. The other contractor offers a more hands-on
        approach to developing landscape plans, using bubble diagrams,  tracing  paper,
        and colorizing.

        These advanced classes have approximately 25 participants and feature
        significant one-to-one assistance that focuses on each participant's landscape.
        Participants  are charged $20; similar individualized consultation with a
        landscape architect would usually  cost over $200. The agency's budget for a
        total of 19 workshops is approximately $46,000. The City of Phoenix  considers
        these  workshops to be an important part of its education program and  believes
        that the xeriscapes that result from the classes can serve as models in the

 Water agency staff members involved with these programs indicated that these water-
 efficient landscape workshops are very popular among customers. San Diego County
 Water Authority staff said that they had a "positive and overwhelming" response to
 their workshops, and that classes were over-enrolled until the agency scheduled
 additional workshops. The City of Phoenix noted in the survey that, "Residents have
 shown an  overwhelming interest in the implementation of water-efficient landscape
 principles  which increase property value, improve home salability, reduce water  use,
 reduce maintenance costs, improve community aesthetics and pride, and  enhance
 regional identity." A staff member from another water agency cautioned  that landscape
 retrofits may  be very expensive and these workshops may be more appropriate in areas
 where new housing  is being developed. Consistent with this reasoning, the City of
 Phoenix intends to target its next round of xeriscape workshops at homeowner
 associations in new  developments.
 Commercial/Industrial Water Conservation Workshops

 Industrial customers were widely cited by respondents as a difficult-to-reach customer
 class. Some of the problems described include the site-specific nature of industrial
 conservation, the high cost of the measures, and up-front capital requirements.
 Training is one approach that many respondents believe to be successful in reaching
 these customers.

       City of Phoenix, Arizona. Phoenix Water Department offers water
       conservation workshops to commercial, industrial, and institutional customers.

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While discussing landscape conservation measures, one agency staff member noted
that, "Hardware alone never saved a nickel." Almost all irrigation systems can be run
with a high degree of efficiency—but not unless they are operated correctly. Irrigation
training workshops attempt to address this by educating landscape maintenance

These workshops teach low-water-use irrigation methods and are particularly relevant
to sites with extensive turf areas, including parks and open space, golf courses,
industrial parks, and schools. Some water agencies also invite to these classes property
managers or landscapes for multifamily housing or condominium/townhouse
complexes  with large landscaped areas.

Topics covered in these workshops include efficient irrigation techniques, such as drip
irrigation, as well as methods for improving soil conditions to promote water
penetration and retention. Most of them focus on evapotranspiration (ET),  scheduling,
controller programming, auditing matched precipitation rates, and maintenance
programs. They may also cover new technologies such as soil and rain sensors and use
of ET data, such as the  California  Irrigation Management Information System (CIMIS)
program sponsored by the California Department of Water Resources.

       San Diego County Water  Authority, California (SDCWA).  The SDCWA
       offers a basic irrigation course, in Spanish and English, to field-level workers
       at large turf sites and private landscape maintenance companies. California
       Polytechnic State University at San Luis  Obispo (Cal Poly), under contract to
       SDCWA, developed  the class and trained local Resource Conservation District
       staff to teach the course. The course, which runs three to four hours,
       emphasizes soil/plant/water relationships, basic irrigation concepts,  and what
       landscape maintenance workers can do to save water.  The course takes a
       "hands-on" approach and is taught in the field. Once the program caught on,
       the  agency was flooded with requests for the workshop.  The program began in
       March 1992, and there have been over 400 participants to date.

       Surprisingly, middle managers have also  participated in the SDCWA program.
       According to SDCWA staff members, reaching these supervisors can be very
       helpful because they are often involved with purchasing equipment, but
       frequently buy the least expensive  alternative, rather than the model that will
       help their system run most efficiently. Also, this training teaches supervisors
       what is achievable, so that they  know what level of water use and conservation
      - they can realistically expect their staff to achieve.

         Metropolitan Water District of Southern California, California (MWD). A
         CIMIS training program funded by MWD is offered in five counties in
         Southern California. The class is offered through University of California
         Extension Service and through Cal Poly. The program has been offered for five
         years and is marketed and administered through farm advisors in each county.
         The course  is open to all landscape professionals; in most cases there is no cost
         to participants. (An equivalent Cal Poly class offered through the Department
         of Water Resources costs participants approximately $250, which suggests the
         value of the incentive.)

         City of Phoenix, Arizona.  Phoenix Water Department offers half-day
         commercial landscape classes covering turf irrigation, system design, and
         landscape conversion. Classes are designed in-house by conservation program
         staff. These classes are very popular and always filled to capacity (40
        participants  per class). Participants include facility managers from hotels, golf
        courses, and cemeteries. Costs to the agency are approximately $250 for the
        facility, $10 per participant for materials, plus approximately 60 hours of staff

        City of Tucson, Arizona.  Tucson Water also offers training in irrigation
        techniques. The program is targeted at schools, parks, and recreation areas, but
        is also  open to landscape companies. The training program was initiated when
        it became clear through the landscape audit program that management
        personnel and landscapes did not have the expertise to maintain low-water-use
        landscapes. The full-day workshop is offered at no cost to participants. Three
        workshops have been offered, and the response has been very positive.

        City of Santa Monica, California.  Santa Monica offers an irrigation training
        with the goal of providing the City with trained maintenance personnel. The
        program is targeted at minority youth and is offered  through the regional jobs
        training program. The course  provides training in basic irrigation system
        maintenance and repair, use of ET information, and irrigation water audit
        techniques. Students receive a $400 stipend if they attend 95% of the classes
        and  complete all required materials. At the end of the course participants are
       prepared to take the California Landscape Contractors Association Certified
       Landscape Technician Test and the Irrigation Association Landscape Auditor
       Exam. The course participants currently include  students as well as adults
       currently working in the landscape profession  who are interested in skills
       enhancement and professional certification.

                                                           INFORMATION INCENTIVES
       Half-day or full-day workshops are offered on a variety of topics, including
       cooling tower efficiency, water conservation in hospitals, and water
       conservation in hotels. These workshops, which are designed in house, have
       been offered to customers since 1987 and there have been over 800 participants
       to date. Topics  vary depending on demand, which in part is  determined by
       surveying participants in each class about what future workshops they would
       find most useful. Currently the most  popular courses are commercial landscape

       Metropolitan Water  District of Southern California, California (MWD).
       MWD's commercial/industrial program has a heavy emphasis on training.
       MWD has offered two training programs. The first is a Cooling Tower
       Training  Program. Eight of these full-day workshops have been offered. MWD
       fully funds and develops the classes,  with the assistance of outside contractors.
       There is no charge to  participants. Member agencies host the classes and invite
       participants, who typically are building managers, cooling tower operators,
       conservation coordinators, and other  appropriate individuals.

       The second class offered is a Commercial & Industrial Conservation Program
       Coordinators training. As a water wholesaler, MWD does not have commercial/
       industrial customers, but can train  conservation coordinators from its member
       agencies  to set  up industrial conservation programs. This class is designed to
       provide the necessary skills.

       The Conservation Coordinators Training is  a full-day class that covers how
       water is used in different industries, as well as such topics as program
       planning, marketing, and assessment. Participants learn how  to conduct a
       simple water audit and view a videotaped site visit to a typical industrial
       facility, including an interview with the facility engineer and a physical
       inspection of the water-using features of the building. In small groups,
       participants then apply the methods and principles learned in the class to the
       televised site. Each group assesses the climate,  lists conservation opportunities,
       and performs back-of-the-envelope calculations to estimate savings. MWD has
       thus far offered 12 of these classes, which are very  popular with member
       agencies. This training was also offered in Northern California through the
       California Urban Water Agencies (CUWA), the Department of Water
       Resources, and local water agencies.
Results of Training Programs

 It is difficult to determine the amount of water savings actually attributable to training
 programs. None of the agencies surveyed have estimated the actual level of savings
 achieved by these programs. The agencies in our survey that offer these programs plan
 to continue to offer them, and many are actually expanding their training programs.
 Survey respondents differed on how effective they thought the training programs are,
 but many respondents noted that these programs are good for public relations. Also,
 the classes that  include auditing skills provide a cadre of trained auditors that may
 improve the effectiveness of audit and direct installation programs (described
 elsewhere in this handbook).

In Chapter 2, we discussed how incentives in the form of information—through audits
or training—can increase customer awareness of water conservation. However,
customers cannot install cost-effective conservation technologies if they lack access to
those technologies. Even if the measures are available in the market, it may take time
and effort to locate, purchase, and install those measures. Water agencies can address
this barrier by improving customers' access to conservation technologies. An agency
can either directly distribute and/or install conservation devices, or can take steps to
increase the availability  of those technologies in the market, such as offering financial
incentives to distributors or retailers. This chapter discusses these two approaches to
improving customer access to conservation technologies.

Distributing conservation devices is one direct approach to increasing customers'
access to conservation technologies, Many of the earliest water conservation customer
incentive programs—some dating back to the early 1980s—involved free device
distribution. In a device distribution program, an agency procures conservation devices
and makes  them available to customers, usually free of charge. While this incentive
provides a financial benefit to customers, many of the devices typically included in
these programs are relatively inexpensive. Thus, it is likely that the inconvenience of
procuring the device is a  greater barrier to adoption by customers than is the "cost of
the device.  Convenience to the customer is therefore a critical component of this

Device distribution programs can vary along several dimensions, including:

       •   Which devices are included in the program;
       •   The distribution method; and
       •   Who installs the devices.

Discussions of each of these dimensions follow.

 Which Devices Are Included in the Program

 While a few water agencies give away single devices, such as ultra-low-flow toilets
 (ULFTs) or showerheads, many water agencies included in the survey procure and
 distribute free conservation kits containing a variety of devices.  Devices typically
 included in the kits are toilet tank displacement bags, dye tablets for toilet tank leak
 detection, faucet aerators, shower flow restrictors, and low-flow showerheads. Most
 kits also include installation instructions, as well  as informational and promotional
 materials. Some agencies also include landscape water conservation devices, such as
 sprinklerheads or moisture meters. However, these are rarely included unless
 accompanied by  a water audit because the devices themselves are unlikely to achieve
 water savings in the absence of appropriate instruction.

 Many agencies that distribute conservation kits report that they chose this incentive
 approach because the kits were inexpensive and could be widely distributed. The costs
 of the kits ranged from $0.50 to $25 each, depending on the items included. Most kits
 cost under $10, before distribution, marketing, and other administrative costs.

 Some survey respondents noted that customers had experienced problems with the
 quality  of the devices  included in kits, particularly with faucet aerators, and
 particularly in earlier programs. They felt that higher quality devices would improve
 participation. Seattle Water Department conducted an extended customer preference
 study5 to determine the showerhead to be offered in its conservation kits, and felt that
 the resulting offer of a high-quality product was the single  factor that most encouraged
 customers to participate in the program.

 Survey  responses indicate that participation in many  of the device distribution
 programs is limited to residential customers. However, several agencies make kits or
 showerheads available to commercial and institutional customers as well. For example,
 San Diego County Water Authority provides showerheads,  "flushometer" retrofits,  and
 sprinkler heads for public institutions—a program that the agency deems extremely
5For more information on gauging customer preferences, see Chapter 8 of this handbook.

                                             ACCESS TO CONSERVATION TECHNOLOGY
Distribution Method

Conservation devices can be mailed or delivered door-to-door, or customers can pick
up the devices at designated locations ("depots"). Some agencies also give away
devices at special events, such as county fairs. The method of distribution, marketing
strategy employed to promote installation of the kit items, and the level of follow-up
and installation assistance, all affect the installation rate. Mailing the kits or
distributing them door-to-door can achieve a higher penetration rate in terms of
number of households receiving the kit and overall number of installed devices.
However, depots and other approaches that require some customer motivation to
acquire the kit tend to have  higher installation rates relative to the number of kits

       City of Phoenix, Arizona. Phoenix tried several different distribution
       approaches for its conservation kits, including door-to-door distribution, depot
       pick-up, and direct installation by staff. They found that depot distribution was
       a highly cost-effective way to get kits into the hands of people who  would
       actually install the devices. However, they noted that some of the more
       sophisticated  measures, such as  early closure flush  valves and dual flush
       mechanisms,  probably would not be successfully installed by homeowners.
       Therefore, even though such devices may have greater per-home savings
       potential, they are not appropriate for distribution by canvass or depot methods.
       Phoenix also  found that the level of follow-up was  a key factor in program
       success, and that there was a direct relationship  between program costs and
       water savings.

       City  of Tampa, Florida.  Tampa hangs kits on  the doorknobs of residences.
       Kits contain two toilet tank dams, two low-flow showerheads, three faucet
       aerators, teflon tape,  a pamphlet on finding and  fixing leaks, device installation
       instructions in both Spanish and English, a general  water savings tips card, a
       window display card, and toilet leak detection dye tablets. Follow-up
       canvassing is done to encourage residents to install the devices, collect any
       unused equipment, provide adapters if necessary, and verify installation. Tampa
       considers this to be an extremely effective program. As with the Phoenix
       program,  follow-up is considered a key to this success.

       Bridgeport Hydraulic Company, Connecticut. All 62 utilities in the state of
       Connecticut distributed conservation kits to their customers, as required by state
       law. Bridgeport Hydraulic Company distributes the kits by mail upon request,

        and through depot pick-up. It also provide kits free of charge to United
        Illuminating Company to be  installed directly as part of United Illuminating
        energy audits  and direct installation programs. Elderly, disabled, or other
        special-needs  customers can  have the devices installed directly by Bridgeport
        Hydraulic service personnel.  These distribution methods were chosen to ensure
        that the devices were actually installed rather than distributed to people who
        would not use them.

        City of Mountain View, California. Customers can pick up showerheads,
        faucet aerators, and toilet dams at the Mountain View Public Service
        Department during normal business hours. Mountain View has also distributed
        these items  at local street fairs and special events. Customers are required to
        sign an  agreement to install the showerhead and to allow an inspection to
        verify installation.

        City of Fresno, California.  Fresno  hired a contractor to deliver conservation
        kits to all residential customers. Kits contain two  low-flow showerheads,  toilet
        tank displacement devices for two toilets, two toilet leak detection tablets, and
,        instructions. A telephone hotline was established to answer customers'
        questions. The hotline offers  assistance in six languages.

 Some agencies  in the survey include device  distribution as an element of their audit
 programs. For example, Pasadena,  California, gives customers  low-flow showerheads,
 toilet dams, faucet aerators, hose bib timers, moisture meters, and soil enhancers as
 part of its Home Water Survey. Mountain View, California,  auditors install low-flow
 showerheads, faucet aerators, and toilet dams during residential audits.
 Who Installs the Devices

 Distributing conservation devices only saves water if the devices are actually installed
 and left in place. Most conservation device distribution programs rely  on participants
 to install the devices. However, some programs include direct installation as part of
 the incentive. In that case, agency staff or agency sponsored contractors install the
 measures for free or at a reduced charge.

        City of Santa Monica, California. For a $35 fee, Santa Monica offers
        customers direct installation of a ULFT and low-flow showerhead. Santa

                                             ACCESS TO CONSERVATION TECHNOLOGY
       Monica supplies and installs the devices. This program is extremely attractive
       to customers because of the minimal effort required on their part.

       City of Fresno, California.  Fresno offers direct installation of conservation
       kit devices, by appointment, to residents who are unable to install the devices

Some agencies limit installation services to elderly and handicapped customers or to
multifamily buildings, while others offer it to all participants. Several survey
respondents noted that as a component of their direct installation programs the installer
takes away and disposes of the original fixture to discourage people from reusing it.

Many agencies surveyed feel that direct installation is an important component of their
programs; however, one survey respondent found it better to have homeowners install
devices themselves  to avoid scheduling difficulties and potential customer reluctance
to let an installer into their homes. Also, direct installation programs require a greater
staffing commitment  than limiting the incentive to device distribution.  Several
agencies surveyed have retained contractors to  distribute or install the devices.  Some
agencies operate hotlines to answer customers' installations questions.

Device,distribution  or direct installation programs  can be offered in collaboration with
local energy utilities, particularly for low-flow  showerheads, which  conserve both
water and energy. Examples of these partnerships  are shown in the  following table.
Water Agency
Seattle Water Department, WA
San Diego County Water Authority, CA
City of Mountain View, CA
City of Portland, OR
Bridgeport Hydraulic, CT
Energy Utility
Seattle City Light, Puget Power
San Diego Gas & Electric
Pacific Gas & Electric
Portland General Electric
United Illuminating
Installation and Retention Rates

Survey respondents differed on how effective they found the device distribution
programs. Most agencies in our survey have not conducted evaluations of the savings

 associated with their device distribution programs; therefore estimates of the
 incentives' effectiveness were subjective. A few agencies have surveyed program
 participants and have estimated the following installation and removal rates:

        City of Phoenix, Arizona, used three different distribution methods:
        (1) canvass—door-to-door distribution in limited areas, with little publicity, and
        staff door-to-door follow-up; (2) depot-1—pickup at two customer service
        locations; and (3)  depot-2—pickup at the two customer service, locations and
        supplemental  temporary  neighborhood depots, as well as direct mail
        solicitation. Phoenix found the following  installation and retention rates from
        its three different distribution methods:
Toilet dam installation (% of households
receiving kits who initially install the
toilet dam)
% Retention of installed toilet dams after
one year
Showerhead installation (% of households
receiving kits who initially installed the
% Retention of installed showerheads after
one year
Installed at least one of the two devices
Installed both devices
- Dep6t-2c
"Behavior Research Center, Inc., City of Phoenix Retrofit Survey, Prepared for the City of
Phoenix Water & Wastewater Department, November 1989.
""Behavior Research Center, Inc., City of Phoenix Retrofit Survey, Prepared for the City of
Phoenix Water & Wastewater Department, August 1991.
°Behavior Research Center, Inc., City of Phoenix Retrofit Survey, Phase II, Prepared for the
City of Phoenix Water & Wastewater Department, August 1992.

                                                /ACCESS TO CONSERVATION TECHNOLOGY
        City of Tampa, Florida, estimates the following installation and retention
Toilet dams
Faucet aerators
Installed at least one device
vv , Installation Rate, - -"<„
(% of households receiving kits)
% Retention of Installed
Devices After JLTYear

        City of Fresno, California, estimates that 90% of households receiving kits
        installed at least one of the devices.
        City of Bridgeport Hydraulic, Connecticut, estimates the following
        installation rates:7
Toilet dams
Faucet^ aerators
Lead detection tablets
Installed at least one device
Installation/Use . „
(% of households that ordered kits)
. 23%
Much of the information reported by respondents was gathered through telephone
surveys and may be less reliable than actual on-site inspections. The Tampa study,
however, used on-site inspection as well as a mail survey, and statistical tests found no
6Jack C. Kiefer and William Y. Davis, Tampa Residential Retrofit Evaluation: Analysis of Pilot
Program (City of Tampa Water Department, August, 1991).

