Performance contracts and outside consultants help municipalities fund and repair infrastructure.
When officials with the city of Mount Vernon, IN, offered Chuck Gray the position of water superintendent, Gray’s first instinct was to walk away.
That might have seemed like an odd position to take. After all, the move to superintendent was a step up for Gray. But as head of another Mount Vernon city department, Gray knew all about how the water department was operating. And, he didn’t like what he saw.
“That place was a train wreck,” says Gray. “I didn’t want to deal with it. We were having systemwide boil orders every three months. The city hadn’t spent the money to keep the water system up; it was literally falling apart.”
How bad was it? Gray had to stick bubblegum and tape over a hole in one of the main intake pipes leading into the city’s water treatment plant. It was the only way he could stop the pipe’s persistent leak.
“They had to work with what they had at the time,” says Gray. “Back then, everything was duct tape and baling wire. Unless, of course, we were using gum.”
Times have changed in Mount Vernon. Today, this city, located along the bend of the Ohio River in the most southern point of Indiana, boasts a state-of-the-art water system. Since Gray became water superintendent in 2005, the city has installed new, more accurate water meters. It has replaced outdated dissolved air flotation units and installed a temporary intake system.
And because Mount Vernon and outside contractor Glendale, WI-based Johnson Controls worked together under a performance contract, the city has been able to pay for these costly improvements through the increased revenue and savings generated by those improvements.
Johnson Controls employees worked with Gray and his water department staffers to design the improvements to the city’s water system. Johnson Controls also devised the performance-contract system that allowed a city operating under budget limitations to afford the significant changes it needed to safely and efficiently deliver water to its business and residential customers.
Mount Vernon, though, is not an unusual case. A growing number of municipalities are working with outside consultants and engineers to complete infrastructure and conservation programs. And increasingly, these municipalities are seeking performance contracts to provide them with budget relief.
Under such contracts, the revenues generated from infrastructure improvements pay for all or much of the repairs necessary to update aging water systems. Companies offering these contracts guarantee a base level of savings every year. If these savings aren’t realized, the companies promising them make up the difference.
This allows municipalities to take on improvement projects knowing ahead of time exactly how long it will take them to pay back their costs. In Mount Vernon, city officials know that they will generate enough additional revenue and savings every year to pay back the total cost of the water system infrastructure project in 15 years. After those 15 years are up, the city will be able to invest those increased revenues back into their system or use them to cover the costs of other projects.
“Performance contracts are an easier sell to municipalities,” says Troy Knight, president of Kansas City, MO-based RTS Water Solutions. “And this is important because so many municipalities are working with aging infrastructures. They have a serious need to replace that infrastructure. Performance contracts allow them to do that. There has been enlightenment with regard to utility directors and those who run municipal utility departments that they need to make these investments because of the age of their infrastructure. Signing performance contracts with outside consultants can help them do this without stretching their budgets even more than they already have.”
Saving Dollars in Florida
Knight says that municipalities face a tremendous need today for improvements to their water distribution systems. Many municipalities are losing a steady stream of dollars because of old pipes with large leaks. Others are relying on old water meters that no longer accurately chart the amount of water that residential and commercial properties are consuming. Other systems are plagued by sharp pipe bends that make pumps work harder and consume more energy. While others, like in Mount Vernon, are issuing regular boil orders that aggravate and inconvenience residents.
At the same time, municipalities across the country are facing tight budgets as cities and towns strive to provide services in an economy that is still struggling. City and town councils are no longer as open to costly infrastructure projects, at least not when city departments are still facing layoffs, cutbacks, and budget shortfalls. This leaves the perfect environment for performance contracts and infrastructure work performed by outside contractors offering these contracts.
Consider automated meter reading (AMR). This technology can generate hundreds of thousands of dollars in new revenue for municipalities with outdated, inaccurate water meters. But Knight points to studies that show that this technology has only hit about 8% of the water-metering market. This means that RTS can target plenty of water districts that would make prime targets for a performance-contract-fueled AMR project.
“We are seeing a significant increase in the number of municipalities and cities pursuing AMR technology,” says Knight. “The tech has been around for a number of years, but it is just now gathering steam in making its way into the municipal market. Our ideal customer, really, is the municipality that has meters that have been in the ground for 10, 15, or 20 years that are read manually. These municipalities know that AMR can generate more money for them. They just need a way to be able to pay for installing this technology.”
RTS recently finished a project with the city of Brooksville, FL, in which it installed 4,500 new water meters. RTS contracted with Energy Systems Group to perform the work. Energy Systems Group workers actually installed the new meters, while RTS Water Solutions evaluated the condition of the city’s existing ones to determine how many had to be replaced. By replacing their meters, Brooksville was guaranteed to capture $275,000 a year in revenues that the city was previously losing because of inaccurate readings from its old meters. The city never would have realized these savings if it hadn’t first reached a performance-contract agreement with an outside consultant.
