June 29, 2017

Addressing the FEAR of Water Innovation

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I recently spent two days among colleagues from a broad range of water utilities at an amazing peer-to-peer conference of the California Water Efficiency Partnership (CalWEP). The assembled group discussed water innovation and exhibited many classic traits of high performing teams:

  • Commitment to a common mission
  • Dedication to their jobs and to the group over long periods (10-30 years)
  • Welcoming of new participants 
  • Diversity across ages, backgrounds and cultures 
  • Collaborative spirit fostered by natural, non-competitive monopolies

CalWEP’s mission is to drive water innovation and adoption of new technologies. These market transformations will make our state more sustainable in the face of rapidly rising populations and increasing variable water supply. For the past 40 years, CalWEP (and its predecessor organization, the California Urban Water Conservation Council) has enabled California to largely meet its drinking water supply needs through successful adoption of new technologies, practices, and behaviors. The result has been lower urban water demand even as the state’s population and economy have grown. Following the conference, I am wondering how much longer we will be able to deliver on the promise of innovation, even as 91% of water utilities see innovation as critical to their future.

There are, unfortunately, indications that the industry may not be up to the task. The reason is FEAR; not fear of the future, but structural reasons that lead to slow rates of innovation: Financial, Evaluation, Adoption and Risk. 

Financial
Water is relatively inexpensive and utilities often cannot generate sufficient revenues to invest in the infrastructure stack from supply to treatment to efficiency. Water rates are set based on cost of service, which makes sense for public utilities until you realize that this model creates a disincentive to continue investing to provide a safe and reliable supply. As a consequence, public health dangers will grow as projects are delayed for lack of funds. The average corporation in the United States spends just over 2% or revenue on R&D, while technology companies may spend upwards of 5-15%.  Water utilities, however, typically spend far less than 1% on technology, which starves entrepreneurs of crucial funds to trial, test, and evaluate new, flexible, and innovative technologies that can result in improved sustainability and lower long-term costs. 

Tech companies spend up to 15% of revenue on R&D while water utilities spend less than 1% Click To Tweet

Evaluation
The world is in the midst of changing how it plans for and builds infrastructure. The old way is to design and build for a world we think we know based on historical patterns, otherwise known as stochastic modeling. Today, our world is experiencing a dramatic flux in technology, climate and social networks. These dynamics cry out for flexible systems that can bend to evolving and unpredictable needs much faster than concrete and steel can be built, installed, or retrofitted. Thus the future water of reliability depends on the ability of management to change and adapt to emerging and sometimes unforeseen challenges.  Program evaluation, measurement and verification (E, M & V) is the basis for continual testing of innovations and new approaches, which should be funded with 5-10% of the total innovation budget. We will still plan for hard infrastructure, but we really need soft, flexible systems in order to test new approaches, learn adaptively, and share best practices with a network of peers.  

Adoption
Even when new innovations are validated, there are significant challenges to accelerating and scaling adoption throughout the industry. Scaling is crucial to improving cost efficiency and to assure that proven, valuable technologies will be available in the future.  The biggest obstacle to ‘adoption at scale’ is widespread industry fragmentation that inhibits collective decision making and implementation of innovative solutions.  When new automobile innovations are developed, such as a windshield wiper or a seatbelt, the component manufacturers need only to sell to the largest 10 auto companies. But for a water innovator, how can any idea or technology be widely and efficiently adopted by over 50,000 water systems?  

The water industry needs a framework for consolidation, and fast. There are several options to achieve functional consolidation, which would enable multiple utilities to adopt best-of-breed technologies as a group and more rapidly achieve economies of scale: 

  • The simplest approach would be to coordinate procurement among existing associations, such as wholesalers or regional water management districts. A master services agreement by one regional group with a technology provider simplifies this approach to achieve technology deployment at scale. 
  • A second option recommended by DC Water’s George Hawkins is to create a platform that enables utilities to opt-in to choose pre-validated technologies. 
  • A third option would be to encourage, incentivize, or require that the thousands of small utilities (serving fewer than 10,000 people) band together with their peers to enable greater sophistication, purchasing power, and operational efficiency.
  • Lastly, the US could follow the UK model of industry consolidation. In the UK, 1,000 public drinking water systems were reorganized into just 24 utilities serving 65 million people. This reflects a similar structure in the U.S. electricity sector where about 100 large utilities serve over 80% of the population (or over 260 million people). 

Consolidation would enable one organization to rapidly scale and manage innovation over larger areas, providing economies of scope.  Consolidation would also elevate the priorities and services of the thousands of small systems that go underserved and under-financed, especially to the most vulnerable people in our country. 

The problems of fragmentation are compounded by state and local regulation. The purpose of regulating public drinking water is to set common standards to fulfill our moral obligation to provide a safe and reliable drinking supply for everyone. We face a weak and under financed federal EPA that delegates most other regulations to 50 different states. Then each city or municipal utility, governed and held accountable by elected representatives, makes decisions for themselves.

Investor-owned utility regulation is also fragmented with 50 individual state public utility commissions. Even if the greatest technological innovation were to emerge, it’s almost impossible to achieve broad regulatory agreement in a timeframe that offers compelling benefits to communities. We all recognize that water, unlike electricity, is inherently a regional or watershed-based resource. It’s far past time to acknowledge that local and regional regulation of certain aspects of our shared resources has become anachronistic and an impediment to adoption of new technologies at scale. 

Risk
The water industry is known for its conservatism, and rightly so. Water suppliers are given the unenviable task of providing a clean, reliable supply of water while avoiding public health risks. Organizations have grown to manage around these risks, but now that risk averse culture is seen as the key barrier to innovation. “To break down this barrier, utilities must foster a safe environment for investment, development and adoption of new ideas,” according to Arcadis.

So let’s unpack the sources of risk a bit further. Utilities have several important job functions of which the provisioning of clean water is just one. Others include billing and collecting revenue, issuing bonds and paying bond holders, communicating with customers, and managing watersheds. Of course these are interconnected activities, but let’s consider placing them in different buckets. The High Risk bucket includes water supply and treatment, and financial management including rate setting. The Low Risk bucket would include billing and collections (very predictable), and customer communications.

Water technologies that improve performance with low risk can spur innovation Click To Tweet

Arguably, technologies that improve performance in the Low Risk bucket could be a safe space where utilities can experiment with new forms of innovation, and where risk to elected representatives can be managed effectively, leading to a faster pace of adoption. Software, analytics, cloud-computing, big data, sensors, metering, and other information technology could all fit into this Low Risk bucket and be managed on a different, streamlined, and rapid adoption track.  

Conclusion
The current state of the American water industry functionally inhibits adoption of new technologies, which signals to innovators and investors that this sector is to be avoided just when our services are so urgently needed in a rapidly changing climate. So while the clean energy industry is booming, creating over 1 million new jobs in the last 5 years, the water industry is stuck with circa 1980s computing and 1920s pipes. There is reason to hope the water industry will be able to modernize, but to do so, we will need to overcome our water industry FEARs — financing, evaluation, adoption and risk — to truly transform the market for the benefit of everyone. 

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