Privatizing water utilities in New Jersey

A-3628/S-2412 (Greenwald, S. Kean/Sarlo, Kyrillos) - "Water Infrastructure Protection Act" is being roundly criticized in some corners of the Internet, where some are alleging that water is being privatized in NJ by the governor. I decided to have a quick look at the law and to comment here in a dispassionate manner.

Disclaimer: I am neither a lawyer nor a policy expert - I just happen to know a great deal about the water/finance nexus.

Facts

Facts first: the bill allows public bodies at the municipal, county, or regional level to "lease or sell" water assets to private operators if they meet so-called "emergent" conditions. Here a water asset is a building, plant, or structure that is used to deliver water or treat sewerage (pipes, plants, pumps, etc...). This means that a private operator can either:

1. pay a lease to operate assets on behalf of a public authority - in this case only the operations are privatized. Both the assets and the resource remain in public hands. This is a fancy form of outsourcing.
2. purchase the assets outright, including any debt attached to them, and operate them under a contract with public authorities. Here the water assets are privatized, but not of the water resource itself. This is an important and crucial distinction.

Why the private sector can help

There are several problems with the bill, but I will first give some arguments for private sector involvement in water utility operations. Large water operators (Veolia, Suez, Sembcorp, United Water, etc...) operate water systems around the world. In theory, these operators can:

• bring experience and staff from other locations to bear to a new contract, and so help resolve operational issues
• use their in-house experts and R&D teams to improve operations, finance, collections, technology deployment, etc...
• reduce costs with their strong purchasing power for things like chemicals, power, etc...
• run the utility for a lower cost while improving service and maintenance, all while netting a profit. 

And in the majority of their contracts, they do a fine job.

How the bill fails

Regulatory body

The main problem with the NJ bill (as it stands) is that it fails to appoint a strong regulator. This is bad enough to make the whole bill unworkable. Based on my professional experience, here is why.

Partnering with professional operators is tricky and the contracts are complex. There is often a significant knowledge gap between the public servants entrusted with securing the best deal for the public and the teams of in-house lawyers and financial modelers working for the private sector.

On the private sector side, the lawyers, engineers, and financiers are well-versed in these types of deals: it's what they do. On the public side, it's likely a public servant will do one or two deals in his career, particularly if contracts are long. It's unlikely to be a fair fight (or negotiation).

The knowledge and skills gap extends beyond the contract signature and into the operations phase. During operations, the private operator must report on his actions, investments, decisions, etc... to the public authority. It is crucial that the public be represented by experienced, savvy technocrats who can go toe-to-toe with their private counterparts, lest the contract terms be easily sidestepped.

The solution is to create a regulatory body with strong in-house competency to oversee the privatization processes, review and approve contract terms, and supervise the operations and yearly reporting of the private operators. The regulator is present throughout the life of the contact, from the RFP to the operations, so that it can be ascertained that contractual obligations are, in fact, met.

Recruiting from inside private operators can help ensure that the playing field is level - that the tricks of the trade are known on both sides.

Tariffs

The other problem with the bill is that it puts no obligations on public servants to set tariffs at a cost-recovery level (including debt coverage) prior to private sector involvement. Imagine a case where tariffs have not been raised, or raised too little, for a long time period - resulting in significant yearly losses for the utility and in lower-than-needed maintenance (this is common). 

Tariffs will have to rise, independently of private sector involvement. Waiting until a deal is made to raise tariffs can create the false impression that tariffs are rising to line the pockets of the new operator, when in fact they are just catching up to where they should have been for years. This can result in a public-relations disaster for both the public and private parties, jeopardizing the entire collaboration.

As a corollary, since only relatively "healthy" systems are interesting to private operators, the bill will likely fail at recruiting private sector help where it is most badly needed: for failing systems with heavy debt burdens.

Length of contract

France ended its history of long (25+) year lease contracts a few years ago because it was clear that the contract length was a significant impediment to innovation, an invitation to overly cosy relationships between private operators and public servants, and a bad deal for consumers overall. As a result, contracts in France now typically run 8-12 years, which is significantly better for consumers.

The bill does not make any recommendations or impose any maximum contract lengths. This is a major failing.

Staff

Running a water/sewerage utility is increasingly a people business. Yet, no mention of staff is made in the bill. Taking over a publicly run utility, together with all of its staff, is a major challenge for a private company. Significant cultural gaps exist between the public and private sectors, and water utilities are no exception. If a private operator thinks that it can waltz into a public utility and revolutionize the way that the staff works in a few months, it is sorely kidding itself. 

