The Business of Water

What will the industry look like?

2007 was another typical year for the water industry – full of challenges, surprises, frustrations and complexities, but also offering new opportunities. The job of the water utility – to provide safe and affordable water – may sound easy, but in many ways the job continues to get tougher and tougher. Staying current with technological advances and alternatives and trying to comply with complex regulatory requirements is becoming increasing difficult – particularly for smaller utilities. As consumers become more knowledgeable, they are becoming more demanding – and increasing numbers are switching to bottled water or home treatment devices for their drinking water. Attracting new talent to the industry and maintaining the human resource base – both in terms of management and operations – is a constant challenge for most utilities. And most utilities face the infrastructure spending dilemma – how to convince the public that we need to be reinvesting more dollars in our invisible underground infrastructure. It can be a challenging environment out there for many utilities.

But where there are challenges, opportunity usually follows close behind. The commercial water industry (the providers of products and services to both utility and industrial customers), as a whole, continues to show solid growth. Everyone seems to want to invest in the water industry – from General Electric and Siemens to the growing private equity community and right down to the individual investor.

Some of the higher tech areas of water treatment technology – such as membrane filtration and ultraviolet radiation treatment – continue to grow at high rates and are the subject of investment interest. But the less glamorous sectors of the business are attracting more and more attention, too. The latest U.S. Environmental Protection Agency survey of drinking water needs suggests that the majority of the $277 billion we need to spend over the next 20 to maintain infrastructure will go to distribution and storage – pumps, pipes, valves, and tanks.

The frenzy of consolidation activity and the “urge to merge” that has categorized the water industry over most of the past decade cooled somewhat in 2007. Although transactions continue to occur weekly, the era of the blockbuster deal has perhaps passed. More of the key assets in the industry gradually are consolidating under the ownership of the major industrial companies. At the same time, many rapidly expanding new companies are emerging, particularly in the areas of advanced treatment, real-time monitoring, data transmission and analysis, smart irrigation, and advanced conservation devices.

Economic realities
Outsourcing of water and wastewater treatment operations is one area where the public utility and the private side of the industry increasingly meet and sometimes butt heads. It continues to be debated in the industry. “Privatization” has been replaced by “public-private partnership” not only in the lingo but also in terms of the operating philosophy that must be practiced in order for such ventures to be successful.

Only about 10 percent of the U.S. population is served by private water companies of one sort or another, but this seems likely to increase. The basic economic drivers behind privatization remain strong and growing. Few municipalities enjoy over-flowing coffers, and few public officials want big tax increases on their watch. Many utility managers are between a rock and a hard place: requirements, complexities and costs continue to increase, while the customer base is rarely supportive of increased taxes or users fees. In many cases, the best solution may be to turn to private companies to finance, build, and operate water or wastewater systems. Under any circumstances, it is clear that private operators are going to be judged by a very demanding and critical public.

Looking forward
The start of a new year is always a good time to reflect and measure broad and long-term trends in the business. What might the future hold?

• The price of water will go up, possibly as much as five to ten times higher in certain areas within the next few decades. Although water prices clearly are highly variable on a regional basis, annual price increases over the past couple of decades have been inconsequential in many areas, often in the low single-digit range. Average price increases across the country today are in the 5 percent to 6 percent range, but particularly in the American West and Southwest, rate increases are starting to be much higher. The simple fact of accelerating water price increases will drive massive changes across the industry.

• Higher prices alone will drive a dramatically different and more “enlightened” approach to water management, conservation, and consumption. For most people, only when a problem “hits the pocketbook” do they sit up and begin to take notice and start to be smarter about water usage. Over the longer-term, all people will start to realize that if no more water is available at any reasonable cost, then they have to start using less.

• Conservation will affect municipal revenue from water services. Conservation programs already have led to substantial results in many arid parts of the country; the resulting lower water usage has translated into lower revenues to the municipality, and hence fewer funds for the utility to invest in badly needed infrastructure. By “doing the right thing” and conserving water, consumers are putting a greater, rather than a lesser, financial burden on the water authority. What this implies for the future may not always be palatable to the consumer – who may have to both use fewer gallons and pay more for the gallons used.

