Case Studies in Clean Water Investments: A Blueprint for Partnership Evolution

To the question “should partnerships advance water quality?”, many practitioners answer: “Yes, but how exactly?” A survey at the outset of the 2021 New England Conservation Finance Roundtable showed 36% of participants were “not sure how to get started” with pursuing water utility partnerships, 39% were “already doing it,” and 26% were “eager to try.” This article delves into three organizations that have embarked on such partnerships, gleaning clues on how they can materialize and evolve.

The Portland Water District

The Portland Water District (PWD) provides drinking water to around 210,000 consumers in and around Maine’s biggest city. The municipalities it serves draw water from the southern end of Sebago Lake, which is surrounded by a 2 mile no-trespassing zone. In the 1990s, the District’s conservation program focused on maintaining a natural filtration system throughout this 2 mile zone via forested watershed. This mainly played out in traditional water protection efforts, such as water quality monitoring, community education, and construction project inspection near the lake. In the early 2000s, the focus changed. 

Shifts began when the Lakes Environmental Association, a non-profit organization dedicated to lake protection, approached the PWD with a request for financial support to protect a tract of land in the Sebago Lake region. “I brought this [request] to our Board of Directors . . . to explain why I thought it would be good for Sebago Lake to have this land conserved,” said Paul Hunt, the Environmental Services Manager for the PWD. Hunt’s argument was rooted in costs.  Achieving compliance with the federal Safe Drinking Water Act via a new filtration plant would have cost the District ~$150 million. Engaging in the conservation of intact swaths of forested lands to maintain water quality and strong watershed protection customs earned the PWD a waiver from this regulation. Land conservation, the PWD figured, would pose a cheaper method of regulatory compliance. The Board agreed, voting to approve the request.

A few months later, the PWD heard another funding request, this time from a local land trust. “Word got out that we had contributed money,” explained Hunt, leading to around 4 additional asks within the span of a 5 year period. With each request, Hunt returned to the Board for approval, and each time, the directors unanimously approved. Still, without an established program for conservation funding, the PWD’s engagement with clean water investments seemed “to be coming out of the blue,” said Hunt. With this in mind, David Kane, the Director of Finance and the General Manager of the PWD, instructed Hunt to develop a policy stating explicitly the District’s support for conservation in the Sebago. The result was the 2007 Watershed Land Preservation Policy.

Though the policy did not formally set amounts of funding for water conservation, its declaration of intent to “support measures to preserve Sebago Lake watershed land in perpetuity and to provide open space for lake-friendly public access” signaled to the broader community that the PWD might be a viable source of funding for their water conservation endeavors. Sure enough, funding requests soon began to come in, and from 2007 to 2012, the PWD executed more deals, contributed larger sums of money, and conserved more acres than ever before.

With the PWD’s conservation program becoming increasingly evolved, the District sought to formalize the funding process with a rubric for funding levels per project. Up to this point, “we were just saying to the land trusts, ‘ask us for how much you need’” while keeping in mind that “we are not an unlimited source of funding,” said Hunt. Thus, in 2012, the PWD began implementing a funding formula based on projects’ proximity to the Sebago Lake and other water bodies, percent of forest cover, and incorporation of wetlands, among other considerations.

Guided by this formula, the District entertained an ask for ~$269,000, their biggest to date. “I was bummed out because I thought that the door was going to get slammed into my face, but we used the funding formula, and it was a big property – like 900 acres – so I went to the board and requested the money . . . they unanimously approved it.” 

From 2012 to 2017, the acreage that the PWD helped to conserve increased from 1605 to 4180, with the program’s expansion garnering the attention of Highstead (a regional conservation non-profit and partner in the Conservation Finance Network), The Nature Conservancy, and the Open Space Institute. “In 2017, other partners came to us and said we love what you’re doing; and we would like to help . . . this wasn’t planned on my part,” said Hunt. The coalition gave rise to Sebago Clean Waters (SCW).