The bill should lay out a framework for the responsibilities of the private operator as it takes over municipal, county, or regional staff, particularly as relates to contracts, incentives, etc... - this is not to protect public staff at all cost, but to ensure smooth operations over the long term.

Elasticity of the price of water

In the early 2000s, there was a study in a Ukrainian city that considered the predictable water demand as part of a master plan for renovating and upgrading the existing water and wastewater systems. To date, this study is the one that best illustrates, in my mind, the considerable elasticity of the price of water.

In this city, there were two different kinds of water consumers:

1. mostly individual homes, some with yards, where the water consumed was measured by a meter, and where consumption was around 150 liters/capita/day (lcd)
2. mostly apartments in condominium buildings, where the water was charged on a per-person basis, and where consumption was around 250 lcd (there was a meter at the foot of the building)

It stands to reason that a house with a yard would require more water (per capita) than an apartment, and in fact this is verified elsewhere. However, the study observed that apartment dwellers were consuming significantly more that house dwellers, despite being mostly poorer.

The city undertook to install individual meters in the apartment complexes, so that each family would be billed according to its actual consumption, rather than a flat per-person fee. The anticipated behavioral evolution was almost immediate. Without delay, the consumption of apartment dwellers dipped to about 150 lcd. Leaks were fixed, faucets turned off, showers shortened, etc... and nobody was worse off.

In fact, everyone was better off, because the reduced future (expected) water demand led to planning for smaller, and cheaper infrastructure.

Detroit, the mystery thickens

This July 13th article provides further information regarding the ongoing crisis affecting the Detroit Water and Sewerage Department (DWSD). Interestingly, the numbers provided do not quite make sense with respect to  those in recent (June 22nd) articles discussed here. 

Specifically, delinquent accounts dropped from 150,000 to 90,000, total outstanding debt from US$118M to US$90M. These numbers are extremely impressive, given that only 21 days have passed. 

The most recent article gives information on the efficiency of the DWSD's investigations of water theft (not the same as delinquent accounts). Specifically, we can see that DWSD employees can investigate about 60 suspected accounts per day. Unless there is another team inside DWSD dedicated to resolving delinquent accounts, or the DWSD is using automated or analytical methods, it is hard to imagine how 60,000 accounts could have been dealt with in 21 days, at a rate of 2857 accounts per day. This would seem worth mentioning or explaining in the article.

My point here is not so much to criticize, without full information, the DWSD or the reporting. Rather, it is to point out some inconsistencies in the reporting of this human and financial crisis. These inconsistencies have real consequences, and they detract from:

• the optimal flow of information needed to keep stakeholders abreast of each other, and 
• the necessary and healthy debate needed to resolve this ongoing crisis

Access to accurate and timely information about the technical and financial status of a public utility is paramount to ensure that it is adequately run and regulated. Transparency is crucial to building and maintaining trust between those who run the water and sanitation utilities, those who consume their products, those who protest their alleged anti-social or anti-environmental policies, those who regulate their activities, those who write the laws that define their operational framework, etc... And that trust is the basis for crisis resolution.

Unfortunately, transparency has not historically been a strong suit for water and sanitation utilities, and this can partly explain the suspicions that surround the business (whether the utility is public or private). I will discuss this further in another post, and in particular how the utility must organize itself to be capable of sharing information with stakeholders.

Detroit

If the numbers provided in recent articles (here & here) are to be believed, the Detroit Water & Sewerage Department (DWSD) is in dire financial straits. 

This is completely understandable as the population of the city has been dropping, leaving ever fewer people to pay the fixed depreciation and increasing maintenance costs of past capital investments. Over-sized infrastructure is a major drain on any utility, and it is one of the most legitimate reasons to aggressively price water services in order to encourage conservation.

Another major issue appears to be delinquent accounts (150,806 out of 323,900 - 48,4%), with an average debt of roughly US$780, for a total of US$118M. Shockingly, this represents only a fraction of the total US$5 billion in debt that the utility has accrued. 

The average monthly water bill is US$75, which means that the utility is grossing US$24.3M per month, US$11.3M of which is going straight into accounts receivables. With the US$13M left over, DWSD has to pay salaries, other operational costs, etc. not to mention the US$5 billion (!) in debt. Looked at it another way, the debt represents 32 years' worth of collected sales.

This calls into question activists' accusations that DWSD is undertaking this campaign to ready itself for privatization. It is hard to imagine a private utility that would take a second look at the DWSD without significant public assistance in cleaning up the debt situation - even with 100% collection rate. Given Detroit's otherwise disastrous debt situation, this is very unlikely.

