Escalating water prices force executives to find solutions
As Ratepayers Balk, Private Enterprise Invents New Solutions
Water quality is a huge business opportunity, and will be for years to come. Escalating water prices (in some cases as much as 200% in a single year), and regulations on water management are making executives sit up and look for ideas and solutions they would not have considered even two years ago.
For some, water is the opportunity for fresh ideas that can manage price and regulatory risk. Others look to invest in technologies that may be tangential to their core business, but that could become products sold in the US or exported to water-stressed countries like India and China. Still others are looking to support policies to make them financial players in what the US Conference of Mayors calls a $1.7-$3.7 trillion dollar market.
For Edward Shafer, former Governor of North Dakota as well as a US Secretary of Agriculture, the private sector is needed to help find market-based solutions that haven’t been tried before.
“This is changing the investment community. How can we deal with private sector investment on critical issues, instead of taking tax dollars and making decisions on risk not opportunity?”
He believes that the free enterprise system can provide the innovation to radically reduce the amount we spend on water quality.
The Challenge of Clean Water
Strapped municipalities can’t keep up with clean water regulations. Public water investments grew through the Great Recession of 2008-2010, even though local government revenues declined. In 2012, Maryland estimated the cost of compliance at $11 billion, while the cost for Frederick County, Maryland, which needs to reduce 500,000 pounds of nitrogen, was estimated at nearly $1 billion. In Pennsylvania, projects combine water quality and aging infrastructure needs. Ratepayers then absorb the infrastructure costs within a compliance time-frame: a ten-year infrastructure upgrade gets pushed through in two or three years. The resulting sticker shock is bringing ratepayers to mayor’s offices and water boards. The US Conference of Mayors report cites the following challenges.
- Population: Cities are expected to grow 32% by 2042, leading to 85 million people living in urban areas.
- Inflation: Costs of clean water exceeds the inflation rate in the economy.
- Replacement: Over the next 20 years, between $2.8-$4.8 trillion will be needed to replace aging infrastructure. In Washington, DC, wooden pipes are still in use.
- Regulatory Compliance: Combined sanitary and sewer overflow enforcement will force some communities to choose between funding infrastructure upgrades or compliance.
- Affordability: The ability of local government to indefinitely continue making annual investments increases should not be taken for granted.
- Rate Structure and User Fees: When capital investments are involved, double digit rate increases usually follow, severely affecting poor and middle class families.
Putting all the stresses together, Rich Anderson, PhD, an author of the report, noted, “Some in the public have come to register a suspicion of profiteering by public water services and a fear that rates are heading toward exclusionary pricing.” Alleviating tax and ratepayer pain should start with an accessible problem: nutrient loading.
Nutrients: The Low Hanging Fruit
One of the largest problems is ‘nutrient loading’: nitrogen and phosphorous that clog waterways with algae, making the water undrinkable and, in many cases, un-swimmable. The Chesapeake Bay alone drains an area of over 64,000 square miles and averages a mere 21 feet in depth. The U.S. Environmental Protection Agency (EPA) estimates that in a year with average rainfall, this water carries with it over 250 million pounds of nitrogen and almost 20 million pounds of phosphorus. These nutrients come from a wide variety of sources, including sewage treatment plants, industrial facilities, runoff from agricultural fields and urban areas, and even air pollution. The ‘big three’ are sewage treatment plants, storm water runoff and agriculture.
Sewage Treatment Plants
The way the problem is currently addressed, wastewater treatment plants are mandated to clean water that has accumulated nutrients along the entire length of the watershed.
The costs for ‘the last mile’ of nutrient reduction can be very high. According to George Hawkins, general manager of the Blue Plains Wastewater Treatment Plant in Washington, DC, a decade ago it cost $100 million to reduce nitrogen discharges from 15 milligrams per liter to 5 milligrams. Reducing it one milligram more – to 4 milligrams – will cost $1 billion.
Municipalities and regulated businesses pass these costs along to ratepayers or customers, often with heavy, up-front costs for projects that could have been paid for over a ten to twenty year life span. A better plan is to examine the largest causes of nurtrient loading, and make plans to stop those nutrients from traveling down waterways to end up at sewage treatment plants. This means focusing on storm water runoff and agriculture. Although estimates vary, the savings of such an approach could be up to 80% of the costs of compliance.