7Amy Vickers and Associates, Evaluation of the 1991 Residential Retrofit Program (Bridgeport
Hydraulic, February 1992).

  differences between field and mail survey samples with respect to toilet dam
  installation and removal, and showerhead removal.

  The Phoenix evaluation of its initial canvass distribution conservatively estimates daily
  water use savings of 9 gallons per person.8 The Tampa study also found savings of
  9 gallons per person daily.9 The Contra Costa Water District results cited earlier (40
  gallons/household-day) were in part attributable to direct installation of showerheads
  and toilet tank displacement devices.10

 Offering an economic incentive to the manufacturers and distributors of water-efficient
 appliances or equipment increases their stake in encouraging the purchase of that
 equipment, and may thus increase the likelihood that they will stock and market it.
 This method is included here because the incentive to the customer is not directly
 financial, but lies in the increased availability of efficient technologies or appliances.
 Rebates to builders, manufacturers, or distributors have not yet been used in the water
 industry, but some programs from the energy industry can illustrate the nature of this
 type of incentive.

        Pacific Gas & Electric Company, California (PG&E). The PG&E
        Refrigerator Salesperson Incentive Program was developed because
        manufacturers informed PG&E that retailers discontinue stocking efficient
        models during months when no customer rebates are offered. The program is
        designed to retain demand for efficient refrigerator production by offering
        salespeople and dealers incentives for selling efficient refrigerators.

        Incentive levels are based on the efficiency level of the models, as compared
        with mandated standards.  The incentives for 1992  were as follows:
Planning and Management Consultants, Ltd., Phoenix Emergency Retrofit Program: Impacts on Water
Use and Consumer Behavior (June 1988).

9Kiefer and Davis.

IOJohn B. Whitcomb, Measuring the Water Reduction from Contra Costa Water District's 1989
Residential Water Audit Program (Brown and Caldwell, May 1991).

                                      ACCESS TO CONSERVATION TECHNOLOGY
Energy Efficiency ,.
(% above standards) ,y
15.0% to 19.9%
20.0% to 24.9%
25.0% to 29.9%
30.0% to 34.9%
35.0% to 39.9%
40.0% or more
"Salesperson Incentive
^ x " -^ *s
Dealer. Incentive
In 1991 the program exceeded its goal of 30,000 units by over 70%. For 1992
the program increased its goals to 40,000 units and was still able to exceed that
goal by 16%.

City of Seattle, Washington.  Seattle Water Department is considering a
rebate to manufacturers of washing machines to increase the commercial
availability of residential horizontal-access washing machines. The Department
hopes that in a relatively short amount of time this program could transform
the marketplace and eliminate the need for agency rebates. The rebate program
would likely involve energy and wastewater utilities as well.

                                   Chapter 4
                             CASH TRANSFERS
 In Chapters 2 and 3 we discussed the types of incentives that provide information
 about water conservation technologies and that make those technologies more
 accessible to customers. Customers may be unwilling, however, to pay  the price of
 investing in water conserving devices. To help overcome this barrier to conservation
 investments, water agencies can lower the total cost of the customer's investment by
 paying  for all or a portion of the costs of the measure. These payments can take the
 form of rebates, vouchers, grants, or bill modifications. This chapter discusses such
 cash transfers, which are considered by most agencies to be an extremely effective tool
 for obtaining program participation, particularly for residential customers.

 Rebates are a common and popular form of financial incentive involving cash
 payments from an agency to a customer to offset all or a portion of the out-of-pocket
 cost of a conservation measure. Rebates are paid after a measure has been purchased
 or installed. Proof of purchase or of installation may be required.

 Rebate programs vary along many dimensions, including:

       •   The qualifying measures
       •   Eligible customer classes
       •   Rebate magnitude
       •   Rebate delivery arrangements
       •   Inspection requirements

Survey respondents used rebates to offset customers' expenditures on a number of
measures: ULFTs; landscape conversion; installation of more efficient irrigation
systems; heating, ventilation, and air conditioning (HVAC) system improvements; and
industrial process modifications. Descriptions of these programs and the corresponding
rebate  levels follow.

Ultra-Low-Flush Toilets (ULFTs)

ULFT rebates are the most common incentive offered by survey respondents. In the
simplest version of this incentive, customers purchase and install a ULFT and submit
the receipt to their water agency, v/ho then refunds all or a portion of the purchase (or
purchase and installation) costs.  The program has many variations: In some cases
customers must call in advance to reserve the rebate to ensure that the agency has
sufficient funds available. In other cases rebates can be paid directly to plumbers, who
procure and install the ULFT for a reduced charge and recoup the majority of their
payment from the rebate. In the  latter case, some agencies require customers to  sign
their rebates over to the plumber, to ensure that customers are aware of the rebate
program.                                                     ,

The rebate may take the form of (1) a flat dollar amount; (2) a percentage (50% to
100%) of the price, usually up to a  certain maximum dollar amount; or (3) a flat rate
depending on the price of the toilet  (e.g., $50 for toilets that cost under $200, $100 for
toilets that cost over $200).

Rebates range from $10 to $240 per toilet for standard ULFTs. The majority of
programs offer $60 to $100 per toilet. This level appears to be sufficient to attract
participation in most residential toilet retrofit programs, although there may be
regional variation due to different costs of parts and labor. Several programs surveyed
began with higher rebate levels and then lowered the rebate to $60 to $75 per toilet.
Staff members  from some agencies  said that lowering the rebate did not result in a
noticeable decline in participation. Lowering the rebate has resulted in decreased
participation for some other agencies, but staff members also attribute the decline in
participation to market saturation or changing local water supply conditions.

One program began with rebates of $30 per toilet for single-family households and
$20 per toilet for multifamily households,  but then raised rebate levels to $40 per
toilet  for all residential customers to stimulate participation. Rebates below $40 per
toilet  do not appear to provide sufficient incentive. Many survey respondents noted
that the necessary rebate level depends on local water supply conditions and the public
perception  about  the need for conservation. For example,  drought surcharges or
rationing greatly increased program participation for many California agencies because
of heightened public concern and awareness. Now that these surcharges are no longer
in effect, staff members believe that higher rebates may be necessary to entice
participants. For more discussion about the appropriate rebate level, please see Chapter
6 of this handbook on cost-effectiveness.

                                                                  CASH TRANSFERS
A few programs limit participation to residential customers, but the majority offer this
incentive to commercial, industrial, and institutional customers as well. Toilets for
some customers may be in high use locations, such as airports. These may require a
different class of equipment that is likely to be significantly more expensive. They
would also justify a higher rebate  amount. The following agencies offer ULFT rebates
to nonresidential customers:

       San Diego County Water Authority, California (SDCWA). The SDCWA
       offers rebates of $75 per ULFT to commercial, industrial, and institutional
       customers, m the Public Institution Retrofit program, the agency targets high-
       use, high-visibility public buildings and reimburses  the customer for the full
       cost of the toilet plus installation materials. These costs have typically ranged
       from $100 to $200 per toilet. However, the cost can be as high as $600 per
       toilet for vandal proof stainless steel toilets in public buildings.

       Los Angeles Department  of Water and Power, California (LADWP).
       Besides offering rebates to residential customers, LADWP offers a rebate of
       $75 per ULFT to nonresidential customers, and there is no limit on the number
       of rebates per account. However, less than 1% of total rebate applications have
       come from nonresidential customers.

       City of Palo Alto, California. Palo Alto found that in the small commercial
       sector, 63% of applicants for the $75 ULFT rebate  were community
       organizations, such as churches, daycare centers, and community centers. A
       limit on the number of rebates and a restriction to tank-type toilet retrofits were
       found to be disincentives for participation by small  commercial customers.

Some survey respondents offer lower rebates for  additional retrofits after the first toilet
or limit the number of  rebates  per household. This  approach is adopted in response to
studies illustrating that  water savings are highest  for the first ULFT installed,
decreasing for additional toilets per household.11 Water savings are also higher per
toilet in multifamily units, which tend to have fewer toilets per person and therefore
more intensive use per  toilet.12 However, these customers are often harder to attract
 "T. Chesnutt, A. Bamezai, and C. McSpadden, The Conserving Effect of Ultra Low Flush Toilet Rebate
 Programs (A&N Technical Services, June 1992).

 to these programs because of the high capital outlay to retrofit an entire multifamily

 Some survey respondents felt that it would be more effective to give away toilets
 directly rather than go through the rebate process. However, they acknowledged that
 this could limit the style options available to customers, which is of concern to many
 participants, particularly in higher income areas.

 Another approach to delivering ULFT rebates that is gaining in popularity is the use of
 community-based organizations.

        Los Angeles Department of Water and Power, California (LADWP).  The
        community-based organization (CBO) approach was pioneered by a partnership
        between the LADWP and the Mothers of East Los Angeles  (MELA), a group
        that originally formed to protest the siting of an incinerator in their
        neighborhood. In 1992 this group approached LADWP and offered to take over
        the ULFT program in the East Los Angeles area.

        The program benefits all parties involved: the resident gets a free toilet and
        MELA gets $25 for each toilet they install. Members of the CBO are very
        effective at marketing the toilets because they can approach  the community
        directly, relying on established personal relationships. The original toilet rebate
        program in East Los Angeles was generating only approximately 50 toilet
        rebates a year; MELA installs up to 500 toilets a week.

       The LADWP/MELA partnership has  served as a model that  is being  copied
       throughout California. Its success is largely attributed to the  fact that the
       partnership ties water conservation into other issues that are  important to the
       community. For example, with profits from the program, MELA has
       established a scholarship fund and a Spanish-language hotline for  battered
       women. A detailed case study of the LADWP/MELA program is included  in
       Chapter 7 of this handbook.

As the following examples illustrate, water wholesalers can assist their member
agencies in offering ULFT rebates as well.

       Metropolitan Water District of Southern California, California (MWD).
       MWD has created a turnkey program for ULFT rebates that member  agencies
       can take advantage of. This turnkey approach allows agencies to take advantage

                                                                   CASH TRANSFERS
       of economies of scale without making a major resource commitment. The
       program is operated through a contractor who is responsible for procuring the
       toilets, marketing, maintaining the database, making inspections and
       administering rebates. MWD pays 50% of the program costs (now $60 per
       toilet) and the member agency pays 50%. MWD has also modified the program
       so that member agencies with no money to contribute can also offer the rebates
       to their customers. In this case the member agency's share  is paid by the

       City of San Jose, California. San Jose was able to meet its ULFT program
       goals for a fraction of the anticipated cost by joining efforts with  the Santa
       Clara Valley Water District (a water wholesaler) and several other water
       retailers. This cooperative approach reduced the city's nonpersonnel costs from
       the original projections of $12.7 million to $7 million. Additionally, by
       targeting older multifamily dwellings, which tend to have older fixtures, the
       program was able to exceed the  original projected water savings.

Staff from other agencies also cited successful partnerships with local businesses that
donated in-kind services,  such as pick-up of old toilets for recycling.

Multifamily accounts are  more difficult to attract to these rebate programs than are
single-family accounts, in part because of the high initial cost of retrofitting multiple
unit dwellings. One approach used in the energy industry to reach multifamily
residences is a rebate program for bulk  purchases of equipment.

       Pacific Gas & Electric Company, California (PG&E).  PG&E's Contract
       Refrigerator Rebate Program offers property managers and builders an
       incentive when they purchase highly energy-efficient refrigerators  in quantities
       of five or more. Incentive levels for 1992  were $50, $75, and $100 for units
       that were 20%, 25%,  and 30% more efficient than 1990 Federal Energy
       Standards. PG&E's annual report on demand side management programs notes
       that, "Most property managers and builders do not choose efficient models
       without a program that offers an incentive. The contract refrigerator program
       promotes and  encourages the value of efficient refrigerators to a market that is
       difficult to penetrate."13
13PG&E, Annual Summary Report on Demand Side Management Programs (San Francisco, Calif.,

This approach could be used for toilets or other water-efficient appliances, such as
washing machines.
Efficient Landscape Rebates

Landscape rebate programs pay customers to install low-water-use landscaping or to
convert all or part of their lawn to nonturf landscaping. Participation in this type of
program is predominantly by residential customers.

The amount of rebate paid in a landscape conversion program is usually based on the
amount of land converted to water-efficient landscape. Alternatively, the rebate may be
based on the percentage of a customer's landscapable area that is converted to nonturf.
A third rebate structure cited in the survey was rebate of a portion of the connection
fees for participants who installed Ibw-water-use landscapes.

Many landscape professionals are concerned that some landscape conversion programs
do not distinguish between appropriate and inappropriate uses of turf. They feel that
landscape conversion programs should promote appropriate uses of turf and other

Water agencies that offer rebates for turf conversion or efficient landscape  design
include the following:

       North Marin Water District, California.  North Marin pays $35 per 100
       square feet of turf removed, to a maximum rebate that depends on the type of
       dwelling unit. The maximum rebates are $200 for single-family homes; $150
       per dwelling unit for townhouses, condominiums, triplexes, and fourplexes;
       $150 per dwelling unit for apartment buildings; and $80 per dwelling unit for
       senior citizens complexes.

       The North Marin Water District reported that during the peak water use month
       the savings were  24 gallons per day per  100  square feet of turf removed; over
       the year, savings  averaged 9 gallons per day  per 100 square feet of turf
       removed. This estimate may not adequately consider the effect of careful
       irrigation management on turf water use.

       This program encountered opposition from sod and seed producers because of
       its imnar.t nn their industries.
its impact on their industries.

                                                                   CASH TRANSFERS
        City of Glendale, Arizona. Glendale pays $100 to customers who install or
        convert over 50% of total landscapable area to nonturf. Preconstruction
        appointments are scheduled with homeowners to review landscape plans. The
        program staff member makes suggestions to the homeowner regarding
        irrigation systems, frequency of watering, placement of plants, and other design
        issues. Glendale conducts follow-up inspections to ensure that rebate
        requirements have been met. The program has been very popular, particularly
        among new residents who are unfamiliar with the plants suitable for
        landscaping in an arid climate.

        City of Mesa, Arizona.  Mesa has a Water Development Fee Rebate Program
        that reimburses a portion of the -connection fee for customers who install a low-
        water-use landscape. All customer classes are eligible. For landscape areas less
        than 2,500 square feet, the rebate is 10% of the water development fee; for
        landscaped areas larger than 2,500 square feet, the rebate is 25% of the water
        development fee. Because the fee has changed over time, the exact amount of
        the rebate has also changed. Currently the 25% level provides a rebate of
        $247.50, while the 10% level provides a rebate of $99. Field  audits are
        conducted to verify compliance with program requirements.

        City of Austin, Texas. Austin recently began a Xeriscape It! program,
        offering rebates in the form of water bill credits to single-family customers
        who replace St. Augustine grass with Buffalo grass or other xeriscaping. There
        are additional requirements (e.g., grass to be replaced must receive at least six
        hours of direct sunlight). The rebate level is $0.08/sq. ft. installed (for new
        landscapes) or replaced (for existing landscapes), with a maximum rebate of
        $240. Initially,  rebates were lower (50/sq.ft replaced for existing landscapes;
        $0.03/sq. ft. installed for new landscapes), but were raised to increase
Efficient Irrigation Equipment

Water agencies can provide rebates to customers who improve the efficiency of their
irrigation system. Of the agencies included in our survey, only a few offered irrigation
equipment rebates; therefore it is difficult to generalize about rebate levels. The
following examples from the survey may provide an order of magnitude estimate for
this type of incentive.

       City of Glendale, Arizona.  Glendale pays a $35 rebate to residential
       customers who install automatic timers on an underground irrigation system.

       East Bay Municipal Utility District, California (EBMUD). EBMUD
       currently offers rebates to irrigation-only customers varying between 10% and
       75% of the cost of measures and installation. To qualify for the rebate, the
       participant must agree to conduct a landscape audit, install the recommended
       measures, and allow a follow-up inspection to confirm proper installation.

       When the program began, rebates were set at 30% of the measure cost, which
       resulted in an average rebate of $450. Rebate levels were modified in  1993,
       however, to tie rebate levels to how much water the measure saves.
industrial HVAC and Process Modifications

Many approaches are available for providing rebates to industrial customers. Rather
than offering flat per-item rebates, most programs included in our survey offer
customized rebates for industrial customers, based on the anticipated water savings of
the measures. Some agencies, such as the City of San Jose, link industrial water
conservation rebates  to reductions in wastewater flows. As with irrigation system
rebates, these programs were not common among survey respondents and it is not
possible to generalize about the appropriate level of rebates for HVAC and process

Examples cited by survey respondents of industrial water conservation  measures that
qualify  for rebates include switching from water-cooled to air-cooled HVAC systems,
converting to recirculated water, installing water-efficient process equipment,  and
installing controls or timers. The program may be limited to a pre-approved list of
qualifying technologies, or an agency may choose to work with commercial/industrial
customers on a one-to-one basis to determine appropriate measures.

       City of Palo  Alto, California.  The Palo  Alto Utilities Department uses the
     .  customized approach for its Water Efficiency Program and rebates 50%  of
       project costs up to $10,000 cumulative per account, with a minimum qualifying
       rebate of $375. Indoor plumbing measures were the most common projects in
       the program,  with 13 out of  19 projects related to this area.

                                                             CASH TRANSFERS
  Palo Alto conducted a survey to find out why participation levels were low.
  The city found that:

      Companies are currently cautious about nonurgent expenditures.

      Many customer-initiated water conservation projects had already been

      The customer's payback on water conservation does not justify the
      expenditure. (Project costs are disproportionately high in relation to the
      value of conserved water, even when considered with wastewater or other

      The time  frame of rebate availability was short compared with customers'
      budget cycle.

      Facilities  managers are too busy to identify projects or evaluate their

 •    A lack of data on indoor water end uses has hampered the identification of
     potential projects.

 Los Angeles Department of Water and Power (LADWP) has a Technical
 Assistance Program (TAP) for commercial, industrial, and institutional
 customers that will pay $1.25 for each  1,000 gallons  of water saved over a
 two-year period. The minimum per-project savings that qualify is 400,000
 gallons over two years, and the maximum rebate is $25,000 per project  per
 fiscal year, up  to  100% of project costs. Projects are subject to pre-approval
 and to post-installation inspection.

 Participation in the TAP program has been minimal, most likely because water
 bills represent a very minor portion of operating costs. One potentially effective
 approach to increasing participation in this program is to involve contractors.
 For example, one contractor who installs recirculating clothes washers in
 convalescent homes generated eight TAP applications.

