The Public Startup Charting Bold New Waters
Water utilities are struggling to lower their operation costs and simultaneously meet stricter environmental rules. Blue Drop, the brainchild of DC Water’s former leader, wants to help.
Most startups fail. Within the first four years, anywhere from 50 to 90 percent of firms go belly up. Investing in them is risky. It’s easy for things to go wrong.
But Blue Drop LLC isn’t a typical startup. To begin with, there isn’t a hoodie or open-loft office to be found in its modest headquarters in downtown Washington, D.C. And the company’s lone investor, the public utility DC Water, hails from an extremely risk-averse sector.
There’s something else unique about Blue Drop: A healthy portion of its revenue plan relies on selling truckloads of what used to be human poop.
Launched in late 2016 with a nearly $3 million investment in cash and resources from DC Water, which provides water and sewage services to residents of the nation’s capital, Blue Drop is the brainchild of George Hawkins, the utility’s former CEO and general manager. Hawkins, who stepped down only recently after a nine-year tenure, is credited with not just restoring public trust in the utility but with making it one of the most cutting-edge water enterprises in the country. (Governing named him a Public Official of the Year in 2014.) Now, he and others think the innovative and creative solutions that have emerged from DC Water over the past decade can be repackaged and marketed to others. Blue Drop, a nonprofit consulting enterprise, will do that by connecting potential public utility clients with the experience and know-how of DC Water. The company has two full-time employees -- for now -- plus five part-timers on loan from the utility.
Blue Drop is the brainchild of George Hawkins, DC Water’s former CEO and general manager. (David Kidd)
That’s where the poop comes in. Initial revenue, which Blue Drop hopes to use to repay DC Water within three years, will be generated from a soil additive that is produced at DC Water’s Blue Plains Advanced Wastewater Treatment Plant. It is made by extracting waste from sewer water and removing harmful pathogens using heat, pressure and bacteria. The end result is a nutrient-rich product similar to soil that is safe to add to anything from kitchen gardens to farm crops. DC Water calls it Bloom.
There is a second revenue stream that will come from consulting services. Here’s where it gets tricky. Blue Drop is certainly not the only utility consultant out there. In fact, a firm called Raftelis Financial Consultants specializes in utilities and has consulted with DC Water on financial planning and rate guidance since 2008. But where Hawkins believes Blue Drop is different is that it is essentially an extension of DC Water. By loaning out its experts, DC Water is banking on there being a market beyond its jurisdiction for the utility’s talent and hands-on experience, which most private firms do not have. “Why not offer consulting services at less cost and from someone who’s already done it?” says Hawkins. “We’ll start them 80 yards down the field.”
Still, the blended relationship with DC Water is both Blue Drop’s biggest asset and its biggest challenge. After all, there’s only so much outreach and sharing of expertise DC Water employees can do working part time for Blue Drop while still performing their primary jobs. The approach has been working on a small scale for the past year. But the nonprofit’s long-term goal after it pays back DC Water is to generate enough revenue so that anything beyond its expenses will go back to the utility for ratepayer relief. That means expanding its efforts and finding out if there exists a viable market for its expertise. “I think no one will argue that Blue Drop’s services are valued,” says Adam Krantz, CEO of the industry group National Association of Clean Water Agencies (NACWA). “But the jury’s still out as to whether it will work at scale.”
Blue Drop’s launch comes at a time when the water industry is at a fork in the proverbial river. For decades, the federal government has been ramping down its investment in water utilities while simultaneously imposing stricter environmental standards on them. Since 1977, federal investment has fallen by 74 percent in real terms while the Environmental Protection Agency has set about suing businesses and governments to enforce standards under the 1972 Clean Water Act. While few in the water industry today are arguing against these water quality standards, implementing them is expensive. Low-interest government loans available to most cities and counties have helped some. Still, by one estimate, U.S. water systems need to invest $1 trillion over the next 20 years. As a result, utilities face putting the financing onus more and more on the localities where they operate and on their ratepayer base.