Storm Water Runoff
Storm water runoff has two implications for clean water. The first is that impermeable surfaces, such as parking lots, drain large amounts of unclean water into the watershed during storms. Secondly, in urban settings unexpected influxes of storm water overwhelm sewage systems, leading to raw sewage being dumped into the basin. Many cities are instituting storm water regulations that mandate how much impermeable surface is allowed in new construction, and charging a surtax on buildings that cannot comply. While the mechanisms vary, they result in unexpected costs that are passed directly to commercial and residential owners, who pass them on to tenants.
Farms are by far the largest contributors to nutrient-loading, releasing 42% of phosphorous and 54% of nitrogen found in waterways. But agriculture is exempt from the Clean Water Act, which means that there is no regulatory incentive for farms to capture nutrients before they enter the waterways. Stopping the nutrient load at the source, rather than waiting for it to enter the waterway to be cleaned downstream, is much more cost effective. One way to achieve this goal is through a public-private partnership based on water quality trading or procurement. Water Quality as a Commodity
Mechanisms for Engaging the Private Sector
‘Water quality’ as a commodity can be bought, sold and traded. Commoditization would create a market, and that market can engage the private sector. The goal would be to maximize efficiencies and drive innovation to produce solutions that address problems cost-effectively and efficiently. A Stormwater Report cites the benefits.
- Efficiencies and Economies of Scale: Cost savings are incentivized through economies of scale — purchasing higher quantities at reduced cost — and the self-interest that comes with long term contracts that include maintenance.
- Standardization: One of the challenges associated with urban-retrofit storm water practices is that there is limited guidance on the latest practices. Most guidance is associated with new development. However, as more retrofits come on line, firms will develop and apply best practices among several projects.
- Innovation: Companies have the flexibility to innovate and conduct research and development as needed. For urban retrofits, installers combine the latest technologies, while innovating on-the-spot at sites that have limited space or utility conflicts.
- Technology Partners: Private enterprise can engage additional partners — other companies or universities — to develop and deploy higher-efficiency, lower-cost technologies without complex public RFP processes.
- Job Creation: The public win is more than clean water. Projects that clean water take time and people. In some cases, that’s thousands of long term jobs in the community.
Water Quality Trading
For over ten years, the US Conference of Mayors, among others, has been urging the EPA to adopt water quality trading. Kurt Stephenson, PhD at Virginia State, added:
“Water quality trading, particularly for nutrients, is increasingly being advocated and proposed by professional economists and regulatory agencies as a means for achieving pollutant control requirements for point sources under the Clean Water Act.”
Water quality trading is not a new idea. The state of Virginia is implementing one of the largest scale nutrient trading programs in the United States.
The way a nutrient market works is by establishing a mandatory cap on the combined pollution loads from multiple sources. It then allows trading of specific loads among individual sources to determine where and how the load reductions occur to meet the cap. It takes advantage of the fact that the multiple sources face different costs when seeking to accomplish the load reductions. In essence, entities are given two options:
- Implement pollution control practices on site, or
- Purchase the load reductions from other sources that reduce loads by more than their requirement.
In the example to the right, a company that does not need to upgrade, does so anyway in order to sell their verified nutrient reductions to another company for which upgrades are too costly.
A real world example is water quality trading along the Ohio River. In that case, utilities that cannot meet their total discharge reductions can buy credits from farmers who turn farmland into forest along the banks of the river, creating a barrier between crops and stream. Through a formula established in the statute, the utility can use that agricultural offset to come into compliance as they work to upgrade their facility.
Auctions or Procurement
Both auctions and procurement rely on contractors providing specific remediation based on requirements set out by the purchaser. A request for proposals (RFP) by the procuring entity can identify cost-effectiveness in relation to the amount of nutrient reduction as the “primary criterion.” As a result, two radically different technologies could meet the standard, since it is outcome rather than process specific. The winning company would then be required to comply with the guidelines set out by the RFP. Such RFPs could set out long-term contracts — as much as 20 years — which would spread costs, helping rate and tax payers while providing the certainty that business needs to perform efficiently.
One example cited by Dr. Rowland, is a water quality project along the Colorado River. A 1988 study conducted for the US Bureau of Reclamation (BOR) estimated annual damages of $311–$831 million due to excess salinity in Colorado River. Damages could exceed $1.5 billion per year if salinity was not properly controlled. The BOR initially expected the cost-effectiveness of controls under a competitive procurement program to average $50 per ton. After the initial four years of the program, selected projects averaged just over half of that estimate ($26 per ton), with a range of $11 to $36 per ton, and slightly over a third of the average cost-effectiveness of controls under the previous program ($70 per ton).
