The Maturation of LWC's Small-Diameter Main Replacement Program by Embracing the Use of Net Present Value as a Selection Criterion

Abstract

From 1992 until 2007, the Louisville Water Company (LWC) implemented an aggressive Main Replacement and Rehabilitation Program (MRRP) targeting approximately 500 miles of unlined cast iron pipe installed in LWC’s system prior to 1931. With an annual budget between $8,000,000 and $10,000,000, cast iron pipes that were both structurally and hydraulically sound were cleaned and cement lined, and those that were not structurally sound or were hydraulically undersized were replaced. Following the completion of this targeted program in 2007, LWC has continued the MRRP with an annual budget of $5,000,000 targeting selected sections of lined cast iron pipe primarily for replacement. Selection criteria utilized included age, breaks, leaks, and main break frequency (MBF) as potential indicators of performance. LWC endeavored to find selection criteria that provided a more business-sense approach. The MBF has been a good standard measurement to compare breaks from one area or time period with another within LWC’s system. It can also be utilized to compare against another water utility’s performance, but it’s not an indicator of how LWC is performing within an environment that speaks in dollars and cents. In selecting candidates, what level of MBF justifies the replacement of a pipe section? Because LWC is looking at a one-time capital cost for replacement in comparison to a series of recurring operations and maintenance costs for repairs, certain factors including inflation, weighted cost of capital, service life, study life, and various other economic terms and calculations need to be considered. In addition, the methodology employs “soft” data to “evaluate costs” of customer outages, traffic delays, criticality of pipe section, and likelihood of future failures. A Net Present Value (NPV) analysis is employed to examine a pipe section’s candidacy for replacement. The paper discusses the background of LWC’s original MRRP, previously utilized selection criteria, and details and illustrates how use of the NPV analysis has allowed the LWC’s current MRRP to evolve and remain a prudent use of rate payer funds in an economically challenging business environment.