Whether the disconnection strategy will yield results remains to be seen. While the utility is right to seek redress from bad payers, outright disconnection effectively reduces the customer base, without providing a solution to sponge up the accounts receivables mess. Disconnecting customers is also costly, to wit:

3000 disconnections per week are 600 disconnections per day, 5 days a week. Depending on the efficiency of technicians, the opposition of residents, the distance between disconnections, etc., we can conservatively assume that this will require 75 technicians (1 disconnection per hour per technician, 8 hr/d). Assuming that a technician's yearly salary is about US$35,000, the monthly cost of the disconnection program is at least US$218K, or about 2% of uncollected monthly sales, not including management costs, gas, depreciation of vehicles, etc...

In other words, this disconnection operations makes sense only if it results in at least a 2% monthly improvement in collected sales. If customers are not paying their bills for lack of money, this seems like an unattainably ambitious goal. If they are failing to pay for lack of discipline or any other non-financial reason, this program might just work.

Innovation in a conservative industry

Water and sanitation is the ultimate conservative industry. In the Western world, where 24/7/365 water is taken for granted, the human, financial, and political consequences of failure are dire.

Utilities, both public and private, understandably spend significant time planning for service breakdowns and make repairs as fast as possible. In fact, it is with a sense of rightful pride that technicians regale with tales of burst pipes fixed in the dead of night under whipping rain and howling winds.

Sadly, the overwhelming importance and focus on sustained services negatively impacts the speed an scope of innovation. The "if it ain't broke, don't fix it" principle, as one might call it, radically discourages innovation, and nowhere is it more prevalent than in the water and sanitation industry. Interestingly, other industries with equally high safety requirements (airplanes come to mind) still manage to innovate over time. To be fair, there have been innovations in the watsan sector, particularly for water and wastewater treatment, but industry-transforming innovation, such as is currently underway at SAUR with the advent of the CPOs, has been rare and limited.

A few causes can be identified, not all of which apply in every case, of course :

• systems that work - the advent of widespread (in rich countries) home-based water and sanitation services is one of the truly great achievements of the last 100 years
• an emphasis on investment over operations - it is much more satisfying to build new (and safely well-tested) infrastructure than to look for ways to optimize operations.
• a fractured market, with few industry leaders with the wherewithal to embark on transformative innovation - most single-city utilities have trouble benchmarking their performance with others, in part because local conditions are so important.
• a few very large players with a history of self-satisfaction and complacency - funding agencies, private firms, consultants, etc. (disclaimer : I worked in this world for several years and participated in the enforcement of the status quo)
• extremely profitable markets - in some countries, water utilities have historically enjoyed very comfortable monopolistic financial positions, reducing the incentive to innovate to reduce costs and protect margins.
• extremely unprofitable markets - in other countries, water utilities barely survive financially and have neither the human nor financial resources to innovate.
• strict regulatory environment and/or labor laws that discourage risk-taking and restrict labor engagement in tranformative change
• political pressure - avoid technical failure at all costs and preserve social peace with labor unions
• long operations contracts - while contract durations are getting shorter, contracts with >5 year duration that do not explicitly require innovative solutions effectively stifle it.
• limited public sector desire for innovation - civil servants who either award private contracts and/or regulate public utilities seldom require technological or organizational breakthroughs from service providers (contractors, consultants, utilities, etc...) with the notable exception of treatment facilities
• self-selection of people who favor safety over risk : because of the conservative nature of the industry, the people drawn to water/sanitation are not typically the free-thinkers and innovators drawn to other, historically more dynamic, industries.

To further that last point, it is worth noting that some of the most innovative solutions currently 'shaking up' the industry come from people who are not watsan engineers, but rather data scientists, software engineer, etc.

The status quo is being challenged, and rightly so, by the advent of Big Data and the Internet of Things, and by new entrants in the various markets. Whether the current players (equipment providers, operators, consultants, finance players, etc.) are best suited to rise to the challenge remains to be seen, even though some are clearly trying to.

The determining factors will be whether (a) their diagnosis of the changing landscape around them is accurate, and (b) they can share this diagnosis and rally their staff behind a common, desirable target that 'makes sense' from the human and technical points of view.

Managing change and the Internet of Water Networks

Appearances can be deceiving. Drinking water is an industrial product, and networks comprising plants, pipes, valves, meters, sensors, etc... are very much machines. That said, delivering water service is first and foremost a people kind of job. The operation of machines is still, to a large extent, the work of humans who make decisions based on their often extensive knowledge of specific, local conditions, and often with limited access to information. 

It is my experience that, around the world, water/wastewater operators care deeply about their work, and develop intimate relationships with the networks or plants in their care. They are proud, highly specialized, and locally focused professionals who know a great deal about the specific infrastructure that they manage. This knowledge is often informal, rooted in experience rather than science or design, and leads to decision-making based on 'what works' rather than 'what the book/engineer says to do'.