P3 or Public/Private Partnerships
Arrangements between government and the private sector can transfer risk to the private sector, according to the Stormwater Report. A company assumes control over financing, constructing, and maintaining large projects. Government repays the private sector over the long term as the infrastructure projects are built and maintained according to specifications.
This echoes an initiative by the Army to eliminate inadequate family housing through long-term contracts with private partners. The private sector is repaid for upfront investments through rent that is equal to the resident’s Basic Allowance for Housing. These partnerships spread the costs over a long time line by paying back the installers over time. In the water economy, this means that the up-front ‘sticker shock’ that has water utilities passing on sizable sums to ratepayers can be avoided.
There are several technologies designed to limit discharge at the source, whether it is urban storm water or agricultural runoff.
One route is to sequester nutrients, either creating barriers between the bay and pollutants, building retention ponds to capture runoff, creating land filters, removing septic systems, or using natural habitats that can absorb and clean water. Dr. Stephenson and his team have created an overview of the costs in dollars and the feasibility for a 1 million gallon development.
|Approach||Annual cost to remove 1 pound of Nitrogen||Technical Feasibility for a 1 million gallon development|
|Agricultural Nonpoint Offsets|
|Early Cover Crops||$26 to $400||16,300 to 64,300 acres|
|15% Nitrogen Reduction||$8 to $56||4,370 to 16,215 acres|
|Continuous No-till||TBD||10,055 to 20,930 acres|
|15% Nitrogen Reduction + Continuous No-till||TBD||3,530 to 10,910 acres|
|Crop to Forest Land Conversion||$66 to $556||1,555 to 4,850 acres|
|Urban Nonpoint Offsets|
|Storm water wet ponds||$1,294 to $3,131||10,900 to 54,600 acres|
|Storm water wetlands||$437 to $749||10,900 to 54,600 acres|
|Bio-retention areas||$230 to $378||6,550 to 32,730 acres|
|Sand Filters||$3,518 to $13,370||8,190 to 41,860 acres|
|Septic Retirement||min $60/lb||750 to 1,500 houses|
|Nutrient Assimilation Offsets|
|Oyster Aquaculture||$0 to $150||21 to 69 million oysters|
|Algal Biomass Harvest||TBD||6 acres|
|Restored Floodplain Wetlands||$14 to $377||50 to 200 acres|
As the chart shows, while some of these approaches may be economically feasible, in many instances the amount of land – or oysters – may be prohibitive.
Reduce at Source
Another approach is to capture the nutrients at the source, either cleaning the nutrients or, best case, returning those nutrient costs to Pennsylvania taxpayers by as much as 80%. The proposed policy initiative enables low cost verified nitrogen reductions from agriculture, primarily livestock, to replace high cost municipal and storm water reductions to comply with the Chesapeake Bay federal mandate.s to productive use. An essential element of any such technology is the ability to verify actual phosphorous and nitrogen reductions. Such verification is the corner stone of putting a price on water quality that allows it to be traded, bought or sold. [See Bion -- Market Leader].
This approach was recently supported by the Pennsylvania Legislative and Budget Committee. It released a study advocating adopting a competitive bidding program for verified nitrogen reductions. This could reduce Chesapeake Bay compliance costs to Pennsylvania taxpayers by as much as 80%. The proposed policy initiative enables low cost verified nitrogen reductions from agriculture, primarily livestock, to replace high cost municipal and storm water reductions to comply with the Chesapeake Bay federal mandate.
Barriers to Acceptance
Anything new in the utility industry has an immediate barrier. Utilities are mandated by law to provide 7/24/365 service to millions of people. Even small changes have large regulatory and financial hurdles, not to mention staff and service providers who would like to keep their jobs. Dr. Stephenson sees the driver as costs, but is more skeptical about adoption of new technologies. For the US Conference of Mayors, it is an essential step to managing costs that are also needed for education, security and many other activities of towns and cities.
Governor Shafer takes a longer view. He sees a changing financial landscape that will make water costs a ballot issue. “Change is driven by the people. When people say ‘We can’t afford it, so you have to figure out how to lower costs so I can live in my community,’ then you will see policy change.”
As a former entrepreneur, he also noted that any market-based system has cycles: innovative companies form to meet a consumer need. As they become successful, they lose sight of changing customer demands. Protecting their business, rather than innovating, they raise barriers for new entrants. Eventually, however, market forces produce change, and that change brings new competitors. In the water sector, the magnitude of the problem, along with the opportunities, is likely to mean that the time is now.