The provision of safe drinking water and the protection of public health and the environment through the treatment of wastewaters is increasingly informed by risk-based decision-making. Aspects of utility management such as process design and optimisation, asset management and compliance monitoring rely on a mature understanding of process risk within a broader context of business and environmental risk management. For operators, risk management is now regarded as a key business function. Understanding risk and being able to implement risk management is critical to the provision of safe drinking water.
As part of a move towards a more strategic, forward looking approach to utility management, the IWA is promoting a risk-based approach to water utility management, from catchment to tap, through the implementation of the Bonn Charter (2004).
- Why manage risk?
- Basic probability and statistics
- Process risk and reliability analysis
- Assessing risks beyond the unit process boundary
- Regulating water utility risks
- Business risk management for water and wastewater utilities
- Managing opportunity and reputational risk
- Embedding better decision-making within utilities
Having provided rationale for the importance of risk management, the text begins with the familiar territory of unit processes and process reliability. It then broadens out to consider, first environmental then organisational risk management. The final sections are concerned with better utility decision-making. The book has been designed for individual self-paced study. Each section of the text gives step-by-step learning in a particular subject, that includes an approximation of how long you will need to spend on that section and provides key points that highlight the principles of the different sections. Each unit includes exercises to help understand the material in the text as well as self-assessment questions to test your understanding and text references.
Read an Excerpt
Why manage risk?
1.1 Risk management and the water utility sector
Risk management is the primary purpose of the water supply and sewerage business. The production and supply of safe drinking water and the treatment of wastewaters to acceptable levels of public and environmental risk have become an essential societal service for affluent nations and remain a top priority for developing countries and international development bodies. Service providers, the water and wastewater utilities that, with others, manage these risks from catchment to tap and then back to the catchment face an array of complex threats and opportunities increasingly described in risk terms. The aim of this introductory unit is to:
state the central importance of risk management to the overall management of water and wastewater utilities;
provide a justification for considering risk management by reference to unit treatment processes;
introduce the terminology, language and fundamentals of risk-based decision-making;
describe the broader context of business and environmental risk management for utilities in which process risk analysis occurs; and
set the study context for Unit 2 on Basic Statistics and Probability.
Water and wastewater utilities
Utility organisations provide services to society such as the provision of safe drinking water, the collection and treatment of wastes and wastewaters and the provision of electricity to industry and homes. Historically, utilities were in state ownership. Many have now become private sector organisations or corporatised entities, whilst others have remained in public ownership. Whichever operating mode they adopt, utilities are under increasing public and regulatory scrutiny, manage vast networks of, sometimes, ageing infrastructures and operate increasingly in a global and multi-utility environment. Their business has become more complex; capital investment is harder to come by, and expectations of utility performance are at an all time high. In this business climate, utility decisions must be defensible, based on good evidence and targeted on the issues that matter most. To deliver this, utilities have to be able to competently assess, prioritise and manage risk.
For example, in the past the UK water industry was dominated by relatively small, reasonably 'low tech' public sector organisations with manpower costs typically in excess of half the total operating expenditure. Now, many water supply companies are either quoted on the stock exchange or form part of much larger international organisations. As a result, they are increasingly aware of the risks of major events that may impact on the future well-being of their business as well as their customer base.
Risk and regulation
The public scrutiny of utility organisations usually comes in the form of 'regulation' administered by government bodies that allow operations (water treatment works; wastewater works; biosolids spreading to land) to go ahead by issuing permits, usually with certain conditions attached. These 'licenses to operate' act as the 'driving licences' for utilities, allowing them planning permission and permissions to abstract water from the environment and discharge treated wastewaters back to rivers, for example. Over the last 40 years, since our understanding of environmental impacts has developed, environmental regulation has become increasingly complex and wide ranging as we seek to protect public health and the environment from releases from industrial processes and other activities within water catchments.
Regulatory bodies now set challenging standards and can monitor an entire water organisation's performance against targets. The ultimate sanction on a utility is the loss of their operating licence. Companies have also been taken to court by regulators for failing to meet standards or for institutional failures. Governments maintain a close eye on the value-for-money that utilities offer society and, against the background of rising standards, there is considerable pressure by governments to restrict price rises to the customer. Managing the business risks to (and from) a utility has become the principal role for a utility manager. But s/he must also consider these risks in the light of opportunities for growth, technological and business process innovation, diversification and business efficiency. Managing this balance of risk and reward is challenging, particularly in a sector that has historically been risk averse.