 City of San Jose, California.  Since 1991, San Jose has  offered monetary
incentives to commercial, industrial, and institutional customers who reduce
wastewater flows by a minimum of 200 ccf/year. Initial incentive levels  were

       set at $l/ccf/year, with a minimum rebate of $200 and a maximum of $5,000.
       The incentive level was later raised, to encourage participation. Currently,
       incentive levels are $2/ccf/year, with a minimum incentive of $400 and a
       maximum incentive of $20,000. There have been 16 participants to date.
Rebate Program Administration

Most agencies surveyed indicated that they believed their rebate programs were
effective at encouraging program participation among residential customers. Several
program administrators felt that the getting the rebate to the customer quickly, either at
time of inspection or at point of purchase, made the rebate even more successful at
encouraging customer participation. Conversely, delay in processing rebate applications
was considered to be a real problem by many agencies, as was not having sufficient
funds allocated.

Survey respondents indicated that the greatest barrier to rebate programs was
customers' mistrust of the chosen technologies and mistrust of the estimated savings,
whether for low-water-use landscape, low-flow showerheads, or ULFTs. An associated
barrier is industry and contractor resistance to these technologies-—particularly to
ULFTs. Survey respondents reported that some plumbers actively dissuade customers
from installing ULFTs, telling customers that these models lead to increased plumbing
problems. (These warnings may  be based on difficulties  that were experienced with
early model ULFTs.) Therefore,  a rebate program might be effectively combined with
an education program to alleviate customer concerns  about these technologies and to
educate retailers and service staff, including plumbers, HVAC technicians, and

Survey respondents also indicated that installation costs and lack of knowledge about
how to install the devices may also pose barriers to customer participation. Rebates
can be combined with direct installation or training .programs to address this barrier.

Survey respondents made the following additional observations and suggestions
regarding program design:

       •   Recycle the old toilets, if possible. This provides additional  environmental
           benefits, and is convenient for customers  who then do not need to worry
           about disposal of the old unit.  However, pick-up and disposal may be
           expensive for water agencies that do not have a market available for the
           old toilets and fittings.

                                                                   CASH TRANSFERS
 Provide a pre-approved list of technologies (including models) that qualify
 for rebate.

 Notify distributors and manufacturers about the program so that they can
 have the approved models in stock.

 Consider providing easier access to the rebate through discount coupons or
 vouchers distributed by water agencies.

 Market ULFT rebates to low-income customers to increase water savings
 per rebate. (Low-income households tend to have the highest person-per-
 toilet ratio and would not likely otherwise purchase the devices.)

 Develop one-to-one relationships between an  agency representative and a
 customer contact, particularly when designing rebate programs  for large
 commercial/industrial customers.

 Estimate the likely magnitude of response and have sufficient funds
 allocated to pay out rebates. Waiting lists may cause frustration among
participants and may damage program image.

Maintain program flexibility.  Program staff from several agencies noted
that to be successful, incentives should be adaptable to changing
The differences between grants and rebates are subtle, and in many cases the terms are
used indistinguishably. For the purpose of this handbook, the primary difference is that
rebates are usually tied to a specific measure, while grants are made for larger scale,
systemic changes and may be calculated on the basis of project costs or on the amount
of anticipated water savings. Additionally, grants may be made before the project is
completed, to help the customer pay up-front costs.

       The Metropolitan Water District of Southern California established a
       Conservation Credits Program in September  1988. The first participating
       member agency received a grant early in 1989. The program pays member
       agencies the lesser of $154/acre-foot (AF) saved over ten years or 50% of
       project costs.  The program is the cornerstone of MWD's conservation efforts

       and has played an important role in funding conservation programs in Southern
       California. Since the program's inception, 19 agencies and 78 programs have
       received funding. The majority of these programs are. ULFT rebate programs or
       showerhead/conservation kit distribution programs. Many of the Southern
       California incentive programs discussed in this handbook have received
       Conservation Credit funding.

       To qualify, a project must have measurable, verifiable savings. Member
       agencies submit an application specifying anticipated program costs and
       savings. Once a project is approved, a letter of agreement is signed between
       MWD and the participating agency.

       Pilot programs are funded in a slightly different manner. MWD pays  75% of its
       share up front and the remaining 25% upon performance verification.
       (However, even if projected savings do  not occur, the member agency is not
       expected to reimburse MWD.)

       MWD is currently trying to expand the  Conservation Credits Program to help
       member agencies meet the Best Management Practices (BMPs) that most
       California water agencies have agreed to implement. To this end, pilot
       programs and evaluations are under way on numerous types of programs, such
       as landscape audits, for which savings are uncertain.

A bill modification is another delivery mechanism for a cash transfer. It differs from a
rebate in that the agency is not required to allocate funds to pay customers. Instead,
the modification reduces the amount the customer must pay to the agency. The
modifications may be a one-time reduction or an ongoing bill discount. Unlike
conservation rate structures, which create incentives for all  types of conservation, bill
modifications are tied to a specific conservation measure.

       City of Santa Monica, California.  In December 1989, Santa Monica
       implemented the Bay Saver Incentive Fee in conjunction with the Bay Saver
       Fixture Rebate program to encourage residents to install ULFTs and low-flow
       showerheads. The program's goals are to conserve water and to reduce
       wastewater flows to the regional wastewater treatment facility and ultimately
       outflow to Santa Monica Bay. In addition to receiving a $75 rebate, customers
       who retrofit their toilets and showerheads avoid a monthly Bay Saver fee of
4-12 .

                                                            CASH TRANSFERS
$2.00/month for single-family households and $1.30/month for multifamily
households. (Initially, the fees were set at $1.00/month for single-family
households and $0.65/unit for multifamily households, but they were doubled
to increase participation.) There have been over 32,500 participants to date.

The Bay Saver fee paid by nonparticipants is used to fund the ULFT program.
It also raises public awareness because it appears on the bimonthly water bill.
Until recently the  cumulative charge amount of these fees to date also appeared
on the customer's water bill, which was  an effective reminder of how much
they were losing by not replacing their toilet. However, this aspect of the
program will be discontinued because it  confused customers, who  thought that
the cumulative total represented a new charge, rather than what they had
already paid.

North Marin Water District, California.  North Marin discounts the
connection fee for developers who install landscapes meeting the District's
water conservation criteria. The  criteria relate to square feet  of turf and to
irrigation system design. Developers submit a plan showing  turf layout. The
District must approve the plan and conduct post-installation  inspection prior to
issuing the discount. The landscape criteria, connection fees, and discounts are
as follows:
Type of Dwelling Unit
Single family
Town house/condominium
Apartment building (5+ units)
Senior citizens unit
Maximum Turf
Area (sq. ft.)
Connection ,
In 1992, few single-family detached homes participated, whereas all new
apartment projects did. The agency attributes this to the scale of savings:
projects involving multifamily dwellings can save large amounts. Cumulative
participation since program inception in 1986 has been 25 single-family
dwellings, 412 townhouse/condominium units, and 387 apartment building


A voucher pays for all or part of a conservation measure at the time of purchase.
Unlike a rebate program, in which customers may have to wait weeks or months for
repayment, vouchers do not require customers to have up-front cash to purchase the
conservation measure. For this reason, vouchers are particularly attractive to owners or
managers of multifamily dwellings, because the up-front cost of retrofitting multiple
units can be prohibitively expensive. From an agency's  perspective, a voucher system
can be easier to administer than a rebate system because processing is done for a small
number of retailers rather than for each individual customer.

       San Diego County Water Authority, California (SDCWA).  The SDCWA is
       implementing a ULFT voucher program that will be administered by a
       contractor. Customers  who want to participate will call to receive a voucher.
       The consultant will confirm on a database that the caller is actually a customer
       in the qualifying service territory. The contractor will then send the customer a
       voucher worth up to $75, along with a list of approved toilets and participating
       dealers. The voucher has a 30-day expiration date.  At the time of purchase the
       customer will owe only approximately $30 for the toilet, depending on the
       model selected. The contractor is also responsible for picking-up the old toilet
       for recycling. At the time of recycling pickup, the customer will also get a free
       low-flow showerhead.

       SDCWA staff members feel that  the voucher program offers them a much
       better program tracking system. Retail stores send a bill and supporting
       documentation to the contractor, who can check  the serial numbers on the
       vouchers to verify that the information matches customer record. The agency
       does not have to worry about running out of funds for a voucher program,
       because it issues only  the number of vouchers covered in the program budget.
       Furthermore, the contractor can call customers if the voucher is not used or if
       the customer does not call to schedule recycling pickup  of the old toilet.
       Finally, because customers are prescreened to ensure that they live in the
       service area, SDCWA will not need to conduct as many postinstallation
       inspections as it did prior to issuing rebates. SDCWA estimates that costs under
       the voucher program will decrease from $115 per toilet  to less than $100 per
       toilet, largely as a result of the decreased number of inspections.

       The voucher idea came out of a meeting SDCWA held with its member
       agencies on how to cut red tape in ULFT programs. Waiting for rebates had
       been a big problem, which vouchers will address. Also, staff members felt that

                                                                  CASH TRANSFERS
       while rebates are a good way to start a program, they are unlikely to achieve
       the highest market penetration possible because too much effort is required on
       the part of program participants. The agency also suspects that a lower subsidy
       can be offered in a voucher program than is required for a rebate program,
       because customers do not need to make an initial capital layout.

One potential problem with a voucher system is the possibility  of fraud. Water agency
staff members raised this concern, citing the San Diego Gas &  Electric rebate program
for refrigerators. SDG&E discovered that customers who were buying the appliances
did not really live in the SDG&E service territory. Also, the agency discovered that
retail stores were submitting falsified paperwork, redeeming vouchers for customers
who had not bought qualifying models. The program was later  modified to provide for
better verification and accountability.  SDCWA believes that its voucher program will
avoid the SDG&E pitfalls by carefully prescreening who receives a voucher.

       Marin Municipal Water District, California (MMWD). MMWD provides
       vouchers to  participants in the agency's loan program for ULFTs. The voucher
       is good for a loan of up to $150, which customers agree to pay back through
       bimonthly payments of $12.50 on their water bill. The agency has a customer
       approval process to ensure that the participant has an active account and good
       credit with MMWD. Currently, customers can use the vouchers like cash if
       they utilize a contractor to install the toilet. The contractor then redeems the
       voucher from the agency. If customers purchase and install the toilet
       themselves,  they use the voucher like a rebate: customers pay for the toilet up
       front and then send the voucher to MMWD for a refund. MMWD is
       considering  modifying the program to allow the vouchers to be redeemed
       directly at retail stores by customers  who choose to do their own installations.
       Approximately one-third of program  participants do the  installation themselves,
       which is a higher rate of self-installation  than the agency had  anticipated.

Vouchers are also used by energy utilities, often for lower priced items for which a
rebate program is not justified.  For example, PG&E offers "instant rebates" for water
heater blankets ($5  voucher), furnace or air conditioner filters ($1 voucher), or low-
flow showerheads ($4 voucher  or 50% of purchase price, whichever is less). PG&E
markets this program through bill stuffers, and the coupons themselves are available at
local retailers. Some utilities include the voucher itself as a bill stuffer.


                                  Chapter 5
Chapter 4 discussed incentives involving cash transfers. In this chapter we turn to
financing incentives that do not involve direct transfer of cash. Financing incentives
spread the cost of conservation equipment over time, thereby enabling customers to
avoid large cash outlays. Therefore, these incentives are of most interest in cases
where installation of conservation technology has a high up-front cost. To date, very
few water agencies have offered financing arrangements  to their customers. However,
financing incentives are currently being explored or are in pilot stages in several
locations. This chapter describes these early efforts as well as some examples from the
energy industry,  where financing incentives have been used extensively. In particular,
two types of financing incentives will be discussed:

       •   Low-interest loans
       •   Shared-savings programs

Low-interest loans are an appropriate incentive when up-front capital costs are a
barrier to participation. Only one water agency in our survey offered a loan program.

       Marin Municipal Water District, California (MMWD). MMWD offers
       residential customers no-interest loans of $150 for purchase and installation of
       ULFTs, repayable through $12.50 payments on bimonthly water bills. The
       program uses a voucher system, as described in Chapter 4. There is no limit on
       the number of toilet retrofits, and the program is open to all customer classes.
       Increasing numbers of applications are coming from commercial and
       multifamily accounts, with some accounts installing several hundred ULFTs.

       MMWD chose to offer loans because  they are a low-cost option for the agency,
       which still provide some assistance to people  interested in taking action to
       reduce water use during the  recent drought. Participation was diminished by the
       fact that the program was not implemented until the drought ended, and the
       sense of immediacy has faded. However, there have still been 2,500 vouchers
       mailed to customers, approximately half of which have been used.

 Loan programs are more common in the energy industry. For example:

        Detroit Edison, Michigan, provides residential customers low-interest loans to
        upgrade insulation or to replace old water heaters with high-efficiency models.

        Lakeland Department Electric & Water Utilities, Florida, offers residential
        customers low-interest loans for improving energy efficiency of their homes.

        Northern States Power Company, Minnesota, North Dakota, South Dakota,
        and Wisconsin, offers commercial and industrial customers low-interest loans
        for general energy-efficiency and lighting applications. The loan term  is
        variable, up to five years.

        The Peoples Gas Light and Coke Company, Illinois, offers multifamily
        property owners low-interest loans and technical assistance  for the installation
        of energy-efficiency measures. Although the program is open to all multifamily
        dwellings, the utility targets buildings that house low- to moderate-income

        Idaho Power Company, Idaho, offers low-interest loans for energy efficiency
        retrofits to commercial and residential customers. Loans are generally used for
        lighting measures among commercial customers and for water heaters among
       residential customers.

Shared savings programs allow customers to pay for conservation measures through
savings achieved by those measures, or allow the water agency to recapture all or a
portion of the measure costs through those savings. Typically this requires knowing
what the water bill would be in the absence of the efficiency improvements. The
customer's new bill is then comprised of the new, lower charge for water use
(reflecting conservation) plus a charge to repay the agency for the conservation
devices. The combination of those two charges should still be less than the customer's
average bill prior to program participation. The latter charge is discontinued after a
specified period of time, when the agency has been fully reimbursed for the
improvements. These programs are increasing in popularity in the energy industry, but

                                          FINANCING AND OTHER TYPES OF INCENTIVES
are still relatively new in the water industry. Agencies that offer shared savings

       City of Santa Monica, California. Santa Monica is negotiating a shared
       saving pilot program. For the pilot, the agency has proposed retrofitting the
       Santa Monica Business Park,  a 49-acre multipurpose commercial development
       with over 13  buildings, 1 million square feet of office space, and 6.61 acres of
       irrigated turf  and shrub areas. The  retrofit would include replacing all toilets,
       installing faucet aerators, and making irrigation system improvements. Total
       cost of the project would be $82,350. MWD, Santa Monica, and the business
       park would each pay for  a portion  of the retrofit. The business park would be
       responsible for repaying $43,325.

       If the project  proceeds, the business park will use a portion of the savings to
       repay MWD and Santa Monica over five years. Savings will be calculated
       using historical water use records. Anticipated  savings could be as high as
       60%, but an estimate of 35%  was used for the purpose of calculating the
       repayment period.

       Based on savings of 35%, the retrofit has the following projected annual
Interior use
Exterior use
Reduced wastewater charge
       If the savings are higher than 35%, the payback would occur even faster. If the
       business park does not achieve the predicted savings, the owners would still
       have to repay Santa Monica and MWD for their investment. After the payback
       period is complete, the business park should continue to save approximately
       $12,915 annually in water and wastewater charges. Also, the City of Santa
       Monica has selected 1990 water use levels as the base year from which future
       rationing targets will be set. Therefore, the business park will not be penalized
       for conservation in future rationing programs.

        The Marin Municipal Water District, California (MMWD). The MMWD
        loan program described earlier (in which customers repay a no-interest loan to
        the water agency through bimonthly payments of $12.50 on their water bill) is
        also, in effect, a shared savings program. It assumes that a large portion of the
        customer's bimonthly payment is actually made up by savings on the water

 Shared savings programs in the energy industry are largely run by energy service
 companies (ESCOs) who agree to take their payment for the installation of energy
 efficiency measures out of the savings achieved by those measures.

 Utilities may lease equipment to their customers. This arrangement enables customers
 to avoid up-front capital costs for equipment. It can also increase access to
 conservation technology by making available equipment that customers do not need to
 purchase but could use for a limited time, such as leak detection equipment. Leasing
 programs  can be combined with shared saving programs by allowing customers to
 make their lease payments through savings on their water bills.

 Leasing has been used by many energy utilities, both for expensive industrial
 equipment and for smaller applications, such as compact fluorescents light bulbs. For

       Burlington Electric Department, Vermont, leases compact fluorescent
       lightbulbs to their customers at a nominal fee per bulb per month. Lease
       payments are added to the monthly bill. The lease duration is five years, after
       which point the lease stops.

       Philadelphia Electric Company, Pennsylvania, also leases compact
       fluorescents to residential customers.

       Traverse City Light &  Power Department, Michigan, leases audit-identified
       energy-efficient equipment to commercial and industrial customers. Equipment
       ownership transfers to the -customer at the end of the lease period.

While leasing is not yet used  as an incentive in the water industry in the United
States, a pilot program leasing water-efficient washing machines is under way in

                                           FINANCING AND OTHER TYPES OF INCENTIVES

  commercial laundromats in Mexico. The specific technology being leased is a washing
  machine that cycles water from the last rinse cycle (by which time it is basically clean
  water) back into the first wash cycle. This technology has energy savings too, because
  the machines save hot water. A meter on the washing machine charges the laundromat
  for water each time it cycles through, in effect charging repeatedly for the same water,
  but at a lower rate. The laundromat has lower water bills because it pays  less for the  '
  reused water.

  Payments for the reused water go toward paying for the equipment.  At the end of the
  lease, the laundromat can buy the machine or continue to lease it (perhaps at a lower
  rate). Once the equipment is installed the process is nonintrusive; the customer retains
  complete autonomy over the business.


 Water agencies may wish to  consider targeting incentive programs where they can
 achieve the most cost-effective savings. In particular, conservation measures  installed
 by low-income customers or  in new construction may yield greater or more cost-
 effective savings than would  participation from other customers, for reasons
 enumerated below.
 Low-Income Programs

 Residential conservation measures can often achieve the highest per-measure savings
 in low-income housing because there tend to be a greater number of people per
 household, so each appliance or fixture is used more intensively. However, it takes
 targeted incentive design and marketing to reach this population. Low-income
 customers are unlikely to participate in rebate programs because they do not have the
 up-front capital. Voucher programs or direct installation are likely to be more
 attractive to these customers. Several water conservation customer incentives have
been targeted at low-income customers.