Throughout the partnership’s first year, the PWD, TNC, Highstead, and OSI each sent a few staff members to SCW meetings, but the partnership had no formal budget or staff. “To do this well, we needed funding,” admitted Hunt. The partnership therefore applied for the Healthy Watersheds Consortium Grant from the US Environmental Protection Agency, receiving $350,000. With the District matching $40,000 of this grant, the partnership enjoyed $390,000 in funding from 2017 to 2020, enabling more land conservation projects to be completed. 

In September 2020, SCW received an additional $8 million Regional Conservation Partnership Program grant from the National Resources Conservation Service. It plans to purchase easements; fund due diligence, outreach, and communications work; and support other watershed water resources efforts (such as invasive aquatic plant removal) over the next five years. With every dollar of this grant requiring a 1:1 cash or in-kind match, individual partners are dedicating staff time or cash contributions. The PWD specifically is planning to contribute $1-2 million in cash from on-hand reserves or from bonding one or more of the transactions to projects over the grant’s 5 year span. 

Ultimately, the PWD’s story vouches for small, gradual steps. “If I went to the board in 2000 and said we want to adopt this policy because we can see ourselves spending over $1 million in the next 15 years, the board would have said I was crazy,” said Hunt. Instead, “our goals each year were just the deals in front of us. We didn’t think about what it would mean if we continued to do another one and another one.” Initially, projects required only tens of thousands of dollars. After the process earned the attention and backing of other conservation organizations, the PWD began grappling with conservation deals in the hundreds of thousands of dollars. This gradual build-up enabled the District to test, see the results of, and buy into the program over time with relatively low cost. “It’s like walking a set of stairs,” said Hunt. “Don’t think about the big picture. Think about the next step . . . you want to have a vision, but you also want to pick a shorter term goal.”

Kane underscores another element of successful partnership building: developing interested local community stakeholders. “As the program grew, Paul engaged other community members in protecting lands. He got a coalition of local breweries interested in helping to protect the land because they use our water in their product, [and] now they’re raising money for the program.” In other words, as practitioners look to scale their own conservation partnerships, community outreach and developing local stakeholders with a vested interest in water protection might also facilitate program growth. 

Think about the next step . . . you want to have a vision, but you also want to pick a shorter term goal.

Perhaps the most important element is trust, says Hunt. “We don’t have any legal bounds between us – nothing that requires these partners to help.” Instead, organizations work toward mutually advantageous benefits that arise from partnering. On one hand, the PWD is able to take advantage of a lower cost of compliance with federal regulations while outsourcing the work related to identifying lands to conserve, working with landowners to reach a sale agreement, conducting due diligence, processing the administrative work for easements, and managing conserved lands. “We don’t get involved with that at all,” said Hunt. Partnering with organizations like Highstead, OSI, and TNC therefore enables the PWD to save time on program administration. On the other hand, the non-profit and land trust stakeholders in this partnership benefit from a consistent source of funding stemming from the steady revenue streams that water utility organizations typically enjoy. 

The Vermont Department of Environmental Conservation: State Revolving Fund

The Water Infrastructure Project Sponsorship Program (WISPr) is one of the Vermont State Revolving Fund’s primary modes of financing water conservation projects. WISPr pairs a municipal “sponsor” undertaking a traditional treatment project with a “sponsored” project, typically a non-profit-spearheaded land conservation, wetland restoration, or woody buffer planting effort. The sponsor assumes the costs for both projects in a combined WISPr loan. Upon completion of both projects, the sponsor pays off both loans and receives a reduced administrative fee on the municipality’s WISPr loan. This reduces the annual payment of the loan below what the sponsoring party would otherwise need to pay. “In the conservation world, grants are the holy grail,” said Celia Riechel, the State Revolving Fund Project Developer at the Vermont Department of Environmental Conservation. Since most conservation projects lack a mechanism for capturing value to enable debt paydown, WISPr sponsorship is effective because it “allows you to effectively get a grant through this administrative fee adjustment,” added Riechel.