Regulators have to regulate an increasing number and diversity of process operations and environmental activities under their jurisdiction. Most environmental regulators have environmental protection responsibilities for a wide range of operations and activities such as nuclear power plants, integrated refineries, waste management facilities, land use, farming practices and contaminated sites alongside water and wastewater treatment facilities. Often with their own fixed resources, they must decide where best to place their regulatory efforts and, within these categories of facility, where to target regulatory attention. This is increasingly a risk-based activity, whereby regulators formally assess risk and then focus on activities that are likely to pose the greatest harm.
Many regulators require utilities to demonstrate the management of operational risk – to show to them that they are capable of assessing and prioritising the management of the key threats to their business, the environment or public health. Regulators, operators and their professional advisors use risk assessments to inform decisions on operational safety and risk. They consider the magnitude and characteristics of risk alongside the costs of risk management, relevant social issues, the availability and capacity of technologies and the suitability of management arrangements required to manage key risks. Considered in this light, risk management is truly a collective enterprise between the regulator and regulated community.
1.2 Should organisations manage risk?
The answer to this question is a resounding 'yes'. At their core, utilities perform a public health service for society (water treatment, waste management, wastewater treatment, electricity generation and supply) and without effective risk management an adverse, preventable event could pose unacceptable risks to individuals, with the additional consequences that the company could lose its reputation and ultimately its business. All businesses involve risk, if only financial risk. Companies that have to manage financial risks, health and safety risks and environmental risks have a more complex task to perform.
Do organisations manage risk?
It is likely that all companies are managing their risks to some extent, but in many cases without formally recognising it as risk management, and in many cases without using formalised risk management processes. This has been the case for many business sectors up until recently (1990s). This is now changing, however, with the advent of new accounting and business auditing standards. In many countries, public and private sector organisations are expected to assess, publicly declare and demonstrate how they are managing their key business risks.
Do organisations manage their risks well?
Whilst most organisations couldn't stay in business unless they operated in a safe and responsible manner, if one was to consider their business as a whole and the full range of hazards to which they are exposed, in many cases the answer to this question would be 'no'. There are many reasons for poor or inadequate performance: lack of knowledge and an incorrect perception of risk, an inadequate allocation of resources, the inadequate provision of risk assessment tools, historical practices, poor competence, poor leadership, inappropriate prioritisation of organisational goals. Clearly the more complex the organisation, the greater the scope and scale of risk and therefore, the more important it is that companies employ capable risk managers.
Risk management for water and wastewater utilities is further complicated by the nature of water supply and wastewater discharge. Unlike many sectors, there are no opportunities to recall the 'product' when supplying drinking water to customers, or discharging treated wastewaters to the environment. Therefore service delivery, ideally, has to be right first time, every time. Often, by the time that evidence emerges that a failure has occurred it is too late to intervene and prevent exposure to a hazard, simply because the water has already been supplied or the wastewaters discharged. Better realisation of this very limited reaction time is now forcing a preventative approach to risk management in the water and wastewater sector; that is, utility managers must now anticipate and secure early warning of the systemic changes in catchments, treatment and distribution systems that might result in an adverse incident and put in place measures to prevent incidents occurring. In this sense, risk management in a true, preventative sense is rapidly becoming a core competency of utility managers.
1.3 The origins of risk
An important starting point for discussing risk management is to understand what is meant by the word 'risk'. The discipline and science of risk has its origins in gambling using games where there is an element of chance, or uncertainty, over an outcome and therefore an opportunity for gain or loss these are the key elements of risk.
A familiar example of risk
Consider a simple gambling game that involves tossing a coin. At the toss of a two-sided coin, (the initiating event), there are only two outcomes ('heads' or 'tails'). You can only either win or lose, (the consequences of the outcome). If the coin is a fair coin, the probability of a head is 1 in 2, or 0.5 and the probability of a tail is also 0.5. A typical gamble might be between two people who stake, say, £1 each (£2 in the kitty). The game requires an agreed rule. For example: if heads lands face up, I win; if tails, you win. The coin is tossed and the winner takes £2 and the loser loses her stake. The first time you play this game you either win or lose. If you keep on playing this game how much do you win?
In this familiar example, the odds = probability of winning / probability of losing = 0.5/0.5 = 1. So, for a £1 stake, you make £1, (odds x stake) + your original stake. On average you win as much as you lose in this game. Although you may well be lucky and have a run of heads, over the long term you will always break even.
The key difference between games of chance such as a lottery and a business is that the odds can be pre-set in a lottery. For business managers, you determine the odds by the way in which you manage your business.
Business risk for water and wastewater utilities
Although a business is far more complex than a coin-tossing game, it is fundamentally similar. An investment (a stake) is made in a water treatment plant, say, which is built and operated to deliver a product (water) that generates revenue. The investment is made in the expectation that it will return a financial surplus or profit. The odds must be favourable in the long run if investment is to be attracted. That is, there must be a goal of making a profit. However, there is still a gamble involved because the operating costs may exceed the revenue, for example. A typical business model is illustrated in Figure 1.1.