       Los Angeles Department of Water and Power, California (LADWP).
       LADWP targeted a conservation kit distribution to 60,000 low-income
       customers. Each customer was contacted three times by mail. The first letter
       announced that the kit would be coming. The second mailing included the kit.
       The third mailing asked if the customer had received the  kit, gave them a
       number to call if they did not receive a kit, and offered installation assistance.

       A follow-up mail survey indicated that 75% of the customers who received the
       kit installed the measures.

       City of Pasadena, California.  Pasadena also has targeted low-income
       customers in their ULFT program. Initially Pasadena offered a rebate plus free
       installation, but had limited success because people could not afford to
       purchase the toilets. Now Pasadena provides the toilets and offers installation.
       This approach is working much better. Pasadena targeted the low-income
       population by a mailing to all Section 8 (subsidized low-income housing)
       property owners. To retain customer privacy and protect anonymity, the offer
       was included as a bill stuffer sent by the Pasadena Finance Department along
       with rent supplement checks. This program has been very successful; the first
       week alone the City got 200 to 300 responses.

       Pasadena also offers free leak repair to low-income customers. Flyers
       advertising this service were sent out through Maintenance Assistance/
       Homeowners (MASH) (a nonprofit organization that does external house repair
       for low-income homes) and other CBOs. Those organizations provided address
       labels without names (addressed to "Resident"). Working  with CBOs that
       already offer services  to low-income customers is likely to be an effective way
       of reaching this population.

Targeting new construction for water conservation customer incentives can be a cost-
effective way of achieving water conservation because it frequently is less expensive
to install water-efficient measures during construction then to retrofit existing
structures. A variety of incentives, especially cash transfers and financing incentives,
are appropriate for new construction. The major difference in a new construction
program is that incentives are often targeted at developers rather than customers.

Several of the landscape programs discussed earlier—such as the City of Austin,
Texas, Xeriscape It! program and the North Marin Xeriscape Credit Program, are open
to new construction. Also, the Phoenix landscape training program plans to target
homeowners associations in new developments. However, no water agencies currently
offer programs that comprehensively address water use in new construction. Through
plan review, low-interest loans, and rebates, a water agency may be able to encourage
purchase of water-efficient equipment and appliances by all customer classes.  Dozens

                                         FINANCING AND OTHER TYPES OF INCENTIVES
of these programs have been used by the energy industry, most of which offer design
assistance or financial incentives.

       Pacific Gas  & Electric, California, Residential New Construction Program
       offers rebates to builders who surpass the State Building Energy Standards by
       Orange & Rockland Utilities, New York, offers rebates to builders and
       homeowners to construct homes to energy-efficiency standards higher than
       those required by the state.

       Potomac Electric Power Company, Washington D.C., offers technical
       assistance and financial incentives to building designers and developers for
       designing and constructing energy-efficient commercial buildings and installing
       energy-efficient equipment.

       New England Electric System, Massachusetts, Design 2000—Commercial/
       Industrial New Construction Program offers incentives to architects, developers,
       and general contractors for developing energy-efficient buildings. NEES
       provides free technical assistance (including a free computer energy analysis of
       the building),  as well as rebates and grants.

       Central Maine Power's Efficient New Construction, New Construction
       Lighting Rebate, and Calculated New Construction Rebate  Programs all provide
       design assistance and rebates.


The handbook thus far had focused on the types of customer incentives that are
appropriate for particular conservation programs. This chapter shifts the focus from the
type to the appropriate level of incentive.

Incentives are  designed to overcome specific barriers to customer participation in
conservation programs.  A "big enough" incentive is one that exceeds the magnitude of
those barriers.  The usefulness of cost-effectiveness analysis is directly related to  the
difficulty of quantifying the magnitude of the barriers to participation. Since many of
those barriers are noneconomic, the value of cost-effectiveness analysis is somewhat

The cost-effectiveness framework presented in this chapter will likely be most useful
in calculating appropriate cash transfers (rebates, grants, vouchers), financing (low-
interest loans, shared savings programs), and bill modifications (one-time or ongoing).
In all of these  cases, the barriers that are to be overcome are primarily economic in

The appropriate type of customer incentive and its amount are closely interrelated.
Customers may respond much better to an incentive of less economic value than other
incentives offered, because of noneconomic factors that influence their decisions. For
example, a customer who faces cash constraints may prefer a $50 voucher to a $75
rebate because the voucher reduces the up-front capital needed to make the
purchase.14 Moreover, effective marketing of a particular incentive type may well
reduce the amount of the economic incentive that must be offered. Therefore, as  is the
case with all analytic tools, the results of applying the cost-effectiveness framework
will have to be combined with other information and a healthy measure of judgment
by utility managers and planners.
I4Determining those noneconomic factors is one of the major goals of the market research discussed in
Chapter 8.


 Cost-effectiveness analysis is a way to systematically compare the benefits and costs
 of an investment. In performing cost-effectiveness analysis of conservation programs,
 it is critical to carefully specify the perspective from which the benefits and costs will
 be assessed. Each perspective provides important information that is helpful in
 interpreting the analysis.

 Over the past decade, California energy utilities and regulators have painstakingly
 developed a framework for analyzing the cost-effectiveness of demand-side
 management (DSM) programs.15 The following discussion is consistent with that
 framework, with adjustments to reflect the differences between water service and
 electric or gas service.

 The perspectives from which cost-effectiveness will be evaluated can be defined in a
 variety of ways, depending on many factors. For example, situations in which there are
 several levels of water providers (wholesalers and retailers) may require a somewhat
 more complex analysis. It is particularly important to clearly understand the following
 four cost-effectiveness perspectives:

       •   Program participants
       •   The water utility
       •   The water supply system
       •   Society

 Figures 6-1 through 6-3 summarize the flow of economic benefits and costs that
 defines these perspectives. The figures build upon one another. Thus, Figure 6-1
 describes the benefits and costs that define the participant and utility perspectives.
 Figure 6-2 expands the  view  to include the water supply system. Figure 6-3 takes an
 even broader view to incorporate the societal perspectives.

 Following are discussions of  each of these cost-effectiveness perspectives:
15See California Public Utilities Commission and California Energy Commission, Standard Practice
Manual: Economic Analysis of Demand-Side Management Programs (December 1987).

                                                     COST-EFFECTIVENESS FRAMEWORK
  Program Participants

  Participants in a conservation program are affected by the program in several ways.
  Some of these effects are not easily quantified, such as potential inconvenience or
  perceptions of reduced service levels (e.g., poorer quality showers from low-flow
  showerheads) or feelings of well-being due to customers' belief that conservation is
  inherently the "right thing to do." Figure 6-1 shows the quantifiable economic benefits
  to participating customers which include the savings on their water bills due to
  reduced consumption and the value of whatever incentive is received from the water
  purveyor. In addition, participants may see reduced electric, gas, and/or wastewater
  bills.  The major economic cost to participants is the cost to purchase and/or install the
 conservation device or measure.
 The Water Utility

 As indicated in Figure 6-1, the major quantifiable benefit of a conservation program to
 the water utility is the avoided cost of new supply. As a demand-side resource,
 conservation reduces the need for new supplies and thereby reduces long-term costs to
 the agency and its ratepayers. Determining the magnitude and timing of these cost
 reductions may be extremely difficult and requires the utility  to single out the marginal
 supply source, that is, the one capital investment that  would be scaled back or
 postponed as a result of conservation. Electric utilities and their regulators have
 wrestled with marginal cost issues  over the past decade  or more. Water utilities are
 beginning to address similar issues.

 The costs of the program to the utility include the incentives to participating
 customers, as well as any other costs associated with the program (e.g., administrative
 or marketing expenses).

 Conservation programs also impose another type of cost on the utility—namely lost
 revenues, which are the "flip side" of the bill reduction benefits to program
 participants. The revenue losses associated with conservation programs are a critical
 concern for utility managers, since  resulting losses must be  recovered through
 increased rates. The treatment of conservation-induced revenue losses has been a
 matter of some controversy among energy utilities and their regulators. In fact, a
 separate cost-effectiveness perspective (the so-called ratepayer impact measure or RIM
test) has been developed, which is distinguished from  the utility perspective by its
consideration of revenue losses.

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                                                    COST-EFFECTIVENESS FRAMEWORK
While few dispute the importance of conservation-induced revenue losses, there is
much less unanimity on the extent to which they should be a primary consideration in
evaluating conservation programs. Many believe that revenue losses are best viewed as
a shift of the cost burden from customers that participate in conservation programs to
those that do not participate. This (transfer payment says little about the economic
viability of the conservation program itself.16

Put another way, not including revenue losses in a cost-effectiveness analysis of a
conservation program is equivalent to assessing the program's impact on  average water
bills. That is, a positive cost-effectiveness result implies that average bills across
participating and nonparticipating customers will decrease; a negative result implies a
higher average bill. In contrast, the inclusion of revenue losses shifts the  focus to
average rates rather than average bills.

Later in this chapter we discuss the significance of considering revenue losses in the
cost-effectiveness analysis used to calculate appropriate incentive levels.
The Water Supply System

For purposes of this discussion, we define the "water supply system" as the water
purveyor,17 the program participants, and the environment. The benefits and costs
from this perspective include the benefits and costs from the water utility and
participant perspectives as well as  any impacts that a conservation program has on the
environment. These environmental impacts will include any avoided environmental
damage associated with the marginal supply resource.

The  perspective of the water supply system is important because it is not affected by
the transfers of funds  among entities,  assessing instead the benefits and costs of a
conservation measure  to the system as a whole. Revenue losses and incentive
payments are therefore not considered, since  (as illustrated in Figure 6-2) such
transfers do not "cross the boundary" of the water supply system. (In other words, the
utility  costs and the participant benefits cancel each other out.) This perspective
16This is essentially the position taken by the California Public Utilities Commission in its evaluations of
energy conservation programs. The commission has taken the view that, while rate impacts should not
be ignored, they are subordinate to the other cost-effectiveness tests. See, for example, CPUC Decision
No. 89-12-057, December 20, 1989.

I7When wholesale as well as retail agencies are involved, the analysis must consider all of these

  compares the avoided supply cost benefits (including avoided environmental costs)
  with the incremental program and conservation measure costs.18

  The broadest cost-effectiveness perspective is that of society as a whole, illustrated in
  Figure 6-3. For the purposes of this discussion, "society" includes not only the water
  supply system but also other types of utilities that might be affected by the
  conservation program.19

  This perspective not only "cancels out" transfer payments  between the water utility
  and participating customers; it also eliminates transfers among the water utility and
  other utilities. Thus, the water utility's avoided costs of purchases from  nonwater
  utilities are not considered, but other avoided water utility costs are included. The
  costs that are avoided by the electric, gas, and/or wastewater utilities are viewed as
  societal benefits, while any additional costs that are incurred by these utilities as a
 result of the water conservation program are societal costs.20


 The^societal and water supply system perspectives are useful for asking questions such
 as, "Which program components should receive greater emphasis?" or "Should the
 program be done at all?" Since incentive payments play no role in these perspectives,
 they have little to say about appropriate incentive amounts.  A conservation program '
 must answer these questions before the issue of the appropriate incentive amount is
 even addressed.

 A program that is not societally cost-effective results in a net loss  of societal
 resources. Such a program should be carefully examined. It may be that the cost-
'8As shown in Figure 6-1, another benefit from this perspective might include the reduced charges paid
by the program participant to non-water-supply (e.g., wastewater) utilities.

"Strictly speaking, this perspective also considers any non-environmental "external" impacts of water
conservation. For example, certain "third-party impacts" associated with water transfers may be avoided.

MSome .wastewater systems report that they may incur additional costs or reduced revenues due to water
conservation. If so, this would also be a cost to society.

                                                    COST-EFFECTIVENESS FRAMEWORK
 effectiveness results have not adequately captured all of the difficult-to-quantify
 societal benefits. Alternatively, the program may have to be redesigned to improve its
 cost effectiveness. For example, in the case of a ULFT rebate program, a focus on the
 types of customers with greater water savings per installed toilet could increase
 societal cost-effectiveness. Achieving greater efficiencies in program administration
 could have a similar result. If improvements in cost-effectiveness cannot be achieved,
 resources should be diverted to other programs.

 The distinction between the two perspectives is one of degree: some decision makers
 focus on impacts on the water supply system; others take the more all-encompassing
 view embodied in the societal test.

 Once a conservation program is determined to  be cost-effective to society or to the
 water supply system, the question of the appropriate incentive amount can then be
 addressed. The participant and water utility cost-effectiveness perspectives are useful
 in addressing this issue.
Use of the Participant Perspective

The participant perspective addresses the question, "How much of an incentive do
customers need?" Assume that an agency is considering  a "cash for grass" rebate
program. Program participants face an initial outlay equal to the difference between
the capital and installation costs for replacement landscaping and the water agency
rebate. Financial benefits, which consist of water bill savings,  are spread over time. If
we assume that  the typical customer will require a two-year simple payback for this
type of investment, we can compute the necessary incentive level, based on
assumptions about replacement landscaping costs and projected water rates.21

Offering an incentive that makes participation cost-effective from the participant
perspective  still does not guarantee participation. The issue of what motivates
customers to undertake various conservation measures is complicated. Research in the
energy sector has shown that the effects of financial incentives on residential
conservation program participation are inconsistent. Several studies have shown that
participation rates are influenced  less by the existence or magnitude of an incentive
21There is little firm evidence that a two-year payback is appropriate.

  than by the way programs are implemented or marketed.22 Other studies have shown
  some degree of correlation between incentive size and program participation but lack
  sufficient data to determine the optimum incentive size.23 Further, financial
  incentives alone appear to be inadequate for program success.

  Commercial investments, in contrast,  are more often made on the basis of relative
  profitability. Survey and focus group  results have shown that the single most important
  criterion for evaluation of commercial conservation investments is projected
  payback.24 While the required payback for conservation investments is uncertain, it is
  thought to be short. Data from nine sources  on the average payback from conservation
  measures already in place nationwide  suggests that planning for a payback of two to
  three years is reasonable.25 Five of the nine studies showed average paybacks of two
  years or less. A two-year payback is generally used as a rule of thumb for commercial
  conservation incentive design, because the uncertainty associated with projected
  benefits encourages customers to seek such short payback periods.

  The research makes clear that noneconomic factors—including the adequacy of the
  marketing  effort, perceptions of risk, and the time and effort required to implement the
  measure—also significantly affect investment decisions.  For example, marketing has
  been found to have a considerable effect on the penetration levels of conservation
 programs, particularly in the residential sector. In fact, some studies have shown that it
 is possible to obtain high participation rates with little or no financial incentives if a
 program is well marketed.26

 Uncertainty about the purported benefits of conservation investments can also be  a
 major barrier to participation in conservation programs.27 Uncertainties include
 performance and aesthetics of the equipment  and future changes in rates that affect the
 dollar savings associated with the investment. Some of this risk can be reduced—for
                      Pemtration °f Energy-Efficiency Programs (Oak Ridge National Laboratory,
  ,InC" DSM Commercial Customer Acceptance Volume 1: Program Planning Insights,
EM-5633 (Palo Alto, Calif.: Electric Power Research Institute, January 1988).
April 1990).

23Ibid., pp. 34-35.
^Ibid. p. 2-8.

26Berry, pp. 32-33.

27Xenergy, p. 2-12.


                                                   COST-EFFECTIVENESS FRAMEWORK
example, through customer access to information and equipment warranties. However,
the credibility of the source of information to the consumer has been found to be
important.28 Community groups, trade  allies, and peers seem to be the  most effective
communication media for this type of  information.

The time and effort required to implement conservation measures can also be an
important determinant of program participation. Despite the purported benefits, if
significant effort is required on the part of the consumer, he or she may find that
conservation is not worth the bother.

The foregoing observations are based on a large body of market research that has been
performed for energy conservation programs. There is little comparable research on
water conservation programs. Two important conclusions probably do apply:

       •   For residential customers, noneconomic factors play at least as large a role
           as economic incentives in customer participation decisions.

       •   For commercial customers, economics play a much more central role, and
           projected payback periods are critical determinants of willingness to

The market research that we  discuss in Chapter 8 will help agencies better define what
is necessary to overcome program participation barriers. Until that information
becomes available, the prior experience of the energy and water utility  industries,
along with judgment, will have to be relied upon. The important point is that,
regardless of the particular criterion  that is chosen to represent the "push" needed by
customers, the foregoing type of analysis will translate that into an incentive level.
Use of the Water Utility Perspective

The utility perspective compares avoided supply costs with program and incentive
costs (and potentially revenue losses) to the utility. The maximum incentive that a
utility can "afford" is the level at which the present value of net utility benefits is zero.
In other words, the incentive that can be justified from the water utility perspective is
one that represents a long-term utility "break even point." This can be expressed
mathematically as follows:
 'Berry, p. 45; Xenergy, p. 3-19.

                       uc +1    -y
                              max    ^ ^
                                           ASCt  {- LRt]
                                              (1  + r)'
                                    ASCt {- LRt]
                                       (1 + r)'
                                                - UC
  where      r       =       discount rate
                     =       avoided supply costs in period t
                     :       lost revenues in period t (if included)
                             present value of utility program costs other than incentive
            Im*x     =        present value of maximum cost-effective incentive

 For example, if we assume that the per-customer present value of avoided supplv cost
 associated with a conservation program is $100, and the program also includes a $20
 per customer initial administrative cost, then the maximum rebate  that the utility could
  afford  to pay is $80. If we further assume that the present value of the future lost
 revenue stream is $50, and that We Wish to consider that lost revenue as a utility cost,
 the  affordable" incentive is reduced to $30.

 A more complete illustration of this approach will be shown when the cost-
 effectiveness framework is applied to the  case studies in Chapter 7.

 Thus, the decision whether to incorporate  revenue  losses has a profound effect on the
 maximum incentive that a water utility is  willing to pay. This is a difficult decision
 and one that each water provider must base on its own circumstances. The remainder
of this handbook  will assume that revenue losses are not considered in incentive
determination. This is based on:

       •    The general practice in the energy utility industry;
    •   The critical nature of conservation as a
        country; and
                                               resource in many parts of the
        The logic of focusing on the magnitude of average bills rather than average
        rate levels. This better serves the goal of placing conservation on a "level
        playing field" with supply resources.

                                                  COST-EFFECTIVENESS FRAMEWORK
 Some utilities may wish to explicitly consider avoided environmental costs in the
 calculation of appropriate incentive levels. Doing so would yield higher permissible
 incentives and thereby offer greater encouragement to conservation programs in cases
 where they avoid significant levels of environmental damage.

 The basic framework can be extended to define additional cost-effectiveness
 perspectives that distinguish between wholesale and retail utilities or that isolate
 impacts on particular nonwater utilities (e.g., electric, gas, or wastewater). Such an
 expanded framework can be particularly useful when  attempting to determine the
 manner in which the costs of customer incentives should be divided among the utilities
 that are affected by water conservation programs.