Chris Summers, regional director with Energy Systems Group, says his company began replacing Brooksville’s meters in July of 2011. The company finished the project, including the upgrade of several of the city's larger meter stations, in October of that same year. By the time the project finished, Energy Systems Group workers had replaced every meter in Brooksville that had been installed before 2006.
“We replaced a variety of meters on this project,” says Summers. “Some meters dated back to the 1950s. Others came in during the early part of the housing boom. The bulk of the meters that we replaced, though, fell between 15 and 20 years in age.”
Summers says that he expects Energy Systems Group to tackle a continuing flow of performance-contract projects in the future. Performance-contract work accounts for the bulk of the company’s workload, he says. Since the company’s founding in 1994, Energy Systems Group has tackled more than $1.2 billion worth of projects, many fueled by these performance contracts.
“A lot of cities, especially smaller cities, know the benefits of upgrading their meters and water equipment, but they lack the capital dollars to make infrastructure improvements,” says Summers. “With a performance contract, you guarantee the results for clients. They can improve their systems without worrying about how they are going to pay for the improvements.”
Steven Bruskiewicz, Municipal Solutions Quality Manager for Johnson Controls, says it makes sound economic sense for municipalities and water districts to work with outside consultants to improve their infrastructure, repair leaks, and update their meters. And with performance contracting, water superintendents can more easily sell such projects to budget-conscious city or town council members.
Bruskiewicz says meter improvements are an especially wise investment on the part of utilities. Not surprisingly, such projects account for a significant amount of the work that Johnson Controls performs for water districts.
“Water meters are cash registers for utilities,” says Bruskiewicz. “It behooves them to make them more efficient.”
Just because this solution makes sense, though—and will, in fact, generate increased yearly revenue for utilities—doesn't mean that all water utility officials are willing to hire outside companies to help them update their aging water meters.
Companies such as Johnson Controls still have to engage in some selling to convince the country’s more skeptical managers and superintendents, Bruskiewicz says.
“More of the utilities out there are seeing the benefits of updating their aging infrastructure and replacing old water meters,” he says. “But you still have members of the old school who say that their meters are just fine. They don’t want to shake the apple cart. They’d rather let things go as they are.”
The country’s difficult economic situation, though, actually helps companies sell their services to these sometimes-doubtful officials, Bruskiewicz says. That’s because water utilities can’t simply raise their customers’ rates to fund system improvements today. They need to find creative arrangements to generate extra revenue; performance contracting ranks as such an arrangement.
Plugging the Leaks
Outside consultants and engineers can also help water utilities plug the leaks that, along with faulty meters, can cost them serious dollars every year. Utility officials are often surprised after consultants conduct system audits at just how much water they are losing through leaks, Bruskiewicz says.
“Sometimes utilities don’t see it right away on their own just how much water they are losing,” he says. “It can be a real eye opener when we perform our audits. They’re surprised, too, when they discover how much money they are losing because of meter inaccuracy. Sometimes that amount can be in the millions of dollars a year. Utilities that have an $8 million, $9 million, $10 million annual operating budget, can be losing 10% to 20% of that budget on an annual basis just through leaks or inaccurate metering.”
A Lifeline in Mount Vernon
Gray, the water superintendent in Mount Vernon, still remembers the bad days. Before he took over as superintendent, his city issued boil water orders for four of the previous five Thanksgiving holidays.
“That didn’t sit well with our residents who were preparing Thanksgiving dinner,” says Gray.
Shortly after Gray took over as superintendent, the city had a fire in one of its more affluent neighborhoods. When the city’s firefighters opened the hydrant nearest the fire, it was dry—not a drop of water came out.
The firefighters, instead, had to run their hoses from a hydrant located more than 1,000 feet away.
Gray agreed to take over this struggling water utility, but on one condition: The city had to somehow make the repairs necessary to transform a failing water system into one that provided reliable service to the commercial and residential customers who relied on it.
“I told them that were going to have to start fixing things,” says Gray. “Problem was, we didn’t have any money. We needed to find creative ways to get money into the system.”
The answer came as Gray was attending a conference by the Indiana Rural Water Association. There, he heard an official from Johnson Controls give a presentation on performance contracting.
“That had my attention,” says Gray. “We could use performance contracting to use money that we were already spending and use that money to finance repairs to our system.”
When Gray returned to Mount Vernon, he took an in-depth look at the water system. The biggest problem? The system’s filtration system backwashed a gallon of water for every two gallons that it treated. Gray says that because of this the system was losing up to 50% of its water on a regular basis.
“We were putting nearly a million gallons of backwash water back into the Ohio River,” he says. “It was a nightmare.”
But positive changes were coming to the system, which serves about 8,000 customers. Johnson Controls would replace the system’s outdated meters. That provided yearly revenues of $150,000 to $200,000, thanks to the increased accuracy of the new meters. This easily pays for the yearly payments of $150,000 that Mount Vernon is making to Johnson for this work, and Mount Vernon is now on pace to pay back the costs of this project in 15 years. Because the city is paying for the project with a tax-free municipal lease, it did not have to go through the bonding process to raise funds for the renovations. Gray calls it a “painless process.”
