1. ECONOMIC CRITERIA FOR REGIONAL WATER SUPPLY PLANNING IN TENNESSEE: Evaluation of Practicable Alternatives to Harpeth River Water Supply Presentation to TN AWRA William W. Wade, Ph. D. Energy and Water Economics Columbia TN 38401 April 18, 2007

2. E&WE 2 Zen Thought “ Fifty years ago Franklin was a small town and the Harpeth was a small river, which was a good source for its water supply. Today Franklin is a rapidly expanding small city with growing needs. The river remains the same small river it was in 1956.” - Franklin citizen

3. E&WE 3 Franklin wants to double Harpeth intake and size of Water Treatment Plant (WTP). TDEC has ruled this will degrade the stream. Given degradation, how should this project be evaluated in terms of the feasibility, economic and environmental impacts of alternatives?

4. E&WE 4 Dry Season Low Flows Dominate Consideration of Harpeth as a Water Supply Source. source: Aquaeter 030507 Franklin’s use of Harpeth River is an unreliable water system. Storage needed to supplement seasonal low flows is too large to be economic.

5. E&WE 5 Rivers of Tennessee provide multiple services to society. Water supplies Vegetation and species habitat Swimming, wading and picnicking recreation Boating Fishing Wastewater assimilation Viewsheds Instream services have values to society. Permit for withdrawal must assess values affected by stream alteration as part of the practicable alternatives evaluation.

6. E&WE 6 What do the TN Regs Say? Tennessee Antidegradation Statement (Tier II & III) 1200-4-3-.06(2) The Tennessee Water Quality Standards shall not.. permit the degradation of high quality surface water. (Tier I) Harpeth River 1200-4-3-.06(1) new or additional degradation will only be allowed if the applicant has demonstrated to the Department that reasonable alternatives to degradation are not feasible. [A]lternatives analysis...shall include a discussion of the feasibility, social and economic considerations, and environmental consequences of each potential alternative.

7. E&WE 7 What do the TN Regs Say? Aquatic Resource Alteration Chapter 1200-4-7 -- ARAP -- governs activities that would alter state streams by withdrawal. ARAP §1200-4-7-.04 (5)(c) 2 states that “... [P]ermit conditions shall protect the source stream's resource value[s].” ARAP §1200-4-7-.03 (29) defines resource values as the benefits provided by the water resource. Lists 7 services provided by water resources. ARAP §1200-4-7-.04 (3)(d)(5)(a) concludes “if there is a practicable alternative to the activity which through avoidance or minimization of impacts would result in no net loss, then such alternative shall be selected.”

8. E&WE 8 Consideration of Alternative Water Supply Sources Requires Economic Assessment of Impacts to all Services. Environmental effects depend on magnitude of the impact of proposed change in water supply intake to identified riverine services. Significance of the impact depends on the sensitivity of those services to the magnitude of the impact given seasonal patterns of water flows. Economic values of the riverine services are based on market values if available or economic use values determined by long standard practice.

9. E&WE 9 Overview of Economic Approach to Evaluate ARAP Alternatives. 1 Define accounting perspective (e.g. utility, stakeholders, society). 2Develop a model to evaluate services from multiple perspectives. 3Focus on what can be quantified and the range of values. Narrow the range of issues that have an effect on the outcome. 4Develop a hierarchy of uncertainty about data, models, assumptions and forecasts. 5Employ Benefit-Cost analysis to evaluate and compare the economic benefits of instream water flows versus benefits of water diversion to supply drinking water. Benefits of drinking water can be measured by costs of service; or Supply reliability benefits to consumers of alternative sources.

10. E&WE 10 Accounting Perspective: Who is the Stakeholder? Plant Manager. Water Utility/City Manager? Objective Fn: Least cost reliable water supply Compliant to State Regulations. CTE study aims at this.

11. E&WE 11 Who is the Stakeholder? Elected Officials. Water Utility/City Manager? Franklin Elected Mayor/Aldermen? Objective Fn: Get Re-elected /Consolidate power s/t long term enhancement of City infrastructure and growth prospects. No information in the record

12. E&WE 12 Who is the Stakeholder? Residents. Franklin Residents? Water Utility/City Manager? Franklin Elected Officials? Objective Fn: Reliable low cost water supply -- s/t protection of river resources and services provided by the river. Services not evaluated or protected.

13. E&WE 13 Who is the Stakeholder? Society. Water Utility/City Manager? Franklin Elected Officials? Franklin Residents? Watershed Residents Objective Fn: Maximize the value of services provided by waters of the State. Regulations should achieve this objective.

14. E&WE 14 Analytic Approach to Compare Alternative Supply Sources in terms of Costs of Impaired Riverine Services Seasonal low flows – Harpeth Amount of withdrawal for water supply Seasonal low flows – Cumberland Net effect > 0 Net effect = 0 Measure Cost of Externality = $$ Sensitivity of riverine service to lower flows LowHigh Add to costs; go to next service.