• Water reuse in all of its varied forms will become more robust in the overall water business. Water recycling initiatives, from the individual residence to the large municipality or major industrial installation will gather more steam. Although direct reuse of wastewater for potable purposes still seems decades away, big gains will be made in the recycling of grey waters for various applications. And again, as prices increase, there will be greater focus on designing and implementing systems that are not only more water efficient but also maximize reuse and recycling of the same water.

• The trend toward greater consolidation may also begin to extend to the municipal side of the business, particularly in the case of smaller utilities or more rural utilities. Consolidation on the municipal side of the industry makes a lot of economic sense where many small utilities are struggling individually to keep up in an increasingly complex technological and regulatory environment. However, this is an area fraught with political sensitivities, and little has happened so far.

Perhaps the biggest unanswered question is how global warming will affect the whole water situation. At first glance, most people worry about rising sea levels and what the impact might be on low-lying areas. But the eventual effects of global warming will be far more complex. The potential of global warming to shift the predictability, timing, and extent of natural rainfall patterns around the world could truly wreak havoc on water availability, agricultural productivity, and food supplies.

Over the much longer-term, people may begin larger-scale migration toward areas of greater natural water availability. Much of this migration will be away from natural desert ecosystems that have been turned into short-lived oases by means of irrigation and long-distance water transfer, such as the southwestern United States.

Shifting rainfall patterns, higher temperatures, and earlier snowpack melting could cause severe seasonal shortages, with huge impact on regional storage requirements. The loss of vegetation in already arid regions could lead to more extreme wild land fires, denudation of the land, and rapid erosion. Greater erosion in more common storm events could, in turn, contribute to greater sediment load and lower water quality in natural streams and rivers that serve as water supply sources. And so on. People clearly don’t understand all the implications of climate change, but clearly it will exacerbate an already challenging situation.

What's a utility to do?
Utilities need to face these challenges with a more aggressive and proactive stance. Although water delivery is perhaps the last “natural monopoly,” water utilities now face a form of increasing “competition” from the booming bottled water industry and manufacturers of point-of-entry devices for home treatment. Utilities must embrace:

• new technological advances and information management systems with open arms;
• more sophisticated asset management plans to optimize existing operations.

In addition, we simply need more investment dollars to ensure the dependability of the infrastructure over the longer-term.

As regulated monopolies, utilities traditionally have not had a marketing orientation – their customer base was pretty much assured. But in the future, that has to change. Utilities have to do a better job of standing up for themselves and “marketing” the true economic value of their product – the great economic bargain that municipal tap water really is for most Americans.

If utilities take a greater leadership role in helping the public better understand the challenges and benefits of the public drinking water system, they can make a difference in their own bottom lines while making an invaluable contribution to the solution of the world’s water problems. Utility leaders – along with their municipal bosses – must have the courage to stand up and tell the truth about the inevitability of price increases, so that future communities will have the necessary funds to maintain infrastructure and avoid massive problems.

From a broader economic perspective, advancing technology definitely has a role to play, but it must be supplemented with full-cost pricing of water and much smarter economic and public policy with respect to its use. Better education and awareness programs must be implemented to help the public truly understand the nature of the hydrologic cycle and human interaction with it. The biggest challenge will be designing public policies that can simultaneously treat water more as an economic commodity and as a basic “human right” – something that all people need to live. Certainly enough challenges exist to go around, but for the smart, innovative, and aggressive players, the opportunities are boundless.

About the Author

Steve Maxwell is managing director of TechKNOWLEDGEy Strategic Group, a Boulder, Colo.-based management consultancy specializing in merger and acquisition advisory services and strategic planning for the water and broader environmental industries. Maxwell is editor and founder of The Environmental Benchmarker and Strategist, the environmental industry’s most comprehensive source of competitive and financial data. He has advised dozens of environmental services and water firms on strategy and merger and acquisition issues and can be reached 303.442.4800.

Featured Webinar