By: Gordon Davidson, Senior Advisor for Technology, Partnerships & Redevelopment, THG

September 2014

In 1973 the Organization of the Petroleum Exporting Countries (OPEC) stopped selling oil to the United States.  This energy embargo led to the common sight of gas station signs indicating that there was no gas to be sold today.  Americans, and western powers generally, had to develop new strategies regarding energy to ensure that a global geo-political crisis of this kind did not occur again.  Thus was ushered in the era of energy efficiency and a broadening of the societal mind-set of sustainability.

Although the parallels are not perfect, this energy crisis and the subsequent transformation of the way in which energy was produced, transmitted, measured, and consumed could be used as a foreshadowing of how we view water both globally and locally.  The great line from Shakespeare’s The Tempest, “What is past is prologue,” may have some applicability here.

Energy was cheap and its provision was taken for granted.  Electricity was generated and distributed through a heavily regulated system that had hardly changed in decades.  Resistance to change was strong, but change, nonetheless, was occurring, because of necessity, including concerns over air pollution, global warming, and dependency.

When it came to this world of energy, Lord Kelvin’s credo, “to measure is to know,” could be modified to mean, “to measure is to finance.”  Beginning with something as simple as a smart meter, worldwide investments in energy efficiency and renewable technologies grew dramatically, demand response became mainstream, cities became smarter, and domestically fresh eyes were put on the staid universe of electric utilities and the sources of energy.   Deregulation picked up steam, creative financial models were developed, and fracking transformed the energy landscape.  Innovation happened.

The water embargo is not a singular event like it was for energy, but a joint-venture between Mother Nature and human behavior.   Systemic shifts in weather patterns are leaving huge swaths of land parched and cracked, illogical water usage is causing shortages, and pollution is rendering enormous volumes of water unusable.  Billions of people are at risk as a result. Just as it was for energy, we are now beginning to understand the true value of water and that this “intrinsic” pricing based on better measurement and clearer social goals will drive innovation and investment, especially where water, energy, and agriculture intersect.

Venture capitalists and strategic investors will play a key role in the development and commercialization of technologies that foster the “circular economy” – that is the use, reuse, recovery, and restoration of water.  Information technology will be the platform that links these factors together and allows users and managers the ability to measure and price water at every step along this sustainable pathway.  More precision will change behavior and foster more investment.

The largest investment will be in infrastructure.  For the U.S. alone, the investment needed to upgrade water utilities is estimated to exceed $1 trillion.  To get an idea of how water utilities are going to address this challenge, one only needs to read “The Value of Water – A Compendium of Essays by Smart CEO’s” by Donna Vincent Roa and the Value of Water Coalition.  This remarkable book is a window into sustainable and innovative thinking that throws off the dust collected by years of a status quo mindset.   In other words, this isn’t your father’s water utility.

Water utility executives are drawing lessons from Singapore, Israel, and Western Australia, listening to corporate executives from Coca-Cola and the pharmaceutical industry, and exploring financing alternatives with Wall Street.  We will see more public-private partnerships such as the KKR/United Water deal with the Bayonne Municipal Utilities Authority in New Jersey, more use of “green” bonds such as the issuance of green century bonds by DC Water, and more innovation across the board.  New companies, like Aquees, which provides a software/smart metering and technology purchase platform, will emerge.  As infrastructure and technology investment grows, there will be a ripple effect all through the water supply-chain creating jobs and improving lives, including those who have limited access to clean water.

When the 1973 oil embargo slammed into the early stages of the sustainability movement, the way we as a society looked at energy changed forever.  We are at a similar inflection point for water.  We’ve always known, a priori, that water has value.  But now that we don’t have enough of it, or enough of it in the right places, or enough of it that is clean, the value we as a society place on water is changing.

Change, initially, will come slowly, as it did for energy.   But, like energy, a simple step forward signals the future.  So, when the installer of the smart water meter comes into your business, your office building, your apartment building, and your home, think of Lord Kelvin and let that person in.

Gordon Davidson is a serial entrepreneur and thought leader in the environmental, water, and energy arenas.  He is a former senior executive at US EPA and a Senior Advisor to The Horinko Group.