15. E&WE 15 Evaluation of Costs of Alternatives Includes ARAP’s “Source Stream Resource Values” Whether HVUD is lower cost than Harpeth is not a sufficient benchmark of “feasible.” Regulatory required evaluation of alternatives must include costs of externalities. Plant Manager’s limited perspective (Cost of XX v. YY) does not govern State’s duty to manage resources to achieve maximum “source stream resource values.”

16. E&WE 16 Most Important Policy Questions have not been Asked and Answered. 1.What are the instream flow values for services at stake for existing and expanded water withdrawals for drinking water? 2Is the drinking water plant or Harpeth flows for wastewater dilution the more pressing economic necessity to the City? 3Does changing “Face” of Franklin affect the decision to expand or close the existing water withdrawal plant? 4Does shutting down the WTP and relying on HVUD for future supplies make the best use of the rivers of Tennessee? 5What is the least cost way of addressing future regional water supply and wastewater dilution needs -- incl all costs? 6Record is incomplete without the above information.

17. E&WE 17 Bottomline Financial Results Support WTP Closure. PV 2007 Franklin Water Supply Costs thru 2012 ($1000) WTP @ 5 cfsWTP @ 10 cfs Buy all HVUD (incl shutdown cost) PV 2007 Total Costs$24,788$25,243$24,261 Higher WTP Cost($527)($982) WTP higher costs exclude externalities. Reasons WTP Cost Higher: 1.HVUD economies of scale; 2.99.99% supply reliability from HVUD v. Harpeth low flow variability; 3.Minimum HVUD Contract purchases cap WTP production thru ~2012; 4.HVUD may increase rates 5 – 8% for larger share of water supply if Franklin builds plant. Lost $1.3 million must be made up somewhere.

18. E&WE 18 Cost of Externalities Reinforce WTP Closure. Values of Harpeth instream flow services reinforce economic decision to shut down WTP: M ost importantly wastewater dilution ignored by the City of Franklin. Wastewater dilution alone doubtless dominates decision. Regional water supply “practicable alternative” exists that substitutes for water supplies from Harpeth River and Franklin WTP. Lower cost at 99.99% reliability. Increased Harpeth instream flows benefits all services.

19. E&WE 19 Instream Flow Considerations 1: Harpeth River Wastewater Dilution Capacity Harpeth River flows provide critical dilution service to Franklin’s Wastewater Plant (POTW). Permit up for renewal now. POTW is running at 6 mgd, but sized for 12 mgd! Growth must be anticipated and accommodated. Harpeth River below Franklin is effluent dominated during low flow season. Harpeth River has been in violation of the DO standard of 5 mg/L during low-flow warm summer months for at least six years. Two other POTWs, Lynwood and Cartwright Creek, discharge into Harpeth. Lynwood Utility POTW has pending application to hook-up 350+ homes. WTP plant withdrawals conflict with instream effluent dilution service requirements.

20. E&WE 20 Instream Flow Considerations 2: Franklin Parks and Greenbelt System City of Franklin has spent $millions and has active plans to develop and enhance four parks along the River: Battle Field Park Pinkerton Park Bicentennial Park Harlinsdale Park Williamson County Rec Center Park Parks will be linked by the Franklin Greenbelt system and river access will be enhanced at various locations. Canoe access and recreation access to the Harpeth will be enhanced. Enhancing flows makes more sense to recreation than reducing flows.

21. E&WE 21 Instream Flow Considerations 3: Forthcoming Riverfront Hotel, Restaurant & Condominium Developments Forthcoming enhancements to downtown Franklin economy depend importantly on Harpeth River view shed. Face of Franklin is changing. Former Dodson’s property in planning and design phase for small boutique hotel, retail, bar and grill. Ties-in with City marketing to attract heritage tourism. Other river frontage property under consideration for condo development. Property and sales taxes provided by downtown enhancements likely are substantial. City of Franklin and citizens are returning to the Harpeth as a valuable aesthetic natural resource.

22. E&WE 22 Concluding Regulatory Policy Recommendations. Financial economic differences between the WTP project and reliance on HVUD purchases show: Shut down is lower cost to City than expanding the plant. Harpeth dry season flows are so low that Franklin’s and TDEC’s decision must include instream values at risk; i. e., the cost of externalities due to reduced flows. Instream flow values lost by withdrawals reinforce conventional cost advantage of HVUD purchases over WTP operation. Further resource valuation of instream flows would reveal magnitude of benefit values at risk. Antideg (1200-4-3-.06(1)) requires consideration of financial, economic, social and environmental consequences to resource values of planned project and “practicable alternatives.”