Blue Drop President Alan Heymann, left, says that if the nonprofi t wins the three contracts it has bids out on, “we’re busy for the rest of the year.” (David Kidd)
While private-sector investment can help, the consensus is that so much money is needed that such investments won’t offset what could be dramatic rises in water rates. Some places -- typically small and mid-sized cities -- have been so overwhelmed by the prospect that they’ve resorted to selling off their water utilities. This move has the attractive benefit of not only getting utility debt off the books, but also providing a one-time cash infusion to spend on other needs. For example, in 2016, financially troubled Scranton, Pa., sold its sewer authority to Pennsylvania American Water, a private company, for $195 million. The move netted the city $83 million to help pay off some of its pension and high-interest debt while offloading an EPA-required $140 million upgrade to the system to protect the Chesapeake Bay. Per the agreement, the private company can raise rates no more than 1.9 percent on average for the first 10 years as opposed to the 5 percent annual increases over 25 years the utility was contemplating. Selling off a public utility is controversial. Within the U.S., public water and sewer systems dominate, with 88 percent of the population served by public systems, according to the University of North Carolina’s Environmental Finance Center.
But there continues to be pressure on water and sewer systems to experiment with new methods to lower the costs of operation -- even as the utilities are already risk-averse. They have to be. After all, when you are responsible for providing clean drinking water to hundreds of thousands of people every single day, there simply isn’t room to try something that may not work. That, says Radhika Fox, CEO of the nonprofit US Water Alliance, tends to attract conservative engineering minds, making the adoption of innovation much slower than in other industries. On top of that, the water industry is incredibly fragmented, with more than 67,000 public water and wastewater systems in the country. So testing and disseminating new technology can be a daunting task. It’s one of the many reasons, Fox says, that venture capital in the water industry lags behind other sectors. In 2015, for instance, the Cleantech Group tracked 430 investment deals totaling slightly more than $2 billion. Of those, a mere 2 percent went to water startups, according to data analyzed by the social journalism publication Medium.
This climate has left a huge gap when it comes to developing new technology that could move the industry forward. According to a worldwide 2016 survey by the Water Research Foundation, more than 90 percent of utilities said innovation is critical but only about one-third actually had a process and defined measures by which to innovate. In short, it’s up to utilities with large ratepayer bases to conduct and disseminate large-scale research and development.
The notion of turning wastewater into a revenue stream has been one such development. Along with D.C., which has partnered with Virginia’s Hampton Roads Sanitation District to develop its biosolid process, Greater Chicago’s water district is also making big strides in this area. At its Calumet Water Reclamation Plant, the largest in the world, engineers create a compost from its biosolid and sell it directly to consumers for $10 per cubic yard. Not only does this product generate tens of thousands of dollars in revenue, but it can also save money on the production side. That’s because the special bacteria that help break down the noxious components of wastewater produce a gas that can be harvested into energy. So far, this technology has made creating the biosolids in places such as Chicago and D.C. a relatively energy-neutral process. Chicago is doubling down on that idea by investing $10 million to expand anaerobic digestion efforts at Calumet. Its goal is to produce enough energy by 2023 to zero out its annual $50 million electricity bill.
Bloom, the soil conditioner, is made by extracting waste from sewer water. (David Kidd)
DC Water, under Hawkins’ encouragement, has also put time and effort into smaller-scale ideas. Case in point: Among the utility’s extensive list of patents is one for an ergonomic manhole cover lifter. Weighing in at more than 100 pounds, manhole covers are notoriously difficult to remove and are one of the biggest causes of accidents in the utility industry. Most portable cover lifters, which look like an altered crowbar, require workers to position themselves at an angle while yanking the cover free. Frustrated by this, two longtime DC Water employees designed and welded a new ergonomic pick at one of the utility’s machine shops. While it might not be flashy, the new design can save workers time and spare them injuries -- which ultimately saves the utility money.
Innovations like these have been at the core of Hawkins’ approach at DC Water. “When you think of innovations, you’re going to think technology and software,” he says. “But I don’t care what you do, if you’re here for six months or more -- whether you work in the machine shop, the mail room or anywhere else -- you’re going to get to know your job and you will think of ways to do your job better. And we want to know.”
