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1 Assessing Customer Preferences and Willingness to Pay: A Handbook for Water Utilities (#4085) Jennifer Thacher PhD-University of New Mexico Jenny Bagby PhD- Seattle Public Utilities Water Research Foundation. ALL RIGHTS RESERVED. No part of this presentation may be copied, reproduced or otherwise utilized without permission.

2 Customer Preference Developing Customer Service Targets by Assessing Customer Perspectives (#2690) Customer Acceptance of Water Main Structural Reliability (#2870) Expanding Water Utility Services Beyond Water Supply to Improve Customer Satisfaction and Utility Effectiveness (#4171) Water Research Foundation. ALL RIGHTS RESERVED.

4 Setting Water Utility Investment Priorities: Assessing Customer Preferences and Willingness to Pay Jennifer Thacher, Megan Marsee, Heidi Pitts, Jason Hansen, Janie Chermak, Bruce Thomson University of New Mexico

5 Project goals 1. Develop tools to better characterize customer input on utility investments Test two survey methodologies in a large survey of Albuquerque q Bernalillo County Water Utility Authority (ABCWUA) customers 2. Provide utilities with a user-friendly handbook on how to conduct their own economic valuation surveys Offer instructions on designing, administering, and analyzing surveys Use ABCWUA survey as a case study Goal: allow utilities to be savvy customers

6 Handbook topics Why economic valuation methods are useful to utilities What is an economic valuation survey Survey development process Survey administration Survey results and interpretation Historically underserved and hard-to-reach populations

7 Why Economic Valuation Methods are Useful to Utilities

8 Drinking water pipes are aging Source: Adapted from EPA, Clean Water and Drinking Water Infrastructure Gap Analysis, 2002

9 Replacement needs are increasing Source: EPA, Clean Water and Drinking Water Infrastructure Gap Analysis, 2002

10 Local funding for capital investments is important Water utility funding sources, 1956 to 1994 Source: EPA Asset Management training, Lorton, VA, 2009

11 Implication Increased Reliance Need for revenue + on local quantitative needs funding customer input

12 What is an economic valuation survey? Economic valuation surveys estimate customer willingness-to-pay for a proposed investment Willingness-to-pay pyis the maximum amount a person is willing to pay, py, sacrifice, or exchange for a good. Advantage: Economic valuation surveys provide quantitative information on customer preferences Most utilities i get input from customers through h customer service representatives, public meetings, and customer satisfaction surveys Information is often qualitative or not representative

13 Why are economic valuation surveys useful to utilities? Economic valuation surveys can: 1. Provide input into benefit-cost analyses 2. Educate customers about tradeoffs utility is facing 3. Inform investment selection and prioritization, and rate-setting tti 4 Incorporate customer preferences into asset 4. Incorporate customer preferences into asset management

14 Types of questions that can be addressed Are customers WTP for an investment that will increase service levels or maintain current service levels from deteriorating? What is the minimum ii life-cyclel cost of an asset, when customer costs of asset failure are taken into consideration? What is an optimal utility investment program?

15 Economic Valuation Surveys

16 Stated preference survey methods Infer values from survey-based choices Stated not revealed behavior Needed for goods not sold in competitive markets Handbook focuses on two methods Choice experiments Contingent valuation

17 Example choice experiment question

18 Example contingent valuation question

19 Integrating WTP in Decision Making Jenny Bagby

20 Integrating WTP in Decision Making Seattle s Asset Management Program quickly led us to realize we needed to know more about the right level of service to offer Economists think of the right level where the amount someone is willing to pay for something is just equal to the amount it costs to provide

21 Integrating WTP in Decision Making Since customers have no choice but to consume the level of service we provide, we needed to use non market valuation techniques to know more about what are customers were willing to pay for service Were we providing the right level, too much or too little?

