Wednesday, May 8, 2019

The Prosperity Paradox : How Innovation Can Lift Nations Out of Poverty 2019

Although Christensen and his colleagues wrote this book targeting developing countries, the last chapter on infrastructure has lessons for everyone. Entitled "If You Build It, They May Not Come", the chapter divides infrastructure into these seven categories: schools, financial systems, ports, electricity, sewer systems, roads and bridges, and water works. The first two, the authors considered soft infrastructure, and the rest hard. Some of these store or distribute natural resources, other do both. From this reality, the authors define infrastructure as, "the most efficient mechanism through which a society stores or distributes value" (p. 243). Given this definition, the infrastructure, schools, does not necessarily deliver the value, education. We see this truth not only in poor countries, but within the educational system in the U. S. This rule of value applies not only to education, but to the other forms of infrastructure. Many countries have stories of bridges or roads to nowhere or disruptive dams.

For the above reasons, Christensen and his colleagues take a market view of infrastructure development rather than relying on a central government:

"It would be easier to rely on governments to take the lead and remove that worry and responsibility from private enterprise. But history tells us that that doesn't often happen.
When you create a new market, the profits from the market help pay for the infrastructures pulled into the economy. This is how many major infrastructure projects in the United States were developed. By themselves, many of the infrastructures--the roads, the rails, the canals, and so on--were not profitable. But once the infrastructures were pulled into an American economy that was creating a lot of value that needed to be stored or transported, the infrastructures then became viable" (pp. 252-253).

Wednesday, April 3, 2019

The Control of Nature, Under Water : Can engineering save Louisiana's disappearing coast? New Yorker Magazine, April 1, 2019 by Elizabeth Kolbert

Unlike many articles on water that I have read, this article forced me to confront the question: How much should humans interfere with the forces of nature? Focusing on Plaquemines, land that extends into the Gulf of Mexico "where the river meets the sea" (p. 32), the author explained the natural interplay between the weather, the Mississippi River, and the land in this section of Louisiana. This area, below sea level, could not withstand the fury of Hurricanes Katrina or Rita. Erosion has brought the city of New Orleans twenty miles closer to the Gulf of Mexico. Additionally, New Orleans, below sea-level, continues to sink. "A recent study that relied on satellite data found some sections of New Orleans dropping by almost half a foot per decade" (p. 41). The city's solution of pumping water exacerbates the problem of subsidence; the more the city pumps, the more the city sinks.

Geographically, Louisiana, like Italy, looks like a boot with Plaquemines at its farthermost point of the toe. Describing the degree of erosion of Plaquemines and in Louisiana generally, the author stated:

"And what's happening to Plaquemines is happening all along the coast. Since the days of Huey Long, Louisiana has shrunk by more than two thousand square miles. . . Every hour and a half, Louisiana sheds another football field's worth of land. . . On maps, the state may still resemble a boot. Really, though, the bottom of the boot is in tatters, missing not just a sole but also its heel and a good part of its instep" (p. 34). 

Citing this phenomenon as a "land-loss crisis" (p. 34). Kolbert attributes the problem to the Army Corps of Engineers attempt to manage and control the Mississippi with "thousands of miles of levees, flood walls, and revetments" (p. 34). Kolbert wrote the article to disclose the latest project to control the river, "a huge new public-works project is getting under way--this one aimed not at flood control so much as at controlled flooding, Ten pharaonic structures are planned. The furthest along of these is slated for Plaquemines Parish. . . and, when operating at full capacity, will, by flow, be the twelfth-largest river in the country" (p. 34).

Historically, the Mississippi has dropped sediment in Louisiana. Tracing the rivers history, Kolbert claimed that "In the last seven thousand years, the river has avulsed six time, and each time it has set about laying down a new bulge of land" (p. 34). The author recounts some of these, from the time of the building of the pyramids and the formation of New Orleans to the creation of Western Terrebonne Parrish during the time of Charlemagne. Plaquemines, the most recent of the avulsions, dates about fifteen hundred years old. However, the story does not end there. The sea eventually reclaims the some of the land, "where the river delivers enough sand and clay to make up for the lost volume, the land holds its own. Where compaction outpaces accretion, the land begins to subside until, eventually, the Gulf reclaims it" (p. 35).