 The energy utility industry is  currently exploring new and more sophisticated cost-
 effectiveness perspectives. For example, the so-called "value test" is a complete test of
 economic efficiency and explicitly considers such customer impacts as changes in
 quality of service, long-run rate impacts, and the ability of a program to overcome
 market barrier costs.

 Another example of how the cost-effectiveness methodology can be refined is in the
 consideration of so-called "freeriders." These are program participants who would have
 taken the conservation action  even without a utility incentive. For such customers, the
 incremental utility benefit as a result of the conservation program is zero. The
existence of large numbers of such customers will  reduce the avoided supply costs
 and, therefore, the incentive payments that the utility can afford.  Clearly, the utility
 should attempt to design conservation programs to minimize freeridership.

The treatment of freeridership issues is illustrated in Chapter 7.


                                   Chapter 7
                               CASE STUDIES
 This chapter presents three case studies, two actual and one hypothetical. Chapters 2
 through 5 of this handbook focused on the types and amounts of incentives water
 agencies can offer. This chapter looks more closely at program design and
 implementation issues and at the effectiveness of specific incentives in encouraging
 customer participation and in achieving conservation. The two actual case studies were
 developed through interviews with agency staff and review of program materials and
 documentation. Each case study includes, when available, a detailed description of the
 following elements:

       •   The conservation program
       •   Program goals
       •   Target market
       •   Incentive structure
       •   Implementation methods.
       •   Marketing approaches
       •   Program budget
       »   Participation levels
       •   Water savings

The cost-effectiveness framework presented in Chapter 6 has been applied to each case
study to determine appropriate incentive levels. The case studies have been selected to
illustrate a variety of program features. The case studies are:

       •  The Los Angeles Department of Water and Power (LADWP) Ultra
          Low Flush Toilet Retrofit Rebate Program. This program was selected
          because of the burgeoning number of ULFT rebate programs. LADWP's
          ULFT program has gone through several phases that will be explored,
          including  the use of  partnerships with community-based organizations
         , (CBOs), an approach that LADWP pioneered and that is currently gaming
          in popularity.

       •   The Seattle, Washington, Home Water Savers Program. This program
          was selected to illustrate a regional utility partnership, several examples of
          which were cited in Chapters 2 through 5 as cost-effective approaches to
          implementing  incentive programs. Additionally, as a device distribution
          program this is a good candidate for a case study because device

             distribution is often the first water conservation program an agency

             A hypothetical combination water audit/no-interest loan program for
             industrial customers. This case study was developed to illustrate a multi-
             level (wholesaler-retailer-customer) incentive program, and to focus on a
             program that targets industrial customers.

  Program Description

  Los Angeles Department of Water and Power (LADWP) sells water to retail customers
  in the City of Los Angeles, California. LADWP purchases some of its water from the
  Metropolitan Water District of Southern California (MWD). Through its Conservation
  Credits Program, discussed in Chapter 4 of this handbook, MWD assists LADWP with
  funding the ULFT rebate program and also provides input into program

 The LADWP ULFT retrofit program has two variations. The standard program, which
 began in 1990, offers a rebate to all customers who install an approved model ULFT
 Current rebate levels are $100/ULFT for single-family residential and condominium
 customers, and $75/ULFT for all other customers. Customers are responsible for
 purchasing and installing the toilet.

 The Community-Based Organization (CBO) program, which began in 1992, offers a
 ULFT to residents at no cost; the CBO receives $25/installed toilet. The CBO markets
 the program to the community and distributes the toilets, usually at a centralized
 location  (depot). The Metropolitan Water District of Southern California (MWD) pays
 the full program costs to a subcontractor, who handles all program elements, including
 procuring toilets, and locating and training the CBO staff. LADWP reimburses MWD
 for 50%  of program costs.

 Several factors motivated LADWP to initiate a ULFT retrofit program. The agency
 tries to be at the forefront in promoting conservation. It had already nearly saturated
 the market with efficient showerheads, particularly after a 1988 city ordinance
mandated that LADWP provide, and that customers install, low-flow showerheads and
toilet tank displacement bags. Since 1988, LADWP has distributed 1.5 million

                                                                     CASE STUDIES

 showerheads and at least 3 million toilet bags. Surveys'indicated a sustained
 penetration rate of 60% for installed showerheads. Therefore, in 1990, four years into
 the drought, LADWP was ready to take the next step in conservation. Other factors
 influenced the decision as well:

        •   The Board of Commissioners felt that conservation was critical;

        •   Goleta  and Santa Monica already  had  implemented ULFT programs; and

        •   Studies emerging from the Metropolitan Water District of Southern
            California (MWD) indicated that significant water savings were available
            from ULFT retrofits.

 The driving element of the chosen program implementation mechanism was that the
 customers would do most of the work. They would select, buy, and install an approved
 ULFT, and  provide the necessary documentation; then LADWP would provide a

 LADWP considered other options, such as procuring, warehousing/and distributing
 ULFTs. However, it was felt that  warehousing would be cumbersome in a service
 territory as large as LADWP. Also, this method would limit customer choice of
 models. Another option considered—having a contractor distribute and install toilets	
 seemed administratively difficult,  more expensive, and would have required more
 careful LADWP monitoring. Instead, LADWP selected the simple rebate option.

 Program Goals

 The program goal for the first year was to install 7,500 ULFTs. The program actually
 installed 90,000 ULFTs during that time. As discussed later, the drought and
 mandatory rationing were primary reasons for  the unexpected participation level. The
 current goal is to maximize the  number of installed ULFTs, subject to funding
Target Market

When the standard program began in February 1990, it was targeted at residential
customers. In December 1990, the program was opened to all LADWP customers.
There was little information quantifying the savings available from installing the

  ULFTs in nonresidential buildings; however, the Board of Commissioners wanted to
  make rebates available to all customers. The actual percentage of rebates that are
  given to nonresidential customers has been less than 1% and this  case study focuses
  on the residential sector.

  The CBO program targets low-income customers, who were not responding to the
  standard rebate offer.
 Incentive Structure

 Under the current standard program, single-family residential and condominium
 customers are eligible for a $100/toilet rebate, and other customers are eligible for
 $75/toilet rebate. There is no limit on the number of retrofits per household or per

 Under the CBO program, CBOs provide customers with a ULFT at no cost, and the
 CBO receives $25/installed toilet. Again, there is no limit on the number of toilets per
 household or per account.

 Preliminary cost-effectiveness analysis done by LADWP prior to program
 implementation indicated that a $100 rebate would be cost-effective from the agency's
 perspective, based on marginal costs of $230/AF and presumed ULFT savings of 29
 gallons daily. However, the major factor in selecting the rebate level of $100 was that
 it was the level being offered in other nearby jurisdictions, such as Santa Monica and
 Goleta. Also, LADWP knew that at least one major supplier offered a mid-level  ULFT
 for $85. Therefore, $100 seemed a reasonable rebate level that would cover purchase
 price as well as a portion of installation  costs.

 The structure of the CBO program was developed when the Mothers of East Los
 Angeles (MELA),  a community-based organization, approached LADWP and  offered
 to run the program in their neighborhood. Because many low-income customers do not
 have the cash to purchase a ULFT, the rebate program was not an effective incentive
 for  them.  By offering residents a free toilet, LADWP has been able to achieve a much
 higher participation rate in low-income areas.

                                                                     CASE STUDIES
 Implementation Methods

 The Standard Program: Phase I

 During Phase I of the program, customers could purchase any ULFT model on the
 LADWP approved list. The list was generated by the city's Building and Safety
 Department, which develops specifications for all mechanical equipment sold in Los
 Angeles. LADWP retained a contractor to manage most aspects of program
 administration. The contractor did all the necessary marketing, information gathering,
 verification, and application processing. Once the customer had sent in the application
 and proof of purchase, the contractor would schedule an inspection. After  inspection,
 the customer was  then sent a rebate check for $100 per ULFT.  In Phase I  of the
 program all toilets were inspected before the customer received a rebate.

 Almost from the beginning, the program began to snowball. The ongoing drought and
 drought-related ordinances were clearly primary motivators in program participation.
 Significant boosts in participation occurred in March 1991, when LADWP began
 mandatory  10% rationing; in May 1991, when LADWP increased rationing to 15%;
 and again in June  and September 1991, when program discontinuation was anticipated.
 Monthly participation rates are  illustrated in Figure 7-1.

 Four years of decreased consumption due to drought had depressed revenues. In one
 12-month period, LADWP spent $25 million on rebates, while operating with a 30%
 decrease in revenue due to the drought. Therefore, due to funding difficulties, the
 program was discontinued in October 31, 1991. By the end of Phase I, LADWP had
 issued rebates for 230,000 ULFTs.

 Discontinuing the program was difficult but necessary. In addition to the lack of funds,
.the program needed design changes to handle the magnitude of applications. The
 program had been  designed to process 7,500 rebates/year and could not provide
 adequate customer service while processing 230,000 toilet installations during the  first
 18 months.  Customers were waiting as long as  12 weeks to receive a rebate, while
 program literature  promised rebates in four to six weeks.
Standard Program: Phase II

LADWP redesigned the program and started Phase H on July 1, 1992; Phase H is
ongoing at this time. The same contractor is handling the program, but many changes
have been made in program administration. One change was the implementation of a


                                                                      CASE STUDIES
 reservation system for rebates. Customers who are interested call to reserve a rebate,
 and they are then mailed an application. The customer has 60 days to purchase the
 ULFT(s). Reservations are not mandatory to receive a rebate; however, rebates are
 subject to funding availability, so reservations are recommended.

 Another major program change is that the rate structure was revised to allow
 conservation programs that resulted in hardware installation to be charged directly to
 the ratepayer just like purchased water from MWD. This provides the ULFT program
 with a funding mechanism. Prior to this change the program was funded out of the
 conservation budget.

 Also, before starting Phase n, LADWP reevaluated the rebate structure and level.
 Instead of offering $100 per ULFT rebate for all customers, the program was
 redesigned to offer $100 rebates for single-family residences, including condominiums,
 and $75 for  other customers. There is still no limit on the number of ULFTs that could
 be installed.  The difference in rebate was largely introduced because multifamily
 building owners, it was felt, would get ULFTs for a lower per-unit price because they
 would be purchasing in bulk, and could also write off the investment. A $75 rebate
 still seemed  high enough to induce participation. Also, LADWP staff members felt
 that multifamily owners are more aware of utility bills than single-family residents and
 are more  likely to conduct economic analyses and realize that it is to their benefit to
 install the ULFTs, even with a lower rebate level.

 LADWP also considered a tiered rebate, which was supported by evidence that the
 first ULFT installed  per household provides higher savings than additional  ULFTs.
 However, LADWP did no*, want to create additional administrative burdens.

 Finally, in Phase II LADWP decreased the number of inspections. In Phase I, LADWP
 inspected  every ULFT before issuing a rebate. In Phase H, only a portion are
 inspected, with applications for multiple rebates having a higher likelihood of
 inspection. Approximately 25% of all applications, representing 75% of all ULFTs, are
 inspected. This has decreased administrative costs, and LADWP believes that the level
 of fraud is minimal and does not warrant the expense of inspecting every installation.
The CBO Program

The CBO program began in September 1992. As with the standard rebate program,
LADWP has eliminated itself from most of the details of program administration. For
the first ten months of the program, LADWP paid $100 to a subcontractor for each

  installed ULFT. The subcontractor handled all aspects of the program, including toilet
  purchase and storage, and $25 payment to CBO, for this price.

  Starting in June 1993, LADWP created a separate agreement with MWD for the CBO
  program. MWD pays the full program costs to the contractor and LADWP reimburses
  MWD for its share (50%). Recently the rebate amount increased to $110 per toilet to
  cover a $10 per toilet fee to have the old toilets recycled. The LADWP 50% share is
  now $55 per toilet.

  The subcontractor locates a willing CBO and procures the ULFTs. The subcontractor
  also trains the CBO members on detail  of program operations, such as how to
  maintain a database to track participation and how to install the ULFTs if necessary.

  The CBO is paid $25 per toilet to cover its program expenses. CBOs generally do not
  have much funding available and would not be able to operate the program if not
  provided the money. Generally the CBO staff market the program door to door and
  establish a depot where residents can pick up the ULFT. Some CBOs also offer direct
  installation for participants or installation by local plumbers at discounted rates.

 The CBO component of the program is increasing. The CBOs distributed 10 000
 ULFTs during FY 1992 through 1993. For FY 1993 through  1994, CBOs are likely to
 distribute 63,000 ULFTs. Currently four CBOs are running ULFT programs:

       •   Mothers of East Los Angeles
       •   Koreatown
       •   First African Methodist Episcopal Church
       •   Keeping the World at Peace
 Marketing Approaches

 The program has always had several marketing mechanisms, including press
 conferences, point-of-purchase displays, bill staffers, and a LADWP newsletter, which
 is mailed separately from the water bill. According to customer research, most'
 customers learn of the program through bill staffers or the LADWP newsletter.

LADWP also made a formal presentation to one plumbing wholesaler who supplies
thousands of toilets to independent plumbers. Plumbers are quite active in marketing
the program, frequently offering to procure and install the toilet in return for the rebate
or for a small additional'charge.

                                                                   CASE STUDIES
 Because the program began during the drought, and customers were concerned about
 the mandatory rationing, marketing the program was not a problem. It basically sold
 itself. LADWP had more trouble keeping up with the program demand than with
 increasing customer awareness of the program.

 Low-income customers were significantly more difficult to reach, but initiation of the
 CBO program addressed this by having members of the community market the
 program, typically by going door to door.
 Program Budget

 The following table shows program expenses for fiscal year 1992 through 1993. The
 structure of program funding for the ULFT program has varied somewhat over time.
 Recently the process has been simplified: for the standard applications, LADWP pays
 its contractor for program administration, and pays participants $100 per toilet (single-
 family residences and condominiums) or $75 per toilet (all others).

                         ULFT PROGRAM  EXPENSES
                                FY 1992-1993
Number of ULFTs installed
Rebates to customers
Payment to MWD for CBO Program (since June 1993
Payment to contractor (program administration)
LADWP expenses (1 FIE, printing brochures, etc.)
Reimbursement from MWD (@ 50%/ULFT)
LADWP buys water from the Metropolitan Water District of Southern California
(MWD) to augment existing supplies. Formerly, under the Conservation Credit
Program, MWD would reimburse LADWP for up to 50% of the program cost, subject
to available funds. Currently MWD reimburses  LADWP $60 per toilet.

   Until recently, the CBO program funding was comparable to the standard program in
   that LADWP wrote $100 checks to the subcontractor for each toilet installed Starting
   in June 1993, LADWP created a separate agreement with MWD for the CBO program
   MWD pays for the costs up front, and LADWP reimburses MWD for its share (50%)  '
   which at this time is $55 per toilet.  Until this change was made, the CBOs were
   included under the standard program, so the numbers in Table 1 do not accurately
   separate out all payments for the toilets installed under the CBO program.

   65,167 ULFTs were installed during FY 1992 through 1993.
  Participation Levels and Water Savings

  ULFTs in Los Angeles are estimated to save 46 gallons daily in multifamily
  households and 29 gallons daily in single-family households.29 The standard program
  is currently processing approximately 4,000 ULFT rebates per month and the  CBO
  program is distributing approximately 2,500 ULFTs per month. From program
  inception in February 1990 through August 1993,  approximately 310,000 ULFTs have
 Application of Cost-Effectiveness Tests
 The following analysis evaluates the cost effectiveness of the standard program based
 on estimates that were available during the program planning stage before Phase I and
 again using the numbers that were available at the beginning of Phase II.

 The ULFT program can be described as encouraging early adoption of this technology
 f™ -ru311^ plumbinS code ^res all "natural" toilet replacements to be
 ULFTs. Therefore, some portion of lifetime savings would occur even in the absence
 of the program. This issue can be handled in several ways:

        •   The ULFT natural replacement rate can be calculated and  savings from
           those toilets can be subtracted out of the estimate of program savings;

       "   The assumed level of "freeridership" can be increased; or
^Thomas Chesnutt, Anil Bamezai, and Casey McSpadden, The Conserving Effect of Ultra Low Flush
Toilet Rebate Programs, (A&N Technical Services: June 1992).

                                                                     CASE STUDIES
       •   The assumed lifetime of the measure can be shortened in the cost-
           effectiveness analysis, thereby lowering the savings attributable to the

We have taken the latter approach and assumed a 15-year life estimate for ULFTs.

As discussed in Chapter 6, the two cost-effectiveness perspectives that are relevant to
determining appropriate incentive levels are those of the participant and the utility.
Phase I

Participant Perspective

From the participant's perspective, program costs include costs of purchasing and
installing a ULFT. Program benefits include water and wastewater bill savings, as well
as the rebate payment. We assume that participants require a two-year payback on
their investment. As discussed previously, payback period is only one factor that
determines customer participation.

In 1990, when LADWP initiated the program, the best available information did not
distinguish between ULFT savings in single-family and multifamily households. The
participant test reflected the following values:

Savings per toilet = 29 gallons/day x 365 days =
   10,585 gallons/year                                        = 14.15 ccf/year
Average marginal water rate                                  = $1.20/ccf
Average customer water bill savings/year =
   14.15 ccf x $ 1.20/ccf                                      = $ 16.98/year
Marginal sewer rate                                          = $0.75/ccf
Average customer sewer bill savings/year =
   14.15 ccf x .75/ccf                                        = $10.61/year
Average customer combined two year water
   and sewer bill savings                                      =$55.18

Average cost per installed ULFT                              = $150

   Required rebate to achieve a two-year payback
   is therefore $150 to  $55.18
                                                               = $94.82
   The Utility Perspective

  The utility perspective determines the level of incentive that the water provider can
  afford. Recall that in Chapter 6, we defined affordable incentives as those that do not
  increase the present value of the utility's revenue requirement. In this case the
  incentive cost is the cost of the rebate. The maximum allowable rebate is the
  difference between the present value of the agency's avoided water supply costs (plus
  any reimbursement from MWD) and the program costs.