The advent of the Internet of Water Networks, which I mentioned previously, will dramatically change the nature of the relationships that operators have developed with their networks. Indeed, the influx of operational data will threaten the status of the senior operator as the 'wise guru' who has traditionally passed on his knowledge to younger apprentices (an anecdote tells that, in Naples, technicians handed their sons their notebooks as a way of guaranteeing employment by the water utility).

With accurate, real-time monitoring and Big Data backed decision-making algorithms entering the field, local operators, particularly the more senior ones, will see their stock decrease. If a computer can accurately predict which electrical switch is likely to fail next, then the operator's intricate, unwritten knowledge looses value and he looses status within the organisation.

The repercussions of this loss of status can be catastrophic to the individual, but also to the utility. Both have an incentive to ensure that the coming revolution will be a win-win transformation, where the individual can continue to be dignified through his work, and the utility retains the specific, local knowledge that is only learned in the field. 

The solution, it seems, it to introduce the coming Internet of Water Networks as a desirable target for the utility, and therefore for its constituent individuals. Only when there is a shared desire for change can the challenge posed by this sea change in operational practices be successful. Not all individuals will buy into this proposition, but at least they'll have a choice.

To achieve this shared vision of a mutually beneficial future, the utility's management must explain why outside pressures are forcing a change, and propose an appealing target for this change. It must also be willing to increase the scope of the target to address the reservations and desires of the staff. Once everyone agrees on an ambitious objective, it is much easier for all to conclude that the Internet of Water Networks is necessary to achieve this objective.

No rugby player runs faster just because he's got new shoes; he uses the new shoes to run faster only if he wants to score more tries, if he wants to win. The assumption that operators will gladly adopt new technology "because it's cool" has proven wrong in the past. In addition, no competent person likes being told that the way they've been doing things is outdated, or wrong - especially if the management is not often seen in the trenches. 

The Internet of Water Networks is coming, and it will change what operators do, and the way they do it, but more importantly, it will threaten the status of the skilled and knowledgeable technician who has been a pillar of the utility for decades. Perhaps even more so than a technical challenge, the deployment of connected objects along water networks is a personnel challenge. 

Fixing leaks and the Internet of Things

In a previous post, I wrote about when it makes sense the fix leaks (or not) depending on local conditions. Unstated but looming large in that post are some important questions (non-exhaustive list) : 

• where are the leaks?
• how big is each leak?
• what is each leaks' financial cost?
• what is each leak's environmental cost?

I'll now discuss briefly the issue of finding leaks. Traditionally, we have looked for leaks using a combination of sound, gas, and modeling methods. Today, connected objects offer new opportunities.

Sound and gas methods basically involve surveying the water network to listen for leaks or detect leaking tracer gas. Fixed or mobile listening devices can help triangulate a leaks' location, and tracer gas will leak (or not) downstream of where it has been injected - so the search can be optimized. These methods either reveal little information about the size of the leak, or are limited in physical reach. 

Hydraulic modeling makes it possible to focus the search for leaks. However, hydraulic models need field data to be reliable. Unfortunately, it is very difficult to take an instantaneous picture of a water network unless one has a significant number of sensors that are well-calibrated, functioning, and transmitting all at once. As a result, hydraulic models, while sometimes very precise, do not provide instantaneous information about the location and volume of leaks.

Enter a number of companies (i.e.: Visenti) that have combined the power of connected sensors with Big Data to monitor water networks in real-time to identify leaks and bursts as they happen. Connected water networks can update centralized control centers like SAUR's CPO to make it possible to prioritize leaks and react accordingly. We will shortly see the proliferation of connected objects along water networks, from sensors to meters to valves, in step with the capital campaigns of water utilities. 

Water network sensors must be placed at critical points in physically extensive systems (100s to 1000s of km), often in wet, buried, or even corrosive environments. Changing batteries is expensive, and power is not always available. Sensors therefore must be highly energy efficient and resilient, and their communication protocols must be able to overcome specific challenges. Because utilities are often strapped for cash, a major challenge is establishing an appropriate price point and clearly spelling out the ROI of these investments.   

That said, the Internet of Things, and in particular the Internet of Water Networks, is clearly the way of the future for leakage management - and other aspects of water management too. It will provide that elusive instantaneous picture of what is happening on the network, and allow engineers and technicians to increase their efficiency in reducing leakage rates. 

In a future post, I'll discuss why it's not enough to deploy sensors: utilities have to learn how to use them and transform themselves correspondingly.