On the innovation spectrum, Blue Drop falls somewhere between manhole cover lifter and gas-into-energy converter. It seeks to capitalize on and monetize the salesman-like approach Hawkins brought when he took over DC Water in 2009. He immediately set about rebranding what was then an extremely unpopular utility and forging a better relationship with its customers. Hawkins’ rigor regarding community outreach was born partly out of necessity. Because it didn’t have access to low-interest federal loans to pay for federally mandated environmental upgrades, DC Water had to go to its customer base to pay for it. Thanks to the focus on building out its public relations, the utility was able to raise rates even while shedding its reputation of being perhaps the most hated enterprise in the District. That relationship-building skill -- which even today remains rare in the utility world -- has gained recognition nationwide. “When George and his team do something remarkable,” says NACWA’s Krantz, “making people aware of it is part and parcel of what they do really well.”
With many other places in the country facing a similar rate-hike conundrum, Hawkins wants to parlay DC Water’s experience and reputation for good PR into a legitimate revenue stream for the utility. In January, he stepped down as CEO and general manager to start a solo consulting business, which will include advising Blue Drop.
The soil conditioner is now being sold in bulk quantities in D.C. and Maryland. (David Kidd)
So far, the business plan for Blue Drop seems to be working. Bloom, the soil conditioner made by DC Water, is now being sold in bulk quantities in D.C. and Maryland, and Blue Drop is working on making it available in Virginia. The nonprofit receives sales and marketing fees from DC Water for that service. If they reach their goal of selling 40,000 tons a year, those profits and annual cost savings alone could pay back DC Water’s investment by 2020, says Alan Heymann, Blue Drop’s president.
On the consulting side, Blue Drop is more cautious with predictions. Heymann’s goal is $1 million in annual consulting revenue by 2023. The firm completed three projects in 2017: helping the nonprofit group New Jersey Future work with a group of utilities on their customer messaging; hosting workshops on change management for utility leaders in the York Region in Canada; and a survey and analysis for Harrisburg, Pa.’s Capital Region Water aimed at improving internal communications. At the start of 2018, the nonprofit had begun work on two marketing-related contracts with utilities in Massachusetts and was getting ready to bid on three other requests for proposals from places located all over the country. “If we get those,” says Heymann, “we’re busy for the rest of the year.”
It will also provide the test Blue Drop needs to determine whether there truly is a market for its services. Observers say Blue Drop can fill an unpopulated niche in the industry by offering something beyond the peer-to-peer advice freely given, but not up to the level of large-scale engineering consulting. It’s an area where providing information based on a utility’s direct experience is ideal, but the time the utility spends passing on that information would take workers away from their jobs at the expense of ratepayers. There are positive signs that Blue Drop could be successful. For instance, Capital Region Water’s Andrew Bliss says they chose the nonprofit over other consultants in part because they could save time and money by doing away with explanatory sessions. “We quickly realized in our meetings that Blue Drop really ‘got’ us and what we do,” he says. “We weren’t starting from scratch.”
But the notion that Blue Drop’s consulting work will make a difference in the pockets of D.C. ratepayers is a bit of a reach, at least in the short term. Since 2009, customer rates have more than doubled as DC Water has executed major environmental upgrades. Even if Blue Drop is wildly successful and generates a few million dollars in profit after five years, it’s a drop in the bucket for a utility with more than $617 million in annual revenue.
In fact, many in the water industry feel Blue Drop’s more immediate impact will be outside of D.C. “It’s not going to be a rate savings or even cushion rate shock in the immediate sense,” Krantz says. “But if you can do things like put utilities together to leverage purchasing power or find other ways to save money as a group -- that’s a savings to ratepayers over the life of that project.” And that’s what Blue Drop intends to do. Its founders are working on creating a consulting network made up of peer utilities and private consultants across the country who could essentially function as subcontractors for proposals that Blue Drop bids on. The network would also allow utilities to provide consulting services to each other without DC Water. Such a network could help lift up utilities in smaller and mid-sized cities by connecting them with larger partners.
So while Blue Drop is a first, the hope is that other large utilities can follow a similar path. DC Water is particularly well known for its crisis management and branding expertise, says Blue Drop board member Andrew Kricun, who is also executive director and chief engineer of the Camden County Municipal Utilities Authority in New Jersey. But other utilities have their own types of expertise worth sharing. “The idea is to accelerate innovation as a whole,” he says. “Why should we have to work out our challenges in silos?”