  During program planning, projected administrative costs were $20/participant
  Marginal cost was $230/AF, which was the cost of purchasing MWD water  The
  program assumed a ULFT lifetime of 30 years. However, as explained earlier, we use
  a 15-year life of measure in this cost-effectiveness analysis to account for the early-
  adopter effect.                                                               J

 As  described above in the participant test,
 Swings = 29 gallons/toilet x 365 days = 'lO,585 gallons/year = .033 acre foot yearly

 Based on the $230 marginal cost of supply, an 8%  discount rate,  and a 5% escalation
 rate, the present  value of utility avoided costs over  the assumed 15-year life of the
 measure is $2774/AFY.30
 Net present value (NPV) of avoided supply costs per
   toilet = $2774/AFY x .033 AFY
 NPV of program costs per toilet
= $92
= $20
It is therefore cost-effective for LADWP to offer a rebate of up to $72, plus any
additional reimbursement from MWD. Under the Conservation Credit Program MWD
paid LADWP an incentive of $154 per acre-foot of savings over the program life In
this case, because a ULFT saves approximately half an acre-foot over its assumed 15-
year lifetime, MWD would pay $77/ULFT. Therefore the maximum cost-effective
rebate that LADWP could offer would be $149 ($72 + $77).
                           C°nSerVatiVe' beCaUSe m^inal costs h-e more than doubled in the

                                                                      CASE STUDIES
 Given the results of the participant perspective and the utility perspective the cost-
 effective incentive should be in the range of $95 to $149. The chosen level of $100
 falls within this range.
 Phase II

 When' Phase II of the program began, marginal costs had changed, water and sewer
 rates had increased, and estimates of savings per toilet had been refined to reflect
 differences in single-family and multifamily retrofits. Also, the average price of
 ULFTs had fallen considerably.  Based on the updated information, the cost-
 effectiveness analysis follows.
Participant Perspective
The following variables changed since Phase I:

Average marginal water rate per billing unit
Marginal sewer rate/billing unit
Average cost per installed ULFT
Savings per toilet
For single-family residences:

Savings per toilet = 29 gallons/day x 365 days =
   10,585 gallons/year
Average customer water bill savings/ year =
   14.15 ccf x $1.62/ccf
Average customer sewer bill savings/year =
   14.15 ccf x $1.37/ccf
Average customer combined two year water and
   sewer bill savings
= $1.62/ccf
= $1.37/ccf
= $125
= 29 gpd for single family
   retrofits and 46 gpd for
   multifamily retrofits
= 14.15 ccf/year

= $22.92

= $19.39

= $84.62
The required rebate for a two-year payback for single-family customers is therefore
$125 - $84.62 = $40.38

  For multifamily residences:

  Savings per toilet = 46 gallons/day x 365 days =
    16,790 gallons/year                                = 22.45 ccf
  Average customer water bill savings/ year =
    22.45 ccf x $1.62/ccf                               _ $35.36
  Average customer sewer bill savings/year =
    22.45 ccf x $1.37/ccf                               - $30.76
  Average customer combined two year water and
    sewer bill savings                                  = $134.24

  Since bill savings exceed the ULFT cost, multifamily customers require no rebate to
  achieve a two-year payback.
 The Utility Perspective

 The following variables changed since Phase I:

        •   Program costs at this time average SIS/participant, not including the

        •   Marginal cost is now $600/AF, which is the cost of reclaimed water; and

        •   MWD provides flat $60/ULFT reimbursement.

 Based on the $600/AF marginal cost of water, an 8% discount rate, and a 5%
 escalation rate, the present value of utility avoided costs over the assumed 15-year life
 of the measure is $7,236'.

 NPV of avoided supply costs per single family ULFT retrofit = $7,236/AFY x  033
 AFY = $239
 NPV of avoided supply costs per multifamily ULFT retrofit = $7 236/AFY x  052
 AFY = $376

 It  is therefore cost effective for LADWP to offer single-family  residences a rebate of
 up to $286 per ULFT ($239 - $13 + $60 MWD reimbursement). The chosen level of
 $100 falls within this limit.

                                                                    CASE STUDIES
 It is cost effective for LADWP to offer multifamily customers rebates of up to $423
 per ULFT ($376 - $13 + $60 MWD reimbursement). The chosen rebate level of $75 is
 well within that limit, and is not unreasonably low given that multifamily customers
 require no rebate to achieve a two-year payback.

 It is interesting to note that lower water savings per retrofit means that higher rebates
 are required by the participant because lower water bill savings require a higher rebate
 to achieve an equivalent payback. However, lower savings per retrofit translate into
 lower affordable rebates by the utility because of lower avoided costs.

 Similarly, the increase in marginal costs and corresponding increase in rates that
 occurred prior to Phase  II created opposing pressures on rebate levels. In particular,
 the higher rates make payback periods shorter, decreasing the rebate required by the
 customer. At the same time, the increased marginal costs raise the value to the agency
 of each retrofit, raising the affordable rebate. Therefore, although single-family
 customers require only $40 to achieve a two-year payback, and multifamily customers
 need no rebate to achieve  a two-year payback, it is  still a good investment for
 LADWP to offer rebates to these customers.

Program Background and Description

Home Water Savers was a door-to-door conservation kit distribution program offered
in June through October 1992 by a regional utility partnership that included the Seattle
Water Department, Seattle City Light, and Puget Sound Power and Light.. The
Bonneville Power Administration (BPA), Washington Natural Gas, and the
Municipality of Metropolitan  Seattle (METRO) (the regional wastewater agency), also
contributed financial support.

The Seattle Water Department sells water directly to residents of the City  of Seattle,
who are also served by Seattle City Light. Approximately 24% of these customers
have nonelectric water heaters. The Seattle Water Department sells water wholesale to
28 water agencies in other areas. Residents in those areas are predominantly served by
Puget Power, and approximately 60% of those customers have nonelectric water
heaters. Therefore, once the program design was complete, the two electric utilities

  covered program costs for all customers with electric water heaters and Seattle Water
  covered the cost for customers with nonelectric water heaters. In turn, Bonneville
  Power Administration reimbursed a portion of program costs for Seattle City Light.

  While conducting studies to update the conservation element of the Seattle Water
  Department's water supply plan, the Department identified efficient showerheads as
  one of the most cost-effective measures to reduce demand.31 In late 1989, the Seattle
  Water Department conducted a pilot study of 2,000 single-family homes to test
  distribution methods and installation rates of various devices. Based on the results of
  this pilot, the Water Department decided to pursue an efficient showerhead program
  using a door-to-door drop-off method. Analysis showed that the  program would be
  cost-effective even if the Water Department had to cover the entire program cost;
  nevertheless, the Water Department sought involvement from other regional utilities
  because of the energy and wastewater savings the program could achieve along with
  water savings.

  In 1991, the Bonneville Power Administration agreed to cover the cost of efficient
  showerhead distribution programs offered by its wholesale customers.  At this  point,
  Seattle City Light agreed to participate in the joint venture with the Seattle Water  '

 For several years,  Puget Power also  had been offering free efficient showerheads to
 customers (outside of the Seattle Water Department service area) who  mailed  in a card
 requesting one. Approximately 26%  of eligible customers mailed in the request cards.
 Ultimately, Puget Power acknowledged the benefits of a joint utility venture,
 particularly the public relations benefits of cooperation among all regional utilities, and
 agreed to delay implementation of its program in the  Seattle Water Department service
 territory until the joint venture could be implemented. METRO and Washington
 Natural Gas also agreed to contribute financial support.

 Participants agreed that the benefits of collaborating included:

        •   Reducing each utility's program costs;

        •   Increasing program credibility; and
 Brown and Caldwell, Single Family Pilot Residential Retrofit Project for Water Conservation
conducted by Seattle Water Department, Northeast Lake Washington Sewer & Water District  and
Municipality of Metropolitan Seattle (December 1990).

                                                                     CASE STUDIES
       •   Enhancing customer service by allowing all customers to participate
           regardless of the type of water heater.

Each element of program planning (product selection, marketing, distribution, and
evaluation) involved a committee process that included representatives from each
agency. Additionally, a steering committee and a planning committee were established
to ensure coordination and to make overall policy and management decisions.

The participating utilities  agreed that product distribution needed to be tailored to the
needs and preferences of each participating electric  utility. Therefore Seattle Water
worked with Seattle City Light and Puget Power to plan separate distribution efforts
for each electric utility's service area. The actual 1992 summer "household blitz" was
mounted by the electric utilities, which contracted with a service agency and a private
contractor to perform the  distribution.

To ensure customer satisfaction and  measure persistence, the utilities conducted an
extensive customer preference study to determine which showerhead should be
included in the kits. The study  included on-site product comparison testing as well  as a
survey component. Customers in the survey were offered six showerhead models to
choose from. The model selected for the program was preferred by 67% of the
customers surveyed.

Programs in other jurisdictions  often offer two showerheads in each conservation kit.
The program planning committee in  this case decided to include only one showerhead
in the kit, because according to the federal census, the average Seattle household has
only 1.3 showers. The committee felt that giving away more showerheads than people
could use would conflict with the Seattle anti-waste ethic, evident in the City's
aggressive recycling program. However, the committee decided to make additional
showerheads available upon request by mail or telephone. This  approach was well
received. The other items in the kit were included largely because of their low cost.
Even a relatively low installation rate for these items could achieve cost-effective

This case study focuses on the  initial phase of the program, which involved door-to-
door distribution of kits to all one- to four-unit dwellings in the Seattle Water
Department direct and wholesale service areas. The second phase, which is under way,
involves direct installation of kit measures in larger multifamily buildings, as well as
toilet leak repair.

  Program Goals

  The overall goal was reduce consumption of water and .energy resources in the
  participating utilities' service territories. High installation rate of kit devices was a
  corresponding program goal, which influenced the product selection, choice of delivery
  mechanism, marketing approaches, and other program features.

  Target Market

  The first phase of the program, from June through October 1992, targeted all one- to
  four-unit dwellings (330,000 households) in the Seattle Water Department service
  territory. In October 1992 the program began to target larger multifamily buildings.
  Commercial customers will be added to the program in 1994.
 Incentive Structure

 The program incentive was a free kit containing a variety of devices:

        «   One water- and energy-efficient showerhead (2.5 gpm)
        «   One bathroom faucet aerator (1.5 gpm)
        •   One toilet fill cycle diverter
        •   Toilet leak detection dye tablets
        •   Plumbers teflon tape
        •   An instruction booklet

 Instruction materials also asked customers to install their own glass jar as a toilet tank
 displacement device and instructed them how to do so.

 Shower-arm adapters and additional kit materials were available at no charge upon
 request. In addition, customers with electric water heaters received a kitchen faucet
 aerator with  adjustable spray when they  requested additional kits or when they brought
 their old showerhead to community centers. The cost of aerators was covered by
 Seattle City Light and Puget Power.

Free installation of devices was available to elderly or disabled customers upon their
request. (This service was requested by less than  1% of participating households.)

                                                                     CASE STUDIES
Implementation Methods

The 1989 pilot test showed that the canvass and drop-off method was the most cost-
effective approach to delivering the kits. With a door hanger as prenotification,
personal drop-off, and a follow-up visit, this approach achieved a 34% showerhead
installation rate in the pilot.  Water Department staff members felt that with a regional
marketing program, as well  as changes in the showerhead model based on the results
of the customer preference survey, the full-scale program could achieve a 42%
showerhead installation rate.

In the full program, which ran from June through October 1992, kits were delivered
free of charge, door to door, with both prenotification (postcard) and follow-up
services  (return for unused device pick-up). A private contractor distributed the kits in
the Puget Power service territory, and the Seattle Conservation Corps, which is a
division  of Seattle's Department of Housing and Human Services, delivered kits in the
Seattle City Light service territory. Telephone hotlines were established to answer
questions, solve problems, and send additional kit materials.
Marketing Approaches

The program was marketed regionally through radio advertising and newspapers. A
consultant was retained to develop the marketing and advertising plans and materials.
The advertisements provided general information and education about the water,
energy, money, and environmental resource savings from installing efficient

The advertising campaign was scheduled to run for eight weeks, to correspond with
the projected kit distribution period. However, due to changes in distribution timing
and a depleted marketing budget, advertising ran out before the end of the distribution
period. This was unfortunate, as later studies showed that installation rates were
highest during the time the program had a high level of publicity.

The participating utilities felt that program marketing was one of the most difficult
areas of program implementation in this utility partnership. They suggest obtaining
early participation agreements and consensus on program concepts before developing a
marketing plan.

  Program Budget

  The program cost, including marketing and evaluation, was $3,362,296. Seattle Water
  Department's share of that was $1,276,496. The breakdown of costs is illustrated in
  the following table.

                                PROGRAM COSTS
   Kit Items
Water Dept
Seattle City
til1-"'	•••	 	..•.
Cost per
   'Partial BPA reimbursement.
 METRO'S contribution of $100,000 and the Washington Natural Gas contribution of
 $125,000 helped offset the costs for gas and other hot water customers. Seattle City
 Light's costs include $1,226,600 in fixtures purchased directly by the Bonneville
 Power Administration.
 Program Evaluation

 Several evaluation components were included in the program plan. A Phase I survey
 which is complete, included these elements:

     •  •   A short-term survey conducted two to five months after customers received
           their kits assessed installation rates for each kit item, potential barriers to
           participation, additional purchases of conservation products, household
           conservation activities, showering and bathing habits, customer satisfaction,
           and demographic household characteristics related to showerhead use.

       •   A control group survey assessed similar information for a comparison
           group of Tacoma residents who were not given the opportunity to
           participate in the program.

                                                                       CASE STUDIES
        •    Business trends interviews assessed the type of showerhead and aerator
            products carried by wholesalers in the Puget Sound area and sales trends
            for these and other conservation products over the past six years.

A Phase n survey contacted customers one year after they received the kit to assess
the long-term retention rates for all of the kit devices. Phase IH will focus on
multifamily buildings receiving direct installation services in the Seattle City Light
Service area. This final phase will also consolidate research concurrently conducted  by
the Bonneville Power Administration, and will include an impact evaluation of energy
and water savings from all residential building types.
Installation Rates and Water Savings32

The Phase n survey33 of the completed residential program shows that 68% of
households that received the kits installed the showerhead. Within the first year, 4%
subsequently removed the showerhead, resulting in 64% still installed in 1993. The
dramatic increase in installation rate over the pilot was attributed to a variety of
factors, including the selection of a different showerhead as  a result of the customer
preference survey; a severe drought; and the marketing campaign. One-year installation
rates for the other products are as follows: faucet aerator, 44%; leak detection tablets,
31%; toilet fill cycle diverter, 32%; and glass displacement jar, 21%.

Installation rates were not uniform over time or across neighborhoods. Participants
who received their kits during the first three weeks, when the program received
maximum publicity, had the highest initial installation rates (68%). Also, there were
higher installation rates among those who first heard about the program through a
friend  or family member (66%),  television (65%), or a major newspaper (62%), than
among those who first learned about the kit  when it was delivered to their door (44%).

The primary reason the survey respondents said that they installed the showerhead was
the drought (70%) or to cooperate with the city (14%). Few  (only 7%) said that they
installed the showerhead primarily  to save money on water or energy bills. (However,
32Separate evaluations of program savings have been done in the Seattle City Light and Puget Power
service territories. To simplify the cost-effectiveness analysis, this case study uses numbers from the
Seattle City Light evaluation.

33Karen Brattegani, Seattle City Light Survey Research Report for the Home Water Savers Program:
Phase II Report, prepared by Research Innovations for Evaluation Unit, Energy Management Services
Division, Seattle City Light, (December 1993).

  respondents were only asked to give the primary reason and were not asked about
  secondary reasons.) This may reflect the high level of environmental awareness in the
  Seattle area, while bill savings may be a bigger factor in other locations. This finding
  demonstrates the limited role of economics in predicting levels of customer
  participation. As emphasized throughout this handbook, economic considerations are
  only one of many dimensions that influence program participation.
  Approximately 11% of participants who did not install the showerhead claimed that
  they already had an efficient model installed.  (On-site surveys during the pilot showed
  that customers were often mistaken about this.) Aside from that group, the greatest
  barriers to participation were lack of showerhead fit, respondents' lack of time and
  skill to install the showerhead, and respondents' preference for their own wall-mounted
  or hand-held showerheads.

  Freeridership, as explained in the preceding chapter, refers  to program participants
  who would have paid for and installed the measures even in the absence of the
  incentive program. In this case, freeridership was estimated by determining the
 proportion of Tacoma residents (the nonparticipant sample) who purchased efficient
 showerheads during the kit distribution period. Tacoma offered an unusual opportunity
 as a control group because Tacoma receives the same media advertising as Seattle so
 that those residents received the same information and advertising.  Also, Tacoma had
 similar drought conditions and lawn watering restrictions. However, Tacoma residents
 did not have free showerheads  delivered  to their homes.

 According to a survey of Tacoma residents,  a total of 9% of Tacoma  households had
 purchased a low-flow showerhead from July through November 1992. Normal
 purchasing during similar periods before  and since is approximately 3%. This leaves a
 net of 6%  of displaced purchases attributable to the program.

 Also, the showerhead program can be described as an  "early adopter" program because
 a certain percentage of showerheads normally are replaced each year,  and the
 plumbing code now requires these to be efficient showerheads. Therefore,  some
 portion of lifetime savings would occur in the absence of the program, even for
 participants who are not freeriders. This issue can be handled in several  ways in the
 cost-effectiveness analysis:

       •   The showerhead natural replacement rate can be calculated and those
           savings subtracted out of program savings;

       •   The freerider level can be raised; or

                                                                    CASE STUDIES
       •   The lifetime of the measure can be shortened in the cost-effectiveness
           analysis, thereby lowering the savings attributable to the program.

We use the latter approach in the following cost-effectiveness analysis.
Application of Cost-Effectiveness Tests

As discussed in Chapter 6, the two cost-effectiveness perspectives that are relevant to
determining appropriate incentive levels are those of the participant and the utility.
Participant Perspective

The program includes few if any economic costs to participants, other than those who
pay for toilet repairs to repair leaks discovered as a result of the use of the leak
detection tablets. Economic benefits are in the form of water, energy, and sewer bill

The magnitude of these economic benefits can be calculated from the water savings
shown in the following table.

                          WATER SAVINGS PER  KIT3
Measure " *
>Toilet bottle
Fill cycle diverter
Faucet aerator
Gallons Saved per Day
(9.56 ccf/year)
"Both the Seattle Water Department and Seattle City Light are still doing program evaluations. Final
savings estimates may change.
           Average marginal rate per billing unit = $1.36 (weighted average of peak
           and off peak rates, assuming that water savings are uniformly distributed
           throughout the year)

         •   Average customer water bill savings/year = 9.56 ccf x $1.36/ccf = $13.00

         •   Marginal sewer rate/billing unit = $2.81/ccf

         «   Average customer sewer bill savings/year = $2.81/ccf x 9.56 ccf = $26.86

         •   Average customer electricity savings = 430 kWh annually

         •   Average customer electricity rates = 3.45 cents/kWh

         •   Average customer electricity bill savings/year = $14.84

 Average customer combined annual water, sewer, and electricity bill savings = $54.70.