22 History of Seattle s WTP Studies Recycle Value Study 2004 Done with Ph.D. Student, first experience with choice experiments, used mainly as a test of the methods, also compared methods Topics centered around recycling, increasing recycling and adding food waste collection

23 History of Seattle s WTP Studies Role of Customers in Setting Service Levels ( ) Intention to use for helping to decide how much of service to offer, also a test of the techniques Questions on frequency of sewagebackups, water outages, water quality Sewer Study (2005) WTP for reduction in sewer backups Lesson learned on making it real

24 History of Seattle s WTP Studies Solid Waste Residential Customer Survey (2006) Frequency of collection services Timing of collection of missed garbage Addition of materials to curbside recycling Garbage Truck Pollution

25 Use of WTP Studies Asked director of Seattle Public Utilities how he would view/use the results One of the pieces of information that I would consider in making a decision Heemphasized emphasized providing Mayor and Council with transparent and detailed information concerning costs and customer preferences to support decision making Important as we took our rate proposals forward

26 Use of WTP Studies Sewer study Was an important input to the decision on where to set the service level and how much money to spend on the program in the future Solid Waste Survey New contracts, could require all new trucks as base, significant pollution reduction, and significant cost WTP was greater than estimated cost Decision was made to require new trucks, fleet is mostly CNG

27 Albuquerque Case Study

28 Administered five surveys

29 Attributes vary by survey type Water-pipe Attributes Full CE CE CVM(t) CVM(a) Energy CVM Water reuse X Renewable energy X X Number of outages Average outage length Advance notification of outages X X X X X X X X X X X X Additional cost / month X X X X X

30 Survey administration followed Tailored Design Method Five contacts designed to maximize response rate Contact #1: Prenotice letter #2: Survey packet #3: Follow-up postcard #4: Replacement questionnaire #5: Final contact Description Notifies the recipient that he/she will be receiving a survey. Includes a cover letter, questionnaire, incentive, and a stamped,self-addressed dd d return envelope. Thanks those who have responded and reminds those who have not to do so. Sent to nonrespondents. Contrasts with previous contacts (e.g., use of a different mode or mail service).

31 Participants could respond via mail or internet

32 Fairly high and uniform response rate Survey type Response rate Full CE 46% Water-pipe CE 47% Water-pipe CVM (a) 48% Water-pipe CVM (t) 47% Energy CVM 46% Total 47% A high response rate is desireable because it suggests respondents are representative of the population

33 Census statistics also suggest representative

34 Census statistics also suggest representative

35 Census statistics also suggest representative

36 Census statistics also suggest representative

37 CE surveys Can estimate Value of changing attribute by 1 unit Willingness-to-pay to maintain status quo and avoid specific scenario Willingness-to-pay pyto change from status quo to improved scenario

38 Full CE results To avoid/achieve: Customers would be willing to pay an additional monthly fee of: 1hr in avg length of outage 1% inshare of time customers receive advance notification 1 more outage at home 1% in share of greenspace irrigated with reuse water $0.72 $ $0.78 $0.13 Range (95% CI) $0.62-$0.85 $0.05-$0.08 $0.63-$0.93 $0.10-$0.16 1% in use of renewable energy $0.17 $0.14-$0.21

39 How do estimates compare across survey types?

40 Estimating WTP for a change in service quality Levels of service Current Hypothetical Number of outages over next 5 years Average outage length for water utility customers % of time customers receive advance notification of outage hours 15 hours 70% 20%

41 Estimating WTP for a change in service quality

42 Lessons from the handbook

43 Planning can help minimize costs

44 Planning can help minimize costs Cheap isn t good if it doesn t generate a high response rate Almost 90% of respondents answered by mail Although internet surveys are cheaper and faster, maximizing response rate and attaining a representative survey is critical.

45 Planning can help minimize costs

46 Planning can help minimize costs Contact Response % of total Cost per rate budget recipient #1: Pre-notice letter #2: Survey packet N/A 25% 8% 41% $0.45 $2.93 #3: Reminder postcard #4: Replacement questionnaire 11% 8% 5% 24% $0.40 $2.05 #5: Final contact 3% 22% $1.99

47 Hard-to-reach populations are aptly named Surveys are but one tool for assessing preferences Focused on two hard-to-reach populations in Albuquerque Spanish speakers Renters Review techniques for reaching these populations Reaching these populations requires a significant Reaching these populations requires a significant investment of time and money

48 Quality of survey determines data quality Handbook details survey development process Interviews with experts Literature review Focus groups Debriefings Pretest Provides all survey instruments and contacts Explains development process for valuation questions

49 Acknowledgements

South Staffs Water. PR14 Customer Research Willingness to Pay Results. 18th June 2013

South Staffs Water. PR14 Customer Research Willingness to Pay Results. 18th June 2013 South Staffs Water PR14 Customer Research Willingness to Pay Results Scott Reid Amanda Borrmann 18th June 2013 Contents Overview of the survey Key findings Service and bill priorities (qualitative questions)