Industrial users reducing water usage, cut city revenues

It's not usually high drama when the city's water officials show up at City Hall once a year to talk about rates.

This year, though, they arrived with an unexpected concern: The city's water rates have climbed sufficiently in the past couple of years that some large-volume industrial customers are reducing their water usage and/or drilling their own wells.

The sky isn't falling, but, in an operation where 67 percent of the water goes to industrial customers, losing even some industrial business can matter.

“No, it's not great news when water demand drops off, because we rely on revenue to pay debt off,” said Bruce Jacobs, the city's utilities engineering manager.

The city's water operation is just completing a $40 million upgrade. The additional debt, though, has made it difficult for the city to contain increases in water rates.

In reaction, Jacobs said, some industries are looking anew at drilling their own wells, recycling and reusing water they now buy, and using river water for industrial operations that don't require city-treated drinking water.

“I wouldn't call it a mass exodus (from the city system), but a more judicious use of water,” Jacobs said. “Do you need potable water to run a cooling tower? I can't imagine the answer is yes.”

The sprawling Archer Daniels Midland Co. plant along Highway 30 in Cedar Rapids is by far the biggest user of city water - about 30 percent of the 32.5 million gallons of water treated by the city's two water treatment plants on an average day.

All the city's residential customers use only about 21 percent of the plants' average supply, according to city figures.

Figures show that the ADM plant has reduced its daily use of city water by 12 percent since 2007, with possible plans to reduce use by another 10 percent to 30 percent in the future, Jacobs said. A 30 percent drop-off would mean an estimated loss of $1.4 million in annual revenue, or about 5 percent of total city water revenues, Jacobs said.

A second business, the new Red Star Yeast plant, has cut its reliance on city water by 75 percent since 2008, Jacobs said.

According to city figures, Penford Products also has decreased its use of city water, by about 36 percent since 2007.

Erwin Froehlich, vice president and director of operations at the Penford plant along the Cedar River near downtown, said his plant's ability to use less city water is tied to improving the reliability of the company's water system. Penford, he said, long has had wells and the ability to pull water from the river.

The math, Froehlich said, is simple: “City water is a lot more expensive than river water or well water.”

The city's Jacobs and John North, who was Cedar Rapids' water utility director between 1992 and 2007, say the city has long understood some truths: High-volume industrial users are important to the water operation.

Large users help keep residential rates relatively low. Large users, to a certain extent, have the ability to turn their back on the city system if water prices climb too high.

North, who is now co-executive director of the Iowa Association of Water Agencies, said a national consultant concluded some years ago that the city's industrial rates were high and residential and commercial rates were low. As a result, he said, the City Council approved a five- or six-year transition in which rates were tied more to the fixed costs of each user and less to the volume of water used.

Big industrial water users saw their rates stay the same in fiscal 2004, 2005, 2007 and 2008, and actually drop in fiscal 2006.

In the past two fiscal years, however, rates for industrial users jumped 4.7 percent and 7.9 percent. In the fiscal year starting July 1, the city is retreating, flattening the rates for high-volume industries.

Randy Beavers, CEO and general manager of the Des Moines Water Works, marvels a bit at the Cedar Rapids water system, because it serves such a large industrial base.

About 15 percent of the Des Moines system's water output goes to industrial customers, and Beavers said keeping those rates competitive is essential to attracting and keeping industry.

Beavers said the Des Moines water system benefits from a long-standing Polk County ordinance that requires water users to use the public potable water system if it is nearby.

Initially, he believes, the ordinance was designed to protect the public's health. A current-day justification, he said, is to ensure that the public system, with all its investment in infrastructure, has the revenue to maintain itself.

Linn County has no such ordinance.