In this model, cash is raised from the capital markets (1) e.g. as shares or a bank loan and these funds are invested (2) in the firms operations, (e.g. a water treatment plant). These are treated as costs and include all capital and operational expenditure. The operation of the firm develops revenue (or income) (3). If the revenue exceeds expenditure (the difference being the profit), it is returned back to the investors (4b) or reinvested into the company (4a). The latter is acceptable if it leads to an increase in the value of the share price.
Business managers deal with the cash flow. Their goal is to minimise expenditure and maximise income. Activities that increase expenditure are scrutinised. If expenditure exceeds income then the company will be at risk of going out of business or of takeover by a more efficient management.
Where does risk come into this business model? Unfortunately, neither income nor expenditure is certain. Events can occur that reduce income and cause increased expenditure. For example, pipe failures causing leaks will lead to increased expenditure on leak detection and pipe repair, refurbishment or replacement. Or an incident may occur that requires an emergency response and this will also incur costs. Techniques of risk management are usually applied for at least one, and usually several of the following reasons:
Financial. Both capital, and operating costs can be reduced by carrying out assessments during the design stage of a scheme, or operating and maintenance costs can be optimised on an existing plant. Failures and their consequences for the business can be expensive to mitigate and can in some industries lead to the loss of the customer base.
Impact on the business. For most companies, the biggest fear is the loss of the customer base with reduced sales of the product. A serious accident can result in a loss of confidence among the owners of the organisation which can then drive down share prices in publicly quoted companies and can persuade governing boards to make changes to the management and organisation. Following an accident, management has to put a major part of the business's effort into restoring equipment, stocks and customer confidence. Funds earmarked for other projects (contingencies) may than have to be diverted in the response to the incident, depleting reserves.
Impact on people. The failure of a piece of equipment in a water supply system, or the wrong action by an employee can result in either the customers receiving no water supplies or receiving contaminated drinking water that may be injurious to health. This can affect a large number of people simultaneously with little or no opportunity for intervention until after exposure has occurred.
Management of risks to public health are generally of greatest concern for utility companies and attract significant attention. The safe drinking water agenda seeks to ensure these risks remain uppermost in the corporate mindset during a period of substantial sectoral change.
Impact on the environment. Equipment failure or human error can lead to an effect on the environment that may include discharges to the atmosphere, the ground, or the water environment. These may occur directly or as a result of actions to mitigate the results of the failure, such as discharges of polluted water from a tank.
Customer care. If an organisation has target levels of customer care, considerable time and effort can be taken up by employees handling complaints and explaining to customers and the press what has happened. If compensation has to be paid when certain standards are not met, then it can be more economical to reduce the risk of a failure rather than pay compensation to a large number of people, (distribution of this compensation can itself be expensive).
Legislation. A country's legislation sets minimum standards for the product being produced, the handling of the constituent chemicals, the discharge of the waste products and the health and safety of the operational staff and the people living nearby. Even when there is no legislation covering some aspects there can be claims of negligence against the operating company if adverse events occur.
1.4 Definitions of hazard and risk
Hazard: A situation or substance with a potential to cause harm; for example, to humans, property, the environment or a combination of these.
Risk: The likelihood of a specified undesirable event occurring within a specified period or under specified circumstances.
Using these definitions, we can start to become familiar with the hazardous situations around us – dangling kettle leads, broken pavements and unprotected cables. These are all sources of a hazard – scolding, bruising, and electrocution. A chain of events must occur for the hazard to be realised and there must be something or someone that we value that is adversely affected by the hazard if adverse consequences occur. One conceptualisation of risk considers these components as the source of the hazard, the receptor or valued item or person at risk and the pathway by which the receptor becomes exposed to the source of the hazard. Without the connectivity between the source-pathway-receptor, the risk can not occur.
Excerpted from "Risk Management for Water and Wastewater Utilities"
Copyright © 2008 Cranfield University.
Excerpted by permission of IWA Publishing.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Introduction to the Water and Wastewater Process, vi,
How to use this book, viii,
Risk management for water and wastewater utilities, ix,
Unit 1 Why manage risk?, 1,
Unit 2 Basic probability and statistics, 15,
Unit 3 Process risk and reliability analysis, 33,
Unit 4 Assessing risks beyond the unit process boundary, 59,
Unit 5 Regulating water utility risks, 83,
Unit 6 Business risk management for water and wastewater Utilities, 97,
Unit 7 Managing opportunities, reputations and emergencies, 111,
Unit 8 Embedding better decision-making within utilities, 131,
Unit 9 Summary, 147,
Unit 10 Self assessment question abbreviated answers, 151,