The Funding Challenge Of the Water Industry, Just Look to Technology – Part I

Part I: How did we get here?

This discussion of the challenges facing the water industry will be followed with “Part II”, which will provide insight on how technology can help meet these difficult challenges.

The water supply industry is feeling the pressure of extensive infrastructure replacement needs, rising operations costs, declining average customer consumption, and fragmented water systems. These factors combine to drive rates up, only to be met with considerable customer resistance. This is true for municipal systems, water districts, and investor owned utilities.

Buried infrastructure is well beyond its useful life in many areas, with pipes more than 100 years old still in service. The high failure levels of this old infrastructure means more frequent interruption of service to customers, high maintenance costs, and possible water quality issues. The American Society of Civil Engineers has rated America’s infrastructure and gives water systems a “D” grade. The American Water Works Association (AWWA) estimates that the cost to replace water infrastructure in the US at over $1 trillion. The Environmental Protection Agency (EPA) forecasts a capital funding gap of $225 billion and an O&M funding gap of $310 billion over the next 20 years for rebuilding the systems. If correct, such needs of immense capital infusions will result in double digits rate increases annually, well in excess of the cost of living.

In addition to capital needs, operating costs for treating and pumping water are increasing, reflecting increasing costs of the big 3: energy, chemicals, and labor. In order to create room for the capital demand while holding rate increases down, it is growing more critical to find efficiencies that can reduce ongoing costs. The focus on these efficiencies needs to be on the big 3.

In some areas of the country, conservation has been an issue for years. But in nearly all parts of the country it is becoming a driver both from the customer and supplier perspective. New construction and renovation of customer plumbing with low flow devices, wiser use of irrigation, and industrial efficiency improvements are changing demand profiles both in total use and in diurnal patterns by customers. Source of supply scarcity is likewise pushing suppliers to encourage conservation in general and particularly to be able to limit use during drought periods. There is also a greater social awareness of water as a natural resource that needs to be protected and used wisely. Such things encourage regulators and municipal governments to push for conservation even in areas of plentiful supply. Ironically, reduced customer consumption puts upward pressure on rates as a utility’s fixed costs are now spread over fewer gallons sold.

The industry is very fragmented with nearly all systems physically isolated and managed locally. This is vastly different than the electric and gas industries with a well-connected source of supply and typically large service areas. This leads to significant inefficiencies in operations and support. The industry is primarily municipally owned and operated –  especially true in the large urban areas (the NFL, MLB cities). There are only a few national IOU’s and a larger number of small regional companies. There are also a large number of public water districts that primarily exist in rural areas but in recent times have become part of large suburban development. Unlike the electric utilities, which are interconnected through the grid and can be expanded easily and cheaply by running poles and wire, water utilities must develop their own source of supply and operate primarily as independent entities.

The practical limitations in regionalizing water utilities are combined with a strong public sense of “ownership” in water that exists with entities like electric cooperatives. Water, as a commodity, relies heavily on quality as it is the only utility that the customer ingests and is essential to good health.

Despite these obstacles there are opportunities for consolidation. Rising costs, intense capital needs, tightening regulations, supply shortages, and often inefficient municipal operations can move the needle towards privatization, public / private partnerships, IOU mergers, and long term concession agreements. The EPA, many state environmental agencies, and economic regulators are pushing regionalization in order to improve environmental compliance, water quality, and reduced costs.

Be sure to read Part II to see how technology driven process improvements can make a significant impact on meeting these difficult challenges.

Phone: 312-602-4000
222 W. Adams
Chicago, IL 60606
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