An ideal WISPr partnership develops as follows. First, the Vermont SRF’s staff, known as watershed planners, conducts due diligence and stays abreast of current local conservation projects, bringing potential projects to municipalities in the initial planning and design stages of their traditional treatment works. A conversation ensues regarding what projects the municipality finds particularly compelling. “Our bottom line is water quality benefits, but we’re not going to pretend that there aren’t co-benefits that might be more important to our partners,” said Riechel. Making time for these conversations is therefore critical to ensuring that the sponsoring party is “really committed and sees the value for themselves when it’s time for them to sign on the dotted line for a loan whose principal is higher,” added Riechel.

Our bottom line is water quality benefits, but we’re not going to pretend that there aren’t co-benefits that might be more important to our partners.

As potential partnerships emerge, the Vermont SRF makes determinations as to whether those projects are, in fact, providing water quality benefits. “This is a coarse look as to whether a project provides water benefits or not,” said Riechel. This determination occurs internally to the SRF, coordinated between the SRF’s watershed planners and appropriate technical experts.

Once eligibility is established, an implementer partner is identified – the party that implements the project, typically a non-profit, land trust, municipality, or river conservancy group. This entity completes the WISPr sponsored product application, which features a space for the sponsor to commit to funding. The SRF then processes the WISPr application in a standard underwriting process.

While effective in theory, the WISPr loan program is still in its infancy, and the Vermont SRF is currently working with only the City of Rutland. “This program is on the cusp of taking off, but it’s not quite there yet,” admitted Riechel. A key challenge is a complication over whether the Rutland project can be classified under 319 or 212 eligibility. WISPr is administered under section 319(h) of the Clean Water Act, which enables the SRF to ignore certain Clean Water State Revolving Fund requirements, such as the American Iron and Steel Requirement or the National Environmental Policy Act. This enables WISPr to enjoy high levels of efficiency in program processing. However, a project that is classified under 212 eligibility triggers additional standards and requirements that can be difficult to work around. “It’s an entirely different conversation,” said Riechel.

Another challenge is a lack of capacity. “We’re still putting the processes in place and struggling with a lack of staff capacity pretty severely,” said Riechel. As municipalities in Vermont are quite small, many do not maintain the resources or staff necessary to undertake additional conservation projects. “These people are both overworked and have multiple roles to play, [so] any additional work that requires a change in planning or additional effort is an uphill battle. It’s not that they’re not receptive to the idea in theory. It’s just that nobody has that bandwidth,” a sentiment applicable across project types, explained Riechel. Compounding these staffing limitations is the fact that hiring additional help is often easier said than done, incorporating budgetary, union, authority, internal politics, and pension liability concerns. That said, “we need at least one other person who can do project development work,” said Riechel.

A third challenge for WISPr partnerships is simply easing municipalities into the idea of sponsorship. Those “who are traditionally involved in SRF loans are people in public works projects. They’re engineers, [so] this is not their bailiwick, and they don’t feel at home with or comfortable with what these products are.” The staff limitations, difficulties in developing internal processes for management, eligibility requirements, and a general unfamiliarity with the product has led to challenges in the administration of WISPr loans. “We haven’t really been pushing it yet because we’re still trying to work out the details,” said Riechel.

I2 Capital

I2 Capital is an impact investing firm dedicated to aggregating and channeling capital towards watershed conservation solutions via a Revolving Water Fund (RWF), which provides quantified pollution reduction units (known formally as Environmental Impact Units) to stakeholders. The initial development capital for the RWF originated from a combination of sources, including venture capital from I2 Capital themselves; grants from the Natural Resources Conservation Service (NRCS), the Nature Conservancy, and the William Penn Foundation; and corporate dollars from DuPont. 

The RWF was principally developed in the Brandywine-Christina watershed within the Delaware River Basin, a process that Ashley Allen Jones, Founder and CEO of I2 Capital, describes as having engaged three distinct stakeholders. In group 1 are the producers of quantified water pollution reductions, working on the ground. In group 2 are intermediaries that serve as the financial, legal, and regulatory facilitators of the partnership. In group 3 are the buyers.