The Army Corps of Engineers projects of dredging and diversions hope to thwart another avulsion or crevasse, a breach of a levee, in a race against nature.

Tuesday, April 2, 2019

Economist Special Report : Water March 2, 2019

With the subtitle, Thirsty planet, the Economist addressed water from multiple perspectives. In addition to a general introduction, the other subtitles included, Surface tension, Subterranean blues, Desalination, Waste Not Want Not, and the Conclusion, Hard and Soft Solutions.  The authors explained the purpose of the report: "It will look at the state of the world's freshwater and at the increasing demands on it, and consider the ways they can be met (p. 5)." Given that 70 percent of human and Earth's composition is water, the article focused not on quantity but on water management, "or more precisely, how to withstand economic, cultural and political pressures to mismanage water" (p.5) This premise assumes that managers have a holistic rather than a fragmented, national, or regional view of water resources.  Public sentiment, from The United Nations (UN) to other governmental bodies, view water as a fundamental human right.

The introduction mentions climate change, the cheapness of water in the developed world, and the devastation of natural environments as the major threats to water quantity and quality. The authors cite the UN's "water development report" (p. 6) that documents the decline of the availability of water and its increased use, a sixfold increase in one hundred years. The three factors of "population, prosperity, and climate change" (p. 6), the authors argue, will increase demand, with a 20 to 50 percent increase from current levels by 2050. According to the Intergovernmental Panel on Climate Change, temperature change of "a 2 degree C rise, an additional 8% of the world's population in 2000 will be exposed to new or aggravated water scarcity by 2050" (p. 7).

Since agriculture requires 70 percent of the world's water, the authors speculated on the effect that climate change would have on water availability. They acknowledged the current occurrences of extreme weather events, from rising ocean temperature. Their concern, however, focused on the shortage of water and drought with declining stream flows in rivers.

Regarding surface water in rivers and streams, the authors added this subtitle, "poisoned and over-exploited, many rivers are in a parlous state" (p. 7). Human pollution, industrial waste, hydroelectric and other dams threaten water flows. Some remedies include "large scale infrastructure to bring water from elsewhere; flow-management through digital monitoring and the use of economic levels" (p. 8).
The authors cite examples of India's Ganges, Israel's Sea of Galilee (a freshwater lake), and Australia's Murray River as examples of governmental approaches to water management.

Ground water also suffers from chemical and other pollutants from "landfills, septic tanks, leaky underground gas tanks and the overuse of fertilizers and pesticides" (p. 9). As mentioned previously, agriculture accounts for 70 percent of water use. The authors listed the main extractors of ground water: "America, China, Iran, and Pakistan, account for 67% of total extraction worldwide" (p.10). Food production demands the majority of this water.

To solve the problem of insufficient surface and ground water, some countries, especially Israel, have resorted to desalinated sea water. By pumping sea water over a one kilometer distance and purifying it through reverse osmosis, one water treatment plant, the Sorek desalination plant, supplies Israel with one-fifth of its water use. Of the estimated 15,906 desalination plants worldwide, Israel has five,  fewer than Saudi Arabia, the United Arab Emirates, and Kuwait. The cost of the process reflects the ability of these countries to pay for it.  The cost of transport and the energy required to desalinate makes this the most expensive way to produce potable water. A cheaper option, reuse of water and treated sewage, are alternative methods employed by Israel and Singapore, as illustrated by the authors.

Conservation of water, especially by agriculture its largest user, can result from drip irrigation and sensors that "monitor weather, soil and plant conditions and calibrate how much water is delivered" (p.11). The public can control water use in the selection of what foods we eat and what we waste and the water footprint that we create. Technological enhancement can also assist in reducing food waste. "Remote sensor technologies, such as near-infrared spectrometers and hyperspectral imaging, capable of evaluation the perishability of individual items" (p.12) could solve this problem. Leaky water pipes and "non-revenue" water, water used without a cost frustrates the desire to conserve. A local utility in Denver attempted to achieve 'net-zero' water consumption at its newly built waste water treatment plant. Commercial companies, such as Nestle and Unilever,  continue to strive to reduce water consumption.