 In deciding whether to install the delivered devices, most customers implicitly weigh
 these economic benefits against the inconvenience and perceived adverse service

 For customers who use the leak detection tablets and discover a leak, the following
 calculation demonstrates the expected payback period for an investment in toilet

 The Seattle Water Department estimates that repairing a leaking toilet saves  13 3
 gallons daily. For participants who pay a plumber to perform repairs, we assume the
 cost is approximately $50. Payback for these customers can be calculated as follows:

 13.3 gallons/day x 365 = 4,854 gallons = 6.49 ccf
 6.49 ccf x ($1.36  +  $2.81) combined  water and sewer bill savings = $27.06

 $50/$27.06 = 1.85 years

For participants who perform the repairs themselves, we assume the cost is less than
$10.00. Payback for these participants is less  than five months:

$10.00/$27.06 = .36 year = 4.4 months

Utility Perspective

                                                                     CASE STUDIES
The utility perspective is used to determine the level of incentive that the water
provider can afford. Recall that in Chapter 6, we defined affordable incentives as those
that do not increase the present value of the utility's revenue requirement. In this case,
the incentive cost to the utility is the cost of the kit itself.

The following table estimates  the present value of the agency's avoided water supply
costs, using the results of the Phase n survey, as well as  the following information
about the water agency's marginal costs of supply.

The agency's marginal source of supply is a new  dam on the North Fork Tolt River.
The marginal cost of water is  $1.85/ccf during peak season (June through September);
this represents the levelized cost of this dam plus  transmission and distribution costs.
Off peak (October through May), the agency's marginal cost of supply is $0.25/ccf,
which represents non-capacity-related costs, such as pumping and treatment costs.
Assuming that program savings are distributed uniformly throughout the year,  the
weighted average of avoided costs is $0.78/ccf. All  calculations assume a 3% real  .
discount rate.

                                SAVINGS PER KIT

Faucet aerator
Fill cycle
One-quart glass
Toilet leak
Savings per
* v *? ? f

,. S-
Lifetime of
-* (years)

Value of
', .($/ccf) ,

.per Kit,
* -by
'The showerhead lifetime was reduced from 15 years to 10 years to account for the freerider and early
adopter effects.
•in a survey of participants in the pilot study, 15% reported that they used leak tablets; 3% (of total)
reported that they found leaks; and 1% (of total) reported that they fixed those leaks.
 The present value of the agency's avoided supply costs is $28.89 per distributed kit.
 Since the actual kit cost was only $11.75, this program is highly cost-effective to the
 utility. In fact, since the marketing, distribution, and evaluation costs were
 approximately $4.92 per kit as previously illustrated in Table 2, the agency could
 afford to spend up to $23.97 per kit ($28.89 - $4.92) on kit items.  The contributions
 of the other utilities further increase the attractiveness of the program to the Seattle
 Water Department. Thus the  utility could cost-effectively  increase the customer
 incentive to increase installation rates. Alternatively, given the apparent close
 relationship between program publicity and installation rates, these  rates could have
 also been cost-effectively improved by devoting more resources to program marketing.


The following hypothetical case  study is offered to illustrate a range of program
features that were not found in any single program surveyed. Although the numbers

                                                                     CASE STUDIES
 are not based on an existing program, they have been chosen as realistic estimates of
 what this type of program would cost and what it could save.

 This case study addresses the issue of how to structure multilevel (wholesaler-retailer-
 customer) incentives. The assumed incentive to customers will be a zero-interest loan.
 We will focus on the following questions:

       •   What form and level of incentive do customers require?

       •   Given these requirements, how much of an incentive do retailers require
           from the wholesale supplier?

       •   How much of an incentive can the wholesaler afford to pay to the retailer?
Program Description

A water wholesaler offers grants to its retail agencies to develop industrial water
conservation programs.  Grants are given on a per-acre-foot basis for anticipated
savings as described in  grant proposals submitted by member agencies.

One member agency uses this grant to implement a program targeted at medium and
large industrial users. Due to the site-specific nature of industrial water conservation,
the program has two components: a free industrial water audit to identify appropriate
measures and a no-interest loan for the installation  of recommended measures. The
grant from the wholesaler is used to seed a revolving loan fund that allows the agency
to lend at below-market rates and to subsidize the audits.
Target Market

The retail agency is a public agency with annual water sales of 300,000 acre-feet
(AF). Industrial customers represent 10% of these sales (30,000 AF). The top 20% of
industrial customers account for 80% of the demand in this customer class (24,000
AF). The program targets this top 20% of industrial customers. There are 75 customers
in this group. Average water use among these customers is therefore 320 AF/year.

 Incentive Structure

 The incentive offered from the wholesaler to the retail water supplier is a per-acre-foot
 grant. The incentive offered by the retailer to industrial customers is a free on-site
 audit to identify cost-effective conservation measures and a no-interest loan for the
 installation of some or all measures recommended by the audit. In order to minimize
 risk and maintain cash flow, the agency has determined that it does not want to lend
 money for longer than a five-year term.

 Through discussions with its industrial customers, the agency believes that a sufficient
 incentive for these customers  to participate would include no initial cash outlay, as
 well as an expectation of no negative annual cash flow. In other words, annual loan
 payments must not exceed annual water and wastewater bill savings.
 Marketing Approaches

 Program marketing relies heavily on personal contact. The water agency sends a
 direct-mail letter describing the program to each of the targeted customers, and
 advising them that they will be contacted by a water agency representative within the
 following week. Mail materials include examples of qualifying measures and potential

 Each targeted customer is then contacted by telephone to see if the company has any
 interest in participating. An in-person meeting with an agency representative is
 scheduled with each customer who expresses interest. Notices about the program are
 also sent to trade associations and industry groups.
implementation Methods

The water agency retains a contractor to conduct the water audits. Once a customer
has expressed initial interest in participating, the contractor performs a walk-through
audit to estimate whether there will be significant water savings available. The agency
representative meets with the facilities manager to explain the details of the program.
Once the agreement is signed, the contractor schedules the facility audit. Results of the
audit and  recommendations are presented in a meeting with the facility manager and
other appropriate individuals. The customer then prepares  a loan application to finance
particular  recommended measures.

                                                                     CASE STUDIES
 Water Savings

 Measures implemented and savings achieved by customized industrial programs vary
 widely. A study of industrial water conservation in the City of San Jose, California,
 showed available savings of 30% to 40%. Industrial audits conducted for the East Bay
 Municipal Utilities District, California (EBMUD), indicated average savings of 15%.
 Savings in this hypothetical program are assumed to average 20%. Since the average
 water use in the target market is 320 AF/year, average annual savings would be 64
 AF/participant, or a total potential savings of 4,800 AF annually.
 Application of Cost-Effectiveness Tests

 The retailer has determined that loans will be of five-year duration and carry no
 interest. How large a loan must customers receive in order to participate? How large a
 loan can the utility afford? In what ways must the program design change to
 accommodate both perspectives? Finally, how great a grant can the wholesaler afford?

 To address these questions we rely on the various perspectives of cost-effectiveness
 analysis. We begin with the following assumptions.

       •   Industrial retail marginal water rates                = $250/AF
       •   Industrial retail marginal wastewater rates           = $750/AF
       •   Retailer's current  marginal cost of supply           = $300/AF
       •   Wholesaler's marginal  cost of supply               = $400/AF
       •   Average capital cost per acre-foot of annual
           conservation savings                              = $10,000
       •   Agency audit and administrative costs per
           acre-foot of annual conservation savings            = $200 ($12,800 per
       •   Average longevity of savings                       = 15 years
       •   Discount rate                                     = g%
       •   Annual escalation rate                             =3%
Participant Perspective

In order to meet the customers' need for nonnegative annual cash flow, annual loan
payments must be limited to $l,000/acre-foot-yearly (AFY), which is the sum of the
water and wastewater rates faced by the customer. Thus, the loan amount must be

  limited to $5,000. However, the average $10,000/AFY cost of conservation yields a
  $2,000 annual payment. Therefore, as long as rates stay at their current levels, these
  terms would not be sufficient incentive to encourage this customer to participate in the
  For the program to be attractive to the participant, the retailer could offer an up-front
  grant, such that the annual payment on the remaining loan is equal to the value of
  annual water and wastewater bill savings. In this case, the agency would have to offer
  a $5,000 grant and a $5,000 loan.
  Retailer Perspective

  From the retailer's perspective, the costs of the program are the audit and
  administrative costs, the foregone interest on the loan, and the cost (if any) of a grant.
  The benefits of the program are the avoided costs of new supply.

 Based on the $300 marginal cost of supply, 8% discount rate, and 3% escalation rate
 the present value of the avoided supply costs over the 15-year assumed savings term is
 $3,145/AFY. The present value of the incentive required by participants is:

       $1,005 + $5,000 = $6,005/AFY

 (Note that $1,005 is the present value of the foregone interest on a $5,000  zero-interest

 When the audit and administrative costs are added to this, the total revenue
 requirement is $6,205/AFY. The retailer therefore requires $3,060 ($6,205 - $3,145) in
 additional incentive from the wholesaler.

 Wholesaler Perspective

From the wholesaler's perspective, the cost of the program is the payment to its
retailers, and the benefits of the program are the avoided costs of new supply. We
assume the variable portion of administrative costs associated with the program is

Based on the wholesaler's $400 marginal cost of supply, the 8% discount rate, and  3%
escalation rate, the present value of the wholesaler's avoided costs over the assumed

                                                                    CASE STUDIES
15-year savings term is $4,193/AFY. This is the maximum payment that is cost-
effective from the wholesaler's perspective and exceeds the $3,060/AFY required by
the retailer. Thus the wholesaler can afford the incentive that the retailer requires to
meet the perceived needs of the customers.


                                  Chapter 8

 Customer incentives are designed to encourage program participation by helping
 customers overcome barriers that limit their participation. Given the wide range of
 possible incentives, it is important to understand these barriers so that incentives can
 be designed and marketed appropriately.

 This handbook describes various customer incentives and explains some of the factors
 that make certain types of incentives more effective than others in different situations.
 This information can broaden the range of options that a water agency considers
 offering to its customers, as well as help narrow that range to the most appropriate
 choices. However, detailed information about customers' water use patterns, and the
 customers' specific needs and preferences, can be tremendously helpful in designing
 and marketing effective incentive programs.

 The search for this type of information is a form of market research. Market research
 can help water agencies to design conservation programs by illuminating:

       •   The water uses to target;
       •   The barriers to conservation for those water uses;
       •   The incentives that will help customers overcome those barriers; and
       •   The manner in which to market the incentive program to reach the targeted

In the past, few water agencies have considered market research relevant to their
mandate of providing customers with a reliable, high-quality water supply. However,
that mandate increasingly requires the active consideration of conservation as a
resource alternative. In many cases, conservation offers a cost-effective,
environmentally benign source of water supply.

One way in which conservation differs from traditional water supply resources is that
conservation often depends on voluntary customer participation. For this reason, water
agencies must learn to behave more like private businesses: they must recognize
customer needs and preferences, understand how their customers use water, and use
this information to create and market conservation programs. Market research can help
identify these customer needs, preferences, and water use patterns.

   Market research is a complex undertaking and cannot be covered in depth within the
   scope of this handbook. Rather, the purpose of this chapter is to provide a general
   introduction to some of the types of research that agencies may want to conduct to
   help design more effective incentive programs and, indeed, to help better meet the
   needs of customers. Agency staff should consult other sources before actually
   developing and conducting this research.

   Market research can be conducted in several ways:

         •   Literature reviews—searching for and reviewing relevant studies and
             evaluations, including research that has been done by water  agencies,
             research institutions,  and academic institutions. Lessons learned from
             literature reviews should be applied with caution; the needs, preferences
             and behaviors of one agency's customers may not predict all customers''
             responses to an incentive program.

         •    Focus groups—assembling a representative group of customers and
         •    hosting a structured discussion, with a moderator trained to ask questions
             and probe for answers.

         •    Customer surveys—developing a set of questions that may be
             administered to customers by mail, telephone, or in person.

        •   Analysis of observed behavior—reviewing available information on
            customer reaction to and participation in conservation programs, including
            current and past programs of the agency conducting the analysis and those
            of other agencies.

 The bulk of this section focuses on customer surveys, which are the most widely used
 form of market research. It is important to note an inherent limitation of this type of
 survey research: self-reports may differ from reality. Participants may try to give
 responses that they believe reflect upon them favorably, rather than reporting their
 actual beliefs or behaviors. To the extent that external verification is possible (for
 example, by on-site visits to confirm presence of conservation  devices), it strengthens
 credibility  of the survey  results.

 Where appropriate, this section also points out how the other approaches  which
 generally require a smaller commitment of agency resources, may also provide
 valuable insights into customer preferences. Ultimately, a water agency has to balance
its expenditures on market research against other program expenditures. However

expenditures on market research should be viewed as an investment that can boost the
effectiveness of the planned incentive program as well as future incentive programs.

A water agency could collect a large amount of potentially useful customer
information. How much of this information to collect depends on the needs and
resources of the agency and the agency's existing level of knowledge. This chapter
presents a range of research alternatives that represent varying levels of knowledge,
complexity, and expense. More sophisticated analyses are best built upon the
foundation of knowledge that can be obtained by more basic research.

This section discusses the following research questions:

       •   How do customers use water?

       •   What are customers' attitudes toward and knowledge of water use and

       •   How do customers make appliance/equipment purchase and use decisions?

       •   How do water needs, preferences, and attitudes differ among subgroups of

       •   Which incentive program designs are most likely to  encourage customer

For each of these research questions, we discuss what type of information will be
obtained by focusing research on each of these questions, why each type of
information is useful in designing incentive programs, and how  to get this information.
How Do Customers Use Water?

A water use survey can help determine the purposes for which customers use water
and how much water they use for each of those purposes. Electric utilities have
compiled detailed information regarding customer uses of electricity, but water

   agencies, for the most part, do not have this type of information regarding current
   water use patterns. A few agencies have started to collect and use this information.

         City of Phoenix, Arizona.  In 1990 and again in 1993, Phoenix conducted a
         survey on customers' water use patterns and attitudes toward conservation. This
         survey covered such topics as how many baths and showers are taken weekly;
         how many loads of laundry are done at home weekly; how often the
         dishwasher is run; whether the bathroom has ULFTs, toilet tank displacement
         devices, or low-flow showerheads; and how often landscaping is watered and
         with what method.  Phoenix uses this information as a barometer to evaluate
         trends in public awareness and attitudes toward water conservation. Results of
         the survey help determine how future efforts are directed.

        Marin Municipal Water District (MMWD), California. MMWD is
        conducting a water  conservation baseline study that will serve as a basis for
        proposing water efficiency and conservation programs. The  study will:
        determine the level  of water efficiency and conservation measures in place and
        their effect on use; assist in identifying efficiency and conservation
        opportunities; aid in gaging consumer receptiveness to various conservation-
        related programs; and provide a basis for an ongoing demand monitoring

 Why Is This Information Useful for Program Design?

 Identifying customers' water use patterns is a logical first step in market research for
 any agency that does not have this information. Understanding the use patterns of
 water users can help to target specific water uses in conservation programs For
 example, if landscape watering is a large component of usage, then  offering incentives
 for water-efficient landscaping or efficient irrigation systems might be an effective
 approach to conservation.  Similarly, if many industrial customers have cooling towers
 then a workshop on cooling tower efficiency improvements might be a wise
 investment of resources.

 How Can an Agency Obtain This Information?

A literature review can prevent duplication of effort by compiling the research
results—including customer  surveys and program evaluations—of other water

agencies. While a literature search may provide some information on general water use
patterns of customers, an agency survey of its own customers will provide a more
accurate view of water use in that agency's territory. This type of survey can contain
questions regarding building structure, equipment ownership, and customer habits.
Possible questions  for residential customer surveys include the following:

       •    Does your home have a dishwasher? If so, approximately how old is it?
           How many loads of dishes are washed per week?

       •    Does your home have a washing machine? If so, approximately how old is
           it? Is it top loading or front loading? How many loads of clothes are
           washed per week?

       •    How many showers are in the house? Do any of the showers have flow
           restrictors or low-flow showerheads?

       •    If you have a car, how frequently do you wash it at home?

       •    Do you have a swimming pool or spa/jacuzzi?

       •    Is there an on-site well? Is it  used for indoor uses, outdoor irrigation, or

These questions are offered as examples of the topics that a water use survey could
cover. They are not exhaustive, nor are they presented in any particular order. The
actual wording, format, and layout of questions  are all important components of survey
design. These sample questions—as well  as sample questions presented throughout this
chapter—should not be used without review and modification as necessary for your
Customer Attitudes Toward and Knowledge of Water Use and

The second level of information pertains to customers' attitudes toward and knowledge
of water use and conservation. This type of analysis can reveal:

       •   The accuracy of customers' perceptions regarding their level of water use;

       •   Their knowledge about alternatives to their current use patterns;

            Their sources for this information; and

            The perceived barriers to modifying water use patterns (e.g., technological,
            financial, informational, temporal, perceived risk, or institutional).
 Why Is This Information Useful for Program Design?

 Determining customers' attitudes is an important step in revealing potential barriers to
 conservation, as well as in identifying the appropriate incentives that will help
 overcome those barriers. Identifying customers'  sources of information will help
 determine effective points of intervention to change attitudes and perceptions. For
 example, if customers think that ultra-low-flush  toilets (ULFTs) don't work well, and
 that information is coming from retailers, then working to educate retailers can be a
 cost-effective way to increase the success of a ULFT program. If customers perceive
 financial barriers to conservation, then economic incentives should encourage
 participation. If they don't have information on how to conserve water, then
 informational incentives could be more effective.
 How Can an Agency Obtain This Information?

 Some valuable information about customer attitudes and perceptions can be gauged by
 analyzing the preferences revealed in past behavior. For example, the low participation
 rates of industrial customers in water conservation rebate programs indicates that total
 costs may  not be as important as other factors, such as perceived risk, for this
 customer class.

 Focus groups can also be a particularly effective way to determine the underlying
 attitudes and knowledge of customers. Water agencies can assemble groups of
 customers  to discuss water use and conservation. A trained moderator can encourage
 participants to elaborate on then- responses in order to elicit the attitudes and beliefs
 that engender those responses. Focus groups do not provide details on the number of
 customers with a given attitude or  belief, but they can identify many of the water
 issues and  concerns that  are important to customers.

A survey can also be used to assess attitudes and knowledge. For example, one type of
question that might be included in  this type of survey could be:

       On a scale of 1 (strongly disagree) to 5 (strongly agree), please rate the
       following statements:

           I'm skeptical about water-efficient equipment because I know
           people who have had trouble with it.

           I don't know enough about many of the water-efficient technologies.

           Water-efficient technologies cost too much to install.

           Water-efficient technologies save enough in water bills to pay for
           the extra initial cost in a few years.

           Most of our plumbing fixtures and appliances are already water-
How Do Customers Make Appliance/Equipment Purchase and Use

The next level of complexity is to probe the decision-making mechanism for
purchasing and using water-related appliances. This type of research attempts to
identify the roles of all parties involved in decision-making and what factors they take
into consideration.
Why Is This Information Useful for Program Design?

