The Problem
In the coming years population growth, climate change, urbanization, and other factors will stress the aged and complex U.S. water infrastructure—with considerable pressure being felt in the country’s warmer and more-agricultural regions. Investment in water systems has been low compared to other utilities, with hindrances including multilayered and sometimes excessive regulatory regimes, various geographical needs and realities, and limited funding. This, in turn, has hampered innovation in the water sector.
The Proposal
Key changes around pricing and governance would foster investment and innovation in water systems. Pilot efforts could be undertaken first by those states with the most pressing needs. Recommendations include new pricing models that are better aligned with the economic value of water rather than the volume of water provided, regulatory changes that support a more open and flexible governance environment oriented toward innovation, and financing and funding approaches, such as a public benefit charge, to raise investment funds.
Abstract
For more than a century the United States’ water system has been one of the most reliable in the world. Today, it provides sufficient water to support over 315 million people, almost 55 million acres of irrigated farmland, and a $16 trillion economy. Yet the water sector faces increasing pressures. Growth in population and the economy, along with urbanization and land-use changes, are threatening both water quality and the ability to meet water demand. Looking to the future, climate change is expected to further stress water systems in large parts of the country. Water infrastructure, by some measures the oldest and most fragile part of the country’s built environment, has decayed.
Solutions to the country’s growing water challenges lie, in part, with the development and adoption of new innovative technologies. Yet, in comparison to the electric power sector, investment in water innovation is extremely low. Indeed, investment by the savviest promoters of innovation—such as venture capital and corporate research and development—are strikingly low in the United States and globally when compared with other major sectors of the economy. This low investment helps explain low levels of innovative output, as measured by patent filings and other data. Adoption and dissemination of new innovations are also slow.
The primary barriers to innovation are related to the way that the many layers of governmental agencies and water entities manage the nation’s water sector. Among the main management and policy barriers are (1) unrealistically low water pricing rates; (2) unnecessary regulatory restrictions; (3) the absence of regulatory incentives; (4) lack of access to capital and funding; (5) concerns about public health and possible risks associated with adopting new technologies with limited records; (6) the geographical and functional fragmentation of the industry; and (7) the long life expectancy, size, and complexity of most water systems. Although the last three factors are inherent to the water sector and hard to change, substantial policy reforms are feasible that could alter pricing, regulation, and finance in the water sector—all in ways that would encourage innovation.
We focus on several recommendations: (1) pricing policies that would both better align with the full economic cost of supplying water and decouple revenues from the volume of water supplied; (2) regulatory frameworks to create an open and flexible governance environment that is innovation friendly and encourages valuable new technologies; and (3) financing and funding mechanisms, such as a public benefit charge on water, that can help raise sufficient funds to implement innovative solutions. As has been demonstrated in the clean energy sector, implementation of these policy reforms would facilitate greater innovation in the water sector. In addition, we recommend the creation of a state-level water innovation vision that would identify state-specific innovation opportunities and policies, along with state innovation offices to help implement the vision across the many varied agencies and firms relevant to the sector. While we expect these state water innovation offices would become common, a small group of states with the greatest water challenges—such as California, Florida, and Texas, or a consortium of like-challenged states in a region such as the West—would begin the process. Based on the lessons learned, other states could follow.