In conclusion, the authors refer back to the three forces driving water decisions, "economic, cultural and political pressures to mismanage water" (p.5) . They recount the large projects undertaken throughout the world, for example, Israel's National Water Carrier and the Three Gorges Dam in China. However, to achieve the UN's goal on water and sanitation, money is needed, estimated at $114 billion. Equitable pricing of water offers another challenge, as does the issue of allocation. Countries would have to face their current laws on water to establish a regional or collective doctrine.

Friday, March 22, 2019

Seven States Sign Deal in Effort to Avert Water Crisis Along Colorado River : New York Times by John Schwartz

Constant coverage on the Colorado River has emphasized the threat of its inability to supply water to states designated for an allotment in the Colorado River Compact and the other agreements that form the Law of the River. According to the Colorado River Compact of 1922, seven states--divided into the upper basin and the lower basin--would receive a share of the river's waters.  This New York Times article explained an agreement reached on Tuesday, March 19, 2019 by the seven states. Colorado, New Mexico, Utah and Wyoming constitute the upper basin states and Arizona, California, and Nevada, the lower basin.

To avoid a federal mandate and urged by the Bureau of Reclamation (BOR), a federal agency, the seven states wrote a drought contingency plan that they submitted to Congress. "Brenda W. Burman, commissioner of the Bureau Of Reclamation, the federal agency that oversees the river, pressured states and their water agencies to make a deal." The relationship between the federal government and the states results from the role each plays regarding the Colorado River: "the federal government regulates the water, the states own the rights to it."

Having experienced a 19-year drought and the possibility of a dry future with climate change, the group agreed collectively to curtail their use of water.  The primary objector to the agreement, the Imperial Irrigation District, relies most heavily on the river compared to other users in California. During the negotiations, Imperial proposed that it ask the federal government for $200 million to restore Salton Sea, the largest lake in California.  Salton Sea gets its water from return flows that have decreased due to the reduction of water use by farmers.   As the Salton Sea dries up, the dust blows, causing respiratory problems to local residents. Despite the offer of the six other states to "cover Imperial's share of water cuts without requiring that flows to the Salton Sea be reduced." California representatives to the agreement stated the agreement "may mean getting it done, but not getting it right."

Monday, March 18, 2019

Solving the rate puzzle: The future of electricity rate design, McKinsey's consultants Blake Houghton, Jackson Salovaara, and Humayun Tai

Last year my water rates doubled. I called my water provider and asked about the reason for the hike. Although my bi-monthly water bill still costs less that my monthly phone bill, the utility had not hiked rates to this extent since my service began. The water utility explained that their board had voted on a capital improvement charge. According to the McKinsey article, electric utilities should consider similar rate increases, given greater competition from distributed energy sources that generate less carbon.

Because of the federal regulation of electricity companies, unlike water utilities, electricity providers must obtain approval from federal regulators to increase rates. Regulators  and public utility commissions resist sudden spikes in rates. Having charged various customer classes according to the volume of energy used, residential, commercial, and industrial customers receive a volumetric rate, in addition to a flat rate, regardless of the time of use or other variables. Therefore, rates have remained consistent even when utilities face aging infrastructure and other capital costs, such as integrating renewable energy sources into the existing network. In addition to grid modernization, electric utilities face regulatory costs that they must absorb. With growing competition from low-carbon, distributed energy sources, electric utilities face a declining revenue stream and fewer customers.

The authors emphasize a change in the rate structure and urge companies to start planning for a more competitive future. The authors summarize the rate initiatives that utilities should take to generate sufficient revenue: "an updated rate design must align rates with system-wide costs, encourage flexibility, and address customer' differing needs." The authors suggest that utilities increase fixed charges and demand, volumetric, charges. Other recommendations include the adjustment of daily rates to reflect the costs of time of use (TOU)--cheaper at night and more costly during times of high demand. Additionally, the article adds that electric utilities should reward customers to control their home automation devices for cost effective use.  Partnering with customers, electric utilities can better manage the price of energy, its capacity, and the flexibility of use. Other variables that electric utilities can incorporate into the rate structure range from location, dynamic pricing based on market forces, reliability assurances, to energy source options--renewable versus other sources. Customers, residential, commercial, and industrial, would select which of the various offerings fit their needs. The utility would operate as a platform with a wide menu of options available to the customer. To realize these new rate goals and objectives company would assess their capability and support, customer acceptance, regulatory approval, and the alignment of a new rate structure with company sustainability policies.