By: Cathryn Courtin, THG

June 2014

Recent months have seen a number of accidents resulting from crude oil shipment by rail.  On April 30, a train loaded with crude derailed in Lynchburg, VA, causing three tankers to burst into flames.  Nearby residences and businesses had to be evacuated, and 30,000 gallons of oil were spilled into the James River.  On December 30, a train derailed and exploded near Casselton, ND, spilling 400,000 gallons of crude.  Last year, a series of rail accidents in the U.S. and Canada culminated with a major derailment in Lac Mégantic, Quebec, which resulted in an explosion killing 47 people and wiping out a large part of the town’s business district.

Shipments of crude oil by rail have dramatically increased in recent years.  This influx has in part been caused by the rapidly increasing oil and gas development in the Bakken formation in North Dakota and Montana, the Eagle Ford and Permian Basins in Texas, and in the Canadian oil sands.  Routes from new production fields to refineries often do not have pipelines or where pipelines exist, they are operating at maximum capacity.  Given the standstill on new pipeline project approvals, companies have moved to rail and trucks to transport crude oil and other fluids associated with oil and gas development.  This has resulted in a staggering increase in the amount of crude shipped by rail, up from 9,500 carloads of crude oil in 2008 to 400,000 in 2013.

Many of the most serious rail accidents have been intensified by the flammable nature of the light crude that is being transported, in most cases from the Bakken region.  This type of crude contains more natural gas liquids than traditional heavy crude, the variety produced from the Canadian oil sands.  The Department of Transportation’s (DOT) Pipeline Hazardous Materials Safety Administration (PHMSA) released a safety alert in January 2014 to notify stakeholders of this issue and reinforce the requirement to properly test and classify hazardous materials prior to transportation.

In an effort to further prevent accidents, DOT’s Federal Railroad Administration (FRA) and PHMSA have launched “Operation Classification” in the Bakken region, a compliance initiative aiming to verify that shippers are accurately classifying the oil being shipped so that federal, state, and local safety practitioners know what to expect in case of an accident.

Regulatory efforts to bolster safety have continued with more urgency following each incident.  On May 8, DOT issued an emergency order requiring railroads to notify State Emergency Response Commissions (SERCs) when making large shipments (1 million gallons, or about 35 tank cars, or more) of Bakken crude oil (under current practices, railroads are not required to notify states of movements of hazardous cargo).

In announcing this new rule, a DOT official stated, “the number and type of petroleum crude oil railroad accidents…that have occurred during the last year is startling, and the quantity of petroleum crude oil spilled as a result of these accidents is voluminous in comparison to past precedents.”

Simultaneous to the release of the emergency order, FRA and PHMSA issued a safety advisory urging shippers of Bakken crude oil to choose the tank cars of the highest level of integrity and safety from their fleets for these shipments.

Parallel efforts to increase safety include conducting special inspections, moving forward with a rulemaking to enhance tank car standards, and discussing with railroads immediate voluntary actions they can take such as reducing speeds, increasing inspections, choosing the safest routes, using new brake technology, and investing in first responder training.

The rulemaking on tank car standards aims to update standards for the DOT-111 type of railroad car, which are used to transport crude oil and other hazardous and nonhazardous liquids.  Many groups and politicians have encouraged PHMSA to release the proposed standards quickly.  The National Transportation Safety Board (NTSB) has warned that these tank cars are prone to spills, tears, and fires in derailment for 20 years now.  Canada’s Minister of Transport announced proposed regulatory changes in January 2014 that would require additional safety measures for new tank cars.

New standards in the U.S. have been making slow progress since 2011, and the rulemaking process was officially initiated by PHMSA in September 2013.  The rules are expected to ensure the safety of DOT 111 tank cars transporting Class 3 (flammable and combustible) Packing Group I (great danger) and II (medium danger) materials.  There is an ongoing debate between stakeholder groups, however, on the best method and best timeframe for this—by retrofitting old cars, phasing out old cars, setting standards for new cars, or some combination of those approaches.

OMB announced on May 1, 2014 that PHMSA had submitted a notice of proposed rulemaking (NPRM) for “Enhanced Tank Car Standards and Operational Controls for High-Hazard Flammable Trains.”  This follows the advanced notice of proposed rulemaking (ANPRM) published last September.  This timeline of activity suggests that the rulemaking process is proceeding faster than average for PHMSA.  A final rule, however, is not expected before 2015.