Johnson Controls also replaced the city’s filtration system, providing two new filters and a temporary intake structure. This project has shaved about $9,000 each month from Mount Vernon’s power bill. The improvements have also cut down the system’s water loss to about 17%, Gray says.
“I am so pleased with the way things have worked out that I won’t do anything without performance contracting at this point,” says Gray. “The costs are locked in at the beginning of the project. They can’t change unless you change the work or you agree to the change. It’s the best way for us to work.”
Mount Vernon is now working on a third round of improvements with Johnson Controls. This phase includes the addition of a permanent intake structure on the banks of the Ohio River. This portion of the project will raise the electronic components of the city’s water system out of the 500-year floodplain.
“We are right on the river, so we are prone to flooding,” says Gray. “The water where we are stood was at five feet in 1937. That flood would certainly have swamped our electronic controls. This new project will raise all of my controls and electrical out of that floodplain. That will get us to the point where I’m comfortable saying that we now have a reliable system.”
Again, it’s a system upgrade that would not have been possible financially had Mount Vernon not arranged a performance-contract arrangement with an outside contractor. Today, 48 out of the 50 states in the country allow performance-contracting arrangements, Bruskiewicz says.
This is good news for cash-strapped utilities, he says.
“A lot of utilities, because of tight budgets, have to address major problems whenever they can. They can’t always get to them immediately,” says Bruskiewicz. “The small ones are always putting aside problems for another day. That’s just the nature of how utilities are forced to operate.”
Performance contracting, though, eliminates the budgetary reasons for not taking on a repair project. Engineers and consultants will identify areas in which they can make utilities more efficient. They will then monetize that efficiency—such as by installing meters that more accurately measure water usage.
Once the efficiencies are monetized, those dollars are rolled back into utility repair projects.
“There are projects that we’ve taken on that can be 100% self-funded because of this arrangement,” says Bruskiewicz. “It doesn’t happen all the time. Usually, some capital has to be infused into the project. But every once in a while these projects pay for themselves through monetized efficiency gains.”
Some projects save municipalities significant dollars in labor costs. For instance, if a municipality invests in AMR or Advanced Metering Infrastructure (AMI) meter-reading programs, they no longer need five meter readers to manually read their system meters. Instead, they may be able to survive with just one meter reader on staff.
The additional readers needn’t be laid off, either. Personnel can be reassigned to more pressing duties, whether they’re called upon to inspect fire hydrants, monitor a leak-detection system, or join the crew responsible for repairing leaks.
The utility retains talented staffers, saves money, and places these employees where their skills will do the most good. It’s a positive situation for everyone.
“We often negotiate with utilities to determine how much of these reallocated salaries that we can apply to improvement projects because these employees are no longer needed to read meters,” says Bruskiewicz. “We’ll also look at other solutions to help with covering the costs of a project. Maybe a particular municipality is allowed to co-mingle funds between the enterprise fund—reserved for the utility—and the general fund for the city. We can then provide solutions to save municipalities on their energy costs, through better street lighting or LED lights or other energy-saving options. We can roll those energy savings back into the water project. It’s all about being creative. That’s what performance-contracting allows us to do.”
Building a Better System in Kansas
The residents of Olathe—the fifth largest city in Kansas with more than 120,000 residents—have seen the benefits of a strong working relationship between their municipal water district and an outside contractor. In 2011, Olathe officials worked with Johnson Controls to replace all 35,000 water meters in the city. The new water system collects data by computer, eliminating the need for crews to personally drive to individual meters to read them.
Johnson Controls eventually completed an infrastructure and energy efficiency project for Olathe that would cost $12 million. But using the increased revenues generated by the city’s new water meters, Olathe will be able to pay back the costs of the project in 11 years. After this time, Olathe officials can use the extra revenues and savings generated by the improvements to make further enhancements to city systems.
“This has put us in a cycle where are going to be virtually self-sustaining in our ability to provide this greater level of customer service,” says Merv Gleason, chief of Environment Services with the Olathe Public Works department in a written statement. “Otherwise, we never would have caught up.”
Knight with RTS Water Solutions says that his company continues to forge new working relationships with water utilities and municipalities across the country. And as long as these partnerships help utilities save money in the long run—which is increasingly the sales pitch that consultants use when searching for new business—he expects more municipalities to turn to outside help to solve their biggest infrastructure problems.
“There are still so many of the rural water purveyors, for instance, who are still on the old manual-read system when it comes to their water meters,” says Knight. “That is still a steady source of business for companies like us. We have focused on calling out to some of the smaller rural municipalities that still rely on having meter readers jump in a truck to drive out to the meters. That market is ready is for a change.”
By Dan Rafter, Water Effieciency