I2 Capital falls into group 2, bringing the financial, legal, quantification, and regulatory know-how through both internal and external partnerships (I2 Capital partners with Morrison and Foerster for legal work and the Nevada Environmental Quality Incentives Programs for environmental quantification services). “This was the perspective we had when we proposed to the NRCS that we were going to create the Revolving Water Fund . . . [so] what we knew we needed to develop were really strong partnerships with group 1 and group 3,” said Jones.

In identifying group 1 experts, I2 Capital partnered with the Nature Conservancy. At the time, the Nature Conservancy was already working with a water fund and local universities in Delaware, so “there was a really nice alignment between what they were thinking about their global water funds practice and how we were thinking in a transactional perspective,” said Jones. In this group, I2 Capital also aligned with the Stroud Water Research Center, a non-profit water science organization in the Delaware region. These partnerships, Jones says, are mutually beneficial: “We’re not watershed experts. They don’t have the financial, regulatory, legal, quantification, regulatory transaction piece,” summarized Jones. Partnerships evolved through ongoing, weekly, and detail-oriented conversations dedicated to identifying conservation practices that were scientifically based, economically valid, legally sound, and communally supported.

Identifying suitable municipalities, Jones says, is a matter of grit and “pure entrepreneurism . . . figuring out who’s who, what they’re doing, and whether they want to be involved.”

To identify prospective purchasers in group 3, “we focused on regulated entities because there’s the regulatory construct under which they have to reduce their agricultural runoff . . . when you’re trying to create a market solution, voluntary markets can be a little clunky,” said Jones. For instance, the EPA’s Municipal Separate Storm Sewer Systems (MS4) program, which requires municipalities to institute stormwater management programs aimed at reducing water pollution, applies to the Brandywine-Christina watershed and creates clear regulatory drivers for municipal entities to engage in conservation projects. Identifying suitable municipalities, Jones says, is a matter of grit and “pure entrepreneurism . . . figuring out who’s who, what they’re doing, and whether they want to be involved.”

“The challenge in all of this is that these groups tend to be loosely affiliated,” said Jones. In other words, conservation partnerships don’t tend to materialize solely because non-profits or municipalities build them. Instead, “there has to be a champion that says okay, we’re going to create this . . . and that’s the capacity gap in the market,” Jones added. 

Ultimately, Jones describes water conservation partnerships as a process of “engineering.” Conservation engineering entails agriculturalists and economists working on the field to create conservation solutions. Quantification engineering entails pollutant reduction quantification methods. Financial engineering entails new financial structures that can facilitate the direction of private and public capital towards conservation projects. To successfully execute these feats of engineering, “you really have to have a funded group of practitioners whose jobs are to wake up in the morning and figure out how they’re going to make this work . . . it just can’t happen out of a piece of a side of a person” at any one of these organizations who is only partially devoted to the execution unit of a given conservation project, explained Jones. In the case of the Brandywine-Christina, I2 Capital was able to step in as this intermediary, bringing otherwise distinct partners together and executing the agenda across the watershed.

Conclusion: Lessons Learned

Paul Hunt of the PWD underscores the importance of starting small, focusing on the task at hand, and taking gradual steps toward larger conservation investments. Celia Riechel of the Vermont SRF identifies a lack of internal administrative capacity as a key obstacle standing in the way of effective partnership building, illustrating how effective programs in theory can run into practical problems during implementation. Ashley Jones of I2 Capital emphasizes the importance of regulatory parameters in driving municipalities towards water conservation partnerships; she further highlights the need for partnerships to maintain dedicated, funded teams whose day-to-day jobs are to champion the conservation program at hand.

Jones, Riechel, and Hunt all pinpoint the overcoming of internal and external inertia as a key challenge for conservationists going forward. “Vermont has very small communities that rely heavily on civil engineering firms to advise on operations and capital improvements, and it’s not in their sphere to think about solving problems with natural projects vs. pipe and pumps,” explained Riechel. “Public utilities are conservative and slow to change, so conserving land can be an unpopular decision in some areas when positioned against a potential reduction in economic growth potential,” added Kane. Nonetheless, “our goal is to expand the pie for conservation, and we can only do that by tapping new resources that require new levers,” said Jones. “I challenge everybody to not be afraid.”