What are the primary factors that customers consider when purchasing new appliances
or equipment? Who is involved in making purchase decisions? Is initial cost the
primary factor or is reliability of the equipment paramount? Understanding customer
purchase and use decisions should help illuminate barriers to efficient water use and
identify what types of incentives would be likely to encourage program participation.
For example, if up-front cost is the major factor in  selecting equipment, then a low-
interest financing program may encourage the customers to select water-efficient

This type of research could be particularly valuable for encouraging conservation in
new construction, because that is when many appliance  and water fixture purchases are
made. This information can also help reach commercial/industrial/institutional

   customers, who may have multiple levels of management involved in purchasing
   decisions. Illuminating the roles and concerns of those different parties involved in
   purchase decisions can help an agency better address those concerns.

   How Can an Agency Obtain This Information?

   Focus groups and surveys can be used to obtain information on equipment/appliance
   purchase and use decisions. For example, two survey questions for a commercial/
   industrial customer might include:

         On a  scale of 1 to 5 (where 1 means not at all important and 5 means
         extremely important), how important is each of the following in your
        firm's decision to purchase equipment:

             Compatibility with existing equipment
             Initial purchase price
             Operating cost
             Payback period
             Recommendation of supplier or contractor
             Reliability or life of equipment
             Availability of equipment

        What is the maximum payback period that you require to justify an
        investment in water-efficient equipment?

. A substantial  amount of research has been done on consumer decision making;
 however, the decision-making process is still not well understood. One problem with
 trying to gain  insight into how customers make decisions is that responses to direct
 questions may not reflect actual behavior. In particular, people are likely to report a
 higher level of conservation awareness than actually figures into their decision. A
 partial solution is to question customers about past purchases. Asking them to report
 what they did  in fact consider when making a specific purchase—rather than asking
 hypothetical questions  about what they would consider—may provide more accurate
 responses, because customers can report on an actual occurrence rather than idealizing
 how they would like to behave in a future situation.

 Research on water use  patterns, attitudes and knowledge, and decision making can be
 combined, if desired, into one research phase. Another approach is to stage the
 research: first,  conduct a literature review to identify issues;  second, conduct focus

 groups to structure the types of responses consumers have to the issues; third, conduct
 a survey of a random sample of customers in order to generalize the results to the
 entire population. An alternative plan is to survey a subset of customers (e.g., those
 with swimming pools) in depth regarding attitudes and decision making.

 The next two types of market research are more complex and represent a significant
 leap in analytic sophistication. These techniques should follow and build upon a base
 of information gained by conducting more basic research.
 How Do Water Needs, Preferences and Attitudes Differ Among Customer

 Market segmentation is the process of classifying groups of consumers within an
 overall market into groups with similar needs and preferences, and then targeting
 product development and marketing toward the satisfaction of those needs. This is a
 widely accepted practice in the business world and is becoming increasingly popular
 among energy utilities.

 The essentials of market segmentation involve:34

       •   Identifying customer segments that—by virtue of distinct characteristics
           such as needs, attitudes, use patterns,  demographics, etc.—represent
           opportunities for distinct marketing programs;

       •   Selecting particular segments to target; and

       •   Developing and positioning for those  segments  offerings that will cost-
           effectively satisfy customer and  utility objectives.

The following discussion  draws heavily on the Electric Power Research Institute
(EPRI) market segmentation program called CLASSIFY.™ EPRI has the most
extensive utility-related experience with market segmentation research, and CLASSIFY
represents a state-of-the-art market segmentation program. While CLASSIFY cannot
be used by water agencies for the purposes of program planning (because the
34D. Chakravarti, P. E. Hendrix, and W. L. Wilkie, Market Segmentation Research, Vols. 1 and 2 (Palo
Alto, Calif.: Electric Power Research Institute, 1987), Monograph 3.
John Berrigan and Carl Finkbeiner. Segmentation Marketing: New Methods for Capturing Business
Markets (New York: HarperBusiness, 1992).

  information it contains is energy specific), it still offers a valuable model for
  understanding what market segmentation is and why it can be helpful in program
  Why Is This Information Useful for Program Design?

  Underlying needs and preferences that guide such decisions as whether or not to
  participate in a conservation program may vary widely within traditional customer
  classes. For example, some residential customers may base then- decision purely on
  economics, while others are motivated by environmental consciousness. EPRI market
  research found that for 85% of the participation decisions examined in a national
  survey of customers, energy needs characteristics such as convenience or safety
  predicted program participation more accurately than  demographic characteristics such
  as income and education.35 (EPRI,  1989)

  A segmentation study can determine the distribution of customer needs within
  particular classes. .A water agency can then more  appropriately design incentives and
  market programs to particular segments. For example, a water agency could use needs-
  based segmentation to develop a plan for encouraging residential customers to install
  low-water-use landscapes. If the segmentation study showed that budgetary concerns
  for a certain group of customers were of less importance than aesthetic concerns, a
  rebate would probably be a less cost-effective incentive than a series of xeriscape
  workshops that emphasized how pleasing the resulting landscape would be.

  How Can Water Agencies Get  This Information?

 The methodology for market segmentation analysis requires surveying customers'
 responses to a variety of statements regarding their water-use needs or preferences.
 The first step is to determine the different needs and concerns that water customers
 identify as important. This can be done using focus groups or one-to-one interviews.
 The second step is to use the issues raised by the focus groups or interviews to
 generate survey questions. The survey asks  customers  to use a rating scale to respond
 to statements that reflect their water needs and preferences. The survey does not ask
  National Analysts (Philadelphia, Penn.), Synergic Resources Corp. (Bala Cynwyd, Penn.), and QEI,
.Inc. (Davis, Calif.), Residential Customer Preference and Behavior: Market Segmentation using
 CLASSIFY™, EPRI EM-5908 (Palo Alto, Calif.: Electric Power Research Institute, March 1989)

 directly about any water conservation program, but rather asks participants to rank
 statements such as:

            I shop around for appliances to make sure I'm getting the best

            I track my monthly water bills very carefully.

            I like  the convenience offered by lots of different cycle and water
            level controls on a washing machine.

 The survey provides more detailed information than the initial interviews or focus
 groups because of the larger sample size and also because the more general statements
 raised by the focus groups are disaggregated into more specific statements to which
 survey participants are asked to respond.

 Using a technique known as factor analysis, the responses to the survey questions are
 sorted into common ideas or concepts. Factor analysis assumes that a respondent's
 ratings of the statements depend on underlying needs. The larger number of statements
 included in the survey can then be narrowed down to a smaller number of underlying

 For example, the EPRI CLASSIFY model identified the following personal benefits
 and concerns relating to energy use:36

       •   Convenience
       •   Enthusiasm for high-tech products
       •   Comfort
       •   Appearance
       •   Conservation and budgetary issues
       •   Personal control
       •   Safety
       •   Search minimization
       •   Task-oriented versus area energy use (e.g., individual  lights for different
           parts of a room rather than overhead lighting)

We would  expect a comparable list developed for water use to include some similar
dimensions; it would also likely include some different ones.
36National Analysts, et el.

   Using an analytic technique known as cluster analysis, customers are then grouped
   together on the basis of their survey responses. Customers classified in the same
   segment share similar perceptions and needs, and differ from customers in other
   segments regarding those perceptions and needs. The EPRI study identified the
   following six energy-needs-based segments:37

         •   Pleasure seekers—like all of the benefits: comfort, safety, appearance,
             personal control, convenience, and high-technology.

         •   Appearance conscious—more concerned with the image and aesthetic
             benefits of new appliances, and less concerned about budget and
             conservation issues.

         •   Resource conservers—more concerned than most other customers with
             conservation and budget issues, and willing to relinquish control of their
             household energy use in order to conserve energy.

        •    Lifestyle simplifies—exhibit less concern with comfort, convenience, and
             new technology than any other segment.

        "   Hassle avoiders—interested in avoiding the effort and costs of searching
            for programs, products, and services.

        •   Value seekers—willing to  accept search costs in pursuit of other

 Again, these categories may not be definitive for water-related needs, but rather are
 illustrative of the concerns that may motivate customers.

 One limitation of market segmentation  is that segments must still be correlated with
 observable characteristics in order to reach a given segment. (It's hard to send out a
 mass mailing addressed to "hassle-avoiders.") However, the segmentation analysis will
 enable the agency to significantly improve the targeting of its incentives, as well as its
 overall  conservation program design and marketing.
"National Analysts, et al.

 Which Incentive Program Designs are Most Likely to Encourage Customer
 Segmenting the market enables utilities to determine the general types of incentives
 that may or may not be appropriate for particular groups of customers. However, it
 does not address the issue of the specific incentive features that do a better or worse
 job in encouraging customers to take part in a conservation program. One way to
 obtain this information is to survey a sample of customers and ask program
 participants to rank the reasons they chose to participate. Similarly, an agency can
 survey nonparticipants and ask why they have not participated and what incentives
 might encourage their participation.

 Such a customer survey is relatively easy and inexpensive to perform and can provide
 useful information. Nevertheless, its results must be interpreted with caution. Customer
 self-reports of reasons for doing or not doing something (in this case participating in a
 conservation program) are generally not particularly reliable.  For this reason
 researchers often rely on a technique known as conjoint analysis, which attempts to
 replicate the trade-off process customers use when making such decisions. This type of
 analysis attempts to clarify  the structure of respondents' preferences among multi-
 attributed product or program options, in this case the features of an incentive

 Unlike market segmentation surveys—which ask customers to respond to general
 statements  regarding water use—conjoint analysis surveys ask them to react to specific
 program configurations and reveals the relative contribution of each feature to a
 customer's preference for the product.  The term "conjoint" refers to the fact that
 customers are reacting to a  combination of program features,  rather than evaluating
 each attribute  separately.
Why is this Information Useful for Program Design?

This information can be used to predict individual respondents' reactions to a variety
of incentives or programs. It can also help illustrate the trade-offs that customers are
willing to make. For example, assume that a water agency determined, for an
identifiable customer group, that the key barrier to participating in a ULFT retrofit
program was an unwillingness to assume the financial risk of potentially unrealized
water use reductions and attendant bill savings. The most cost-effective incentive then
might be some type of shared-savings program—whereby the agency assumes a
portion of that risk—rather than a rebate program. Alternatively,  the agency might

  structure a program that guarantees a particular (e.g., two-year) payback on the initial

  If we assume, in contrast, that the most important barrier is a lack of convenience or
  availability, then a direct installation program will probably obtain a higher
  participation rate.
  How Can an Agency Obtain this Information?

  The methodology for conducting a conjoint analysis is as follows:

        •   Identify relevant incentive attributes;

        •   Construct a set of hypothetical incentive program designs;

        «   Ask respondents to rate the options individually or to rank order

        •   Calculate the relative value of each attribute level (e.g., how changes in a
            rebate level influence a customer's preference for purchasing a ULFT);

        «   Calculate the importance of each attribute relative to other attributes; and

        •  Estimate customer program preferences or estimate program participation
           by market segments.

 For example,  industrial customers might be given the following three options for a
 particular piece of equipment and be asked to rate how likely they are to purchase and
 install the item.
Option #1
Purchase price
Utility rebate
Monthly bill discount
Monthly operating cost

Option #2
Purchase price
Utility rebate
Monthly bill discount
Monthly operating cost
Option #3
Purchase price
Utility rebate
Monthly bill discount
Monthly operating cost
Customers are given the same items of information for each option (e.g., purchase
price, monthly operating cost), but the value or level of each feature varies. By
changing one or two feature levels in each option, researchers  can isolate and quantify
customer preferences regarding the relative importance of each feature and how
changes in each feature affect customer preferences for that product.

Survey design and administration is a broad and complex field that is beyond the
scope of this handbook. In general, agencies that decide to proceed with customer
surveys must be cognizant of at least the following issues:

       •   Sample selection. The first step in sample selection is to identify the
           relevant population from which to draw the sample. The second step is to
           select a subgroup that represents that population. This involves  selecting
           participants in such a way as to ensure that any member of the  population
           being sampled has an equal likelihood of being selected for inclusion in
           the sample. This is important in order to obtain results that are
           generalizable from the sample to the larger population.

              Survey participation.  High participation is important for the quality of
              results. If only a small percentage of the selected sample actually
              completes the survey, then the results might reflect a so-called
              "nonresponse bias," with nonrespondents differing in some important ways
              from respondents. The results might then not be generalizable to the larger
             population. There are many survey design  and administration techniques to
             minimize this problem.

             Survey design.  Survey questions must be carefully worded to elicit the
             desired information while minimizing the effort required of participants
             Ideally, surveys should be pretested to ensure that participants understand
             the questions as they are intended, and to avoid unforeseen difficulties with
             survey completion.

             Survey administration.  Surveys can be administered in person, by
             telephone, by mail, or with some combination of these. Issues to consider
             include cost and time constraints, the compatibility of the administration
             technique, and the complexity of the survey instrument. Selection and
             training of interviewers must be done carefully to  ensure uniform survev

            Data analysis. Volumes have been written on the subject of analyzing
            survey data. As a rule, the rigor and depth of the analysis should  be
            determined by the types of conclusions to be drawn and the type  of data
            that have been collected.  Thus, the  form of the  data analysis and the design
            of the survey instrument must be considered simultaneously, rather than

An incentive program will be effective only if it encourages customers to participate
Obtaining information on how customers use water, and their attitudes and preferences
toward water use and conservation, will help water agencies select appropriate
incentives to which customers will respond.  The following techniques may help a
water agency obtain this information:

       •   Market research on water use patterns, customer attitudes and knowledge
           and decision-making procedures;

        •   Market segmentation to identify customer submarkets; and

        •   Conjoint analysis to determine the relative importance customers place on
            the various features of a multi-attributed product.

 Market researchers have spent many years analyzing customer purchasing patterns, but
 these decisions are still imperfectly understood. Market research will not provide the
 answer to designing the perfect customer incentive program. However, the additional
 information from this research should help water agencies design incentives that
 address the specific needs of its customers.

               Appendix B

         Appendix A
       - RESPONDENTS -


                 Appendix A:  SURVEY OF WATER
                          - RESPONDENTS -

David Schultz
Water Conservation Coordinator
City of Glendale
6210W. Myrtle, Suite 112
Glendale, AZ 85301-1700
(602) 930-2710

Timothy Edwards
City Utilities Supervisor
City of Goodyear
119 North Litchfield Road
Goodyear, AZ 85338

Ann Testa
Water Conservation Supervisor
City of Mesa
P.O. Box 1466
Mesa, AZ 85211-1466
(602) 644-3058
Jane Ploeser
Water Conservation Coordinator
City of Phoenix
455 N. 5th St., 3rd Floor
Phoenix, AZ  85004
(602) 261-8366

Tom Arnold
Tucson Water
P.O. Box 27210
Tucson, AZ  85726-7210
(602) 791-4331

James Gonzalez
Water Conservation Representative
City of Fresno
Water Conservation Program
1910 E. University
Fresno, CA  93703
(209) 498-1016
Jane Siguenza/Monica Villasenor
City of Palo Alto Utilities
P.O. Box 10250
Palo Alto, CA 94303
(415) 329-2241

   California (continued)
   Christ! Robinson
   Conservation Program Specialist
   City of Pasadena—Water & Power
   150 S. Los Robles, Suite 200
  Pasadena, CA 91101
  (818) 405-4728

  Bob Burkhart/Neal Van Keuren
  City of San Jose, Environmental
     Services Department
  777 N. First St., Suite 450
  San Jose, CA  95112
  (408) 277-5533

  Susan Munves
  Conservation Coordinator
  City of Santa Monica
  200 Santa Monica Pier, Suite C
  Santa Monica,  CA  90401
  (310) 458-8229
 Barbara Sarkis
 Water Conservation Coordinator
 Contra Costa Water District
 1330 Concord Avenue
 P.O. Box H20
 Concord, CA  94524
 (510) 674-8136

 Richard Bennett
 Water Conservation Manager
 East Bay Municipal Utility District
 375 llth Street
 Oakland, CA 94607
(510) 287-0590
   George Martin
   Water Conservation Manager
   Los Angeles Dept.  of Water & Power
   P.O.Box 111, Room  1348
   Los Angeles, CA 90051-0100
   (213) 481-6160

  James Fryer
  Water Conservation Coordinator
  Marin Municipal Water District
  220 Nellen Avenue
  Corte Madera, CA 94925-1169
  (415) 924-4600

  Kathy Gibson
  Associate Resource Specialist
  Metropolitan Water District of Southern
 Two California Plaza
 350 S. Grand Avenue
 Los Angeles, CA 90071
 (213) 217-7295

 Lisa Dondick
 Water  Conservation Coordinator
 Mountain View Water Conservation
 231 N. Whisman
 Mountain View, CA  94043
 (415) 903-6217

 John Olaf Nelson
 General Manager
North Marin Water District
999 Rush Creek PI.
Novato, CA  94948
(415) 897-4133

 California (continued)

 Vickie Driver
 Water Resources Assistant
 San Diego County Water Authority
 3211 Fifth Avenue
 San Diego, CA 92103
 (619) 297-3218


 Chris Call
 Conservation Specialist
 Denver Water
 1600 W. 12th Avenue
 Denver, CO 80254
 (303) 628-6343


Wendy Nero
Water Conservation Manager
Tampa Water Department
306 E. Jackson St., 5E
Tampa, FL  33602
(813) 223-8653


Frank Gradilone
Resources Planning Analyst
Spring Valley Water Company
200 Old Hook Road
Harrington Park, NJ 07640
(201) 767-2857


  Warren Liebold
  Director of Conservation
  New York City Department of Environmental Protection
  BWEC—7th Floor
  59-17 Junction Blvd.
  Corona, NY  11368-5107
  (718) 595-6656


  Cynthia Dietz
  Conservation Program Manager
  City of Portland, Bureau of Water Works
  1120 S.W. 5th, 6th Floor
  Portland, OR 97204
  (503)823-7421  .


  Tony Gregg                               Cnris Powers
 Water Conservation Program Manager        Water Resources Manager
 City of Austin—E.C.S.D.                   San Antonio Water System
 206 East 9th Street, Suite 14.127             lOQl E. Market Street
 Austin, TX  78701                         P.O. Box 2449
 (512) 499-3557                            San Antonio, TX  78298-2449
                                          (210) 225-7461
 David Plaisance II
 Director of Utilities
 Clear Lake City Water Authority
 900 Bay Area Blvd.
 Houston, TX  77058


Kim Drury
Manager, Conservation Office
Seattle Water Department
Dexter Horton Building,  11th R.
710 2nd Avenue
Seattle, WA  98104
(206) 684-5879

               Appendix B


















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