What is Your Water Really Worth?

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26 Jan 12:25am
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Hydrocommerce Corner-Where Water & Money Meet

Brought to Investors by http://www.investorideas.com/ and its water investing portal, http://www.water-stocks.com/

January 26, 2010 Edition
By William S. Brennan
Bio and more info: http://www.water-stocks.com/Bill_Brennan/

What is Your Water Really Worth?

A typical day for most adults in the western hemisphere begins with a cup of coffee, a shower and a brush of the teeth before we head of to work for the rest of the day. Most never even give water a second thought as we move about our daily routine since every time we turn the faucet, out gushes a commodity that never seems to end. But what would happen one day if you went to turn the shower on and nothing came out? Or worse the color was dark brown or something unrecognizable that reeked and was visually unappealing? What would you be willing to pay for uninterrupted clean water in the developed world? From an investment perspective, water prices are based on user expectations, failing to reflect the costs of infrastructure and maintenance. A prime example is the Metropolitan Board in Southern California where a 14% price increase did not cover the cost of delivering water, triggering the utility to access its reserves for $182 million. We bring this to light because this is not a one off situation. Water utilities get paid based on usage fees, giving them perverse disincentives to conservation and limiting their ability to invest in new technologies should water stress occur.

Most Americans as well as inhabitants of developed countries don’t pay much attention to the price of water because it is probably the cheapest utility bill that arrives in the mailbox. Think about it. Aren’t you excited that your cell bill is going down due to competitive pressures. So when is the other company going to show up at my front door and install a new water pipe in my front yard so I have an option who I should write the check to at the end of the month? Never! What you have now is what your children and grandchildren will have for the next 50 to 100 years. I can say that with a high degree of confidence since we have for the most part the same pipes and the same company supplying water over the last 100 years. Sure the name may change and the municipality may run out of money forcing it to sell its water works but the majority of us are dealing with the same company that our Grandparents did. This means that those same pipes that worked so well in New York, Philadelphia, Boston and Los Angeles since the 1930’s are still the same pipes that are bringing us our water today!

So what is the real underlying value of water relative to the state of our infrastructure, the energy used to treat and move it and ultimately, is it priced correctly? The water that runs into our homes goes through a comprehensive treatment protocol that is governed by the EPA before it ever hits the transmission pipes. The cost of treatment alone when you add in the energy to move water through various membranes and filters is likely far more than the average person realizes. Once clean enough for potable use, that water travels miles to reach its destination through a complex menagerie of pipes, motors, and valves before it reaches its final destination. Did you ever consider the energy cost to move water up a hill? Just ask the Metropolitan Water District in Southern California or Denver Water in Colorado and they will be happy to provide an answer. In addition, hydro electric plants regularly pump water uphill by “pumped storage,” in which water is moved from a lower-elevation storage facility (either a reservoir or a purpose-built container) to a higher elevation for release during peak demand. Although pumping the water uphill consumes more electricity than is generated by the water flowing back down, the financial return for the peak power is higher than the cost of pumping water during off-peak times. Did you ever give a second though to just how much energy is needed to provide water services? Energy is required to lift water from significant depth in aquifers, pump water through canals and pipes, control water flow and treat waste water, and desalinate brackish or sea water. Globally, commercial energy consumed for delivering water is more than 7% of total world consumption. Energy consumption effects water use more than we realize with 50% of our fresh water being used by electrical power plants

What most fail to realize is that the water industry is a “rising-cost” industry, with prices rising faster than the rate of inflation. Most costs are associated with infrastructure replacement, regulatory compliance (treatment), and population growth (for some areas). Labor, energy, and chemicals are the three major operating expenses for many systems where rising costs are coupled with flat or declining demand (conservation), another source of price pressure. One of the first points we always make with investors in the water sector is that water demand is relatively price inelastic; however, large-volume and discretionary use may fall due to price response. Ultimately, water customers experience the combined and regressive effect of water, wastewater, and stormwater charges. So get ready for higher water rates.


From our view, full-cost water pricing is essential for sustainability, as well as economic efficiency; in the coming years, accurate pricing will signal and encourage efficient production and use and emerge as the catalyst for behavioral change among end users. In the absence of full-cost pricing, subsidies can flow to or from water systems