Center on Financial Risk in Environmental Systems (CoFiRES)

Center on Financial Risk in Environmental Systems: Research Triangle (North Carolina)

Research Triangle (North Carolina)

Designing Robust and Adaptive Water Management Strategies for Regions Transitioning from Abundance to Scarcity

A wide variety of physical and financial tools, from water transfers to index insurance to infrastructure sequencing, can help water utilities combat the risks of water scarcity in a new era in which communities must meet rising demands in the face of uncertainty.

The Research Triangle region of North Carolina, including its four primary water utilities (Cary, Durham, Orange Water and Sewer Authority (OWASA) and Raleigh).

The Research Triangle region of North Carolina, including its four primary water utilities (Cary, Durham, Orange Water and Sewer Authority (OWASA) and Raleigh).

Geographic regions have historically developed in an environment of either water abundance or water scarcity, initial conditions that lead to different developmental paths and stark differences in the infrastructure, institutions and societal attitudes that makeup a region’s water management systems. The Southeastern US currently faces a transition from abundance to scarcity due to population growth, economic expansion, and limits on new water supply development. Like many other formerly water-rich regions, the Southeast is not prepared for this transition due to management systems that are poorly suited for coping with significant levels of scarcity. Climate change will likely exacerbate this situation, especially if its effects are amplified by increased urbanization and changing land use. Our research is focused within the Research Triangle of North Carolina (Triangle), a region recently subjected to droughts-of-record in 2002 and 2007-2008 that represents a broader Southeast US at risk of future water scarcity. Work on this project has generated both tools as well as substantial water management insight for reducing supply and financial risks to utilities. By applying non-structural alternatives such as water transfers – treated and raw – as well as demand reduction through use restrictions, Triangle utilities were shown to meet regional objectives of reliability and cost with a reduced dependence on long-term, expensive infrastructure projects. However, it is critically important to note that use of these short-term drought mitigation strategies could introduce variability in costs and revenues that are financially disruptive to water utilities, putting them at risk for credit downgrades, a potentially catastrophic financial event. This work found the use of self-insurance (reserve funds) and third-party index insurance could offset much of the drought-related financial risk. Utilities in the Triangle were also found to benefit from the identification of optimal infrastructure development pathways, reducing long-term costs through proper sequencing and timing of structural decision-making. Most recently, our work has explored the ability of raw water transfers, a valuable drought mitigation strategy overlooked in the riparian regulatory regime of the Eastern US, to help water utilities avoid expensive infrastructure projects while maintaining service reliability to customers. Overall, this project aims to identify more sophisticated water and financial management strategies for water utilities, affording them additional flexibility as water scarcity concerns continue to spread across the US.

Cornell University: Dr. Pat Reed

University of North Carolina at Chapel Hill: Jeff Hughes, UNC Environmental Finance Center, Dr. Andy Yates, Economics Department

University of Virginia: Dr. Larry Band

Related Publications:

Mozenter, Z. D., Yates, A. J., Schnier, K. A., Hughes, J. A. and G. W. Characklis. (2018) “Understanding Water Utility Attitudes Toward Water Transfers and Risk: Pretest Results,” Journal of Water Resources Planning and Management. doi: 10.1061/(ASCE)WR.1943-5452.0000895

Trindade, B. C., Reed, P. M., Herman, J. D., Zeff, H. B. and G. W. Characklis (2017). “Reducing Regional Drought Vulnerabilities and Multi-City Robustness Conflicts Using many-Objective Optimization Under Deep Uncertainty,” Advances in Water Resources, 104, pp. 195-209, doi:10.1016/jadvwatres.2017.03.023.

Zeff, H. B., Herman, J. D., Reed, P. M. and G. W. Characklis (2016). “Cooperative drought adaptation: Integrating infrastructure development, conservation, and water transfers into adaptive policy pathways,” Water Resources Research, 52, doi:10.1002/2016WR018771.

Herman, J. D., Zeff, H. B., Lamontagne, J. R., Reed, P. M. and G. W. Characklis (2016). “Synthetic Drought Scenario Generation to Support Bottom-Up Water Supply Vulnerability Assessments,” Journal of Water Resources Planning and Management, doi:10.1061/(ASCE)WR.1943-5452.0000701.

Herman, J. D., Reed, P. M., Zeff, H. B. and G. W. Characklis (2015). “How Should Robustness be Defined for Water Systems Planning Under Change,” Journal of Water Resources Planning and Management, doi:10.1061/(ASCE)WR.1943-5452.0000509, 04015012.

Herman, J. D., Zeff, H. B., Reed, P. M. and G. W. Characklis (2014). “Beyond Optimality: Multi-Stakeholder Robustness Tradeoffs for Regional Water Portfolio Planning Under Uncertainty,” Water Resources Research, doi:10.1002/2014WR015338.

Zeff, H. B., Kasprzyk, J. R., Herman, J. D., Reed, P. M. and G. W. Characklis (2014). “Navigating Financial and Supply Reliability Tradeoffs in Regional Drought Portfolios,” Water Resources Research, 50, doi:10.1002/2013WR015126.

Caldwell, C. and G. W. Characklis (2014). “Impact of Contract Structure and Risk Aversion on Inter-utility Water Transfer Agreements,” Journal of Water Resources Planning and
Management, 140(1), doi: 10.1061/(ASCE)WR.1943-5452.

Zeff, H.B. and G. W. Characklis (2013). “Managing Water Utility Financial Risks through Third-Party Index Insurance Contracts,” Water Resources Research, 49, doi:10.1002/wrcr.20364.

Funding Support:
National Science Foundation: Water Sustainability and Climate program, award no. EAR-1360442

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