Tuesday, February 6, 2018

Accelerating Digital Transformation : A Playbook for Utilities McKinsey&Company Adrian Booth, Eelco de Jong, and Peter Peters

All industries have realized the need to transform themselves using Information Technology tools. This article exposes the reasons why utility firms lag many other industries in adapting technologies for greater efficiency and effectiveness and what steps they can take to overcome barriers. Attempts at incorporating agile or lean management strategies or adding piece-meal digital technologies yield modest results.

By reorienting their focus, utilities can realize performance gains, according to the article, in areas such as "safety, reliability, customer satisfaction, and regulatory compliance" (p. 1).  Specifically, the article mentions improvement to technologies that enable "reimagining customer journeys, adding digital leak detectors to gas grids, using predictive models to schedule maintenance, and other asset management activities, and equipping field workers with mobile devices that let them access technical instructions while in the field" (p. 1).

The authors acknowledge what they view as the barriers to transformation. The first, utilities operate  to protect existing infrastructure investment and reduce asset investment risk. Second, as an industry not considered on the cutting edge, the utility sector has difficulty attracting innovators, such as data scientists. Third, legacy systems, processes, and procedures deter innovation.

The article offers solutions to these impediments to change by suggesting three focus areas and their key tasks. The focus areas include: "adopting digital ways of working, attracting and retaining digital talent, and modernizing the IT architecture and environment" (p. 2). The key tasks included for adopting digital ways of working, "Gain support of senior leaders so a digital transformation has high priority" and "Build a digital factory to produce new applications and insights using digital-native methods" (p. 2). For the focus area, attracting and retaining digital talent, the authors listed two key tasks: "highlight the intellectual challenge and social value of the utility's work" and "Tap into a broad pool of digital specialists who value the balance and stability that a utility offers" (p. 2). The last focus area, modernizing the IT architecture and environment, the authors suggest these key tasks: "Simplify the utility's product portfolio and business processes" (p. 2) and "Shift from all-in-one, monolithic IT systems to modular IT architectures" (p. 2).

The article's prescriptions apply to large utilities with the financial capability to engage in a multi-year,enterprise-wide change.

Friday, August 18, 2017

The Rising Advantage of Public-Private Partnerships : McKinsey&Company, Capital Projects and Infrastructure

Michael Della Rocca identified the benefits of Public-Private Partnerships (P3s) as extending beyond the ability to finance major infrastructure projects. Estimated at about $3.5 trillion, the infrastructure needs of the United States has other hurdles besides finance issues. Other obstacles include adhering to budgets and schedules. According to a Syracuse University report,  P3 projects overcome those hurdles more consistently than traditional government owned, managed, and financed projects. However, only 9 percent of U.S. projects have a P3 structure. Rocca cited government's faulty perceptions about P3s as the reason for the lack of acceptance.

Rocca listed the following "pain point" that P3s can alleviate:

"Unclear responsibilities
Poor alignment with strategy
Insufficient optimization of project features
Lack of an ownership mind-set in the delivery team
Lack of discipline in execution
Poor project controls
Low initial cost mind-set
Poor resource optimization"

Admitting that P3s cannot solve all these problems, Rocca referenced P3 successes in the United
Kingdom, Australia, and in the United States. Collectively, the projects saved project owners
up to 20 percent compared to traditional project financing. Rocca offered these statistics:
"The UK Audit Office found a reduction in project schedule overruns deploying a P3 model. An Australian study of 54 projects showed that only 1 percent went over budget; they also beat the schedule on average by 3 percent, while traditional approaches were on average 24 percent late."

The P3 model does not apply in instances of high "political, procurement, delivery, or revenue risks;
value-for-money analyses clearly point out instances where this model is not applicable". If investors demand certain returns on their contributions or if the partnership executes a flawed contract, avoid P3s.

As to the future of P3s in the United States, in January 2016, the Federal Highway Administration noted statutes that included the P3 model as a project delivery mechanism in 36 states and the District of Columbia and Puerto Rico. Rocca anticipated a growing use of P3s in the United States in the future.