Following the recent accidents in Canada, the Canadian government has taken a number of additional actions to improve the safety of rail shipments.  In October 2013, they passed laws requiring classification tests on crude oil before transporting or importing it through Canada.  More recently, in April 2014, Canadian regulators announced that they would require emergency plans from railroads for responding to explosions and would require shippers to upgrade to the safest, newest models of tank cars within three years.  Since cross border rail shipments must meet the safety requirements of both countries, this requirement will spur upgrades in the U.S. and likely encourage similarly protective U.S. regulations.

Origin of Regulatory Regime

The oil and gas exemption from the federal Resource Conservation and Recovery Act (RCRA) precludes EPA from regulating the transportation of oil and gas development related fluids including hydraulic fracturing fluid, wastewater, and crude oil.  The federal bodies responsible for non-pipeline transportation regulation include the Federal Highway Administration (FHA) and the Federal Railroad Administration (FRA), for transportation by truck and rail, respectively.

DOT’s PHSMA is responsible for the safe transport of hazardous materials in all modes of transportation.  The requirements issued by PHSMA are enforced by FRA with respect to railroads.  NTSB investigates accidents and makes recommendations for preventing them in the future but has no regulatory authority.

When an incident occurs involving the release of oil, the National Oil and Hazardous Substances Pollution Contingency Plan, or the National Contingency Plan (NCP) regulates the response to the spill.

If oil is spilled into navigable waterways, shorelines, or other resources of the United States, the Clean Water Act, as amended by the Oil Pollution Act of 1990, Section 311(c), provides explicit federal authority to respond.

Related Efforts Under EO 13650

While DOT works to improve crude oil transportation safety through FRA and PHMSA’s authorities, the Department has simultaneously been working with EPA, Department of Labor, Department of Homeland Security, and a number of other federal agencies to respond to Executive Order (EO) 13650, Improving Chemical Facility Safety and Security, issued in August 2013.  The EO was administered in response to the West, Texas chemical explosion and aims to improve the safety of chemical facilities.  Among other things, it requires agencies to enhance their coordination, information collection and sharing, and collaborate to modernize key policies, regulations, and standards.

While not directed at the transportation of crude oil, the requirements of this EO that relate to crude oil are those that encourage agencies to ensure that state, tribal, and local emergency response commissions have ready access to key information and work with chemical facility owners and operators to improve response procedures, information sharing, and collaborative planning.

With respect to the “modernizing policies, programs, and requirements” clause of the EO, options for improvement were released by OSHA for public comment on January 3, 2014.  The public comment period closed on March 31, 2014.  One of the considerations listed was broadening OSHA’s Process Safety Management (PSM) standard and EPA’s Risk Management Program (RMP) rule to address additional substances and types of hazards such as those derived from upstream oil and gas facilities.  This round of public feedback will inform the agencies’ plans going forward but does not supersede the standard notice and comment process should a rulemaking be pursued.

EPA’s RMP requires operators of facilities that manufacture, use, store, or otherwise handle certain listed flammable and toxic substances to develop risk management programs that include a hazard assessment, prevention mechanisms, and emergency response measures.  OSHA’s PSM standard sets requirements for the management of highly hazardous substances to mitigate accidents that might endanger workers.

OSHA published a Request for Information (RFI) in the Federal Register in early December 2013 and accepted comments on potential revisions to its PSM standard until March 31, 2014.  On May 22, 2014, EPA submitted a request to OMB for approval of an RFI related to the RMP rules.  Developments on these parallel regulatory efforts are expected in the coming months.

Neither the RMP nor the PSM rules currently apply to crude oil, but expanding the rules to cover oil and gas facilities has the potential to improve the safety of facility storage of substances like crude oil and community preparedness in surrounding areas.

A status report for the President covering all ongoing efforts under EO 13650 was released by the EO working group co-chairs in May 2014.  Actions taken to address the general requirements of the EO may work to improve the coordination of federal agencies, state and local planning commissions, and communities in training for, planning for, and responding to accidents, should they occur.

The Long Slog: What Lies Ahead for the Financing of Our Nation’s Inland Waterways Infrastructure, a column featured in the January 2014 edition of the American Water Resources Association’s IMPACT Journal, is authored by Brendan McGinnis, Director of The Horinko Group’s Water Resources Policy, Development and Sustainable Communities team. In it, the author examines the path to smart modernization of the nation’s inland waterway infrastructure. Given the critical importance of this outdated and underfunded infrastructure, innovative financing strategies such as public-private partnerships must be explored to take the next step in finding a solution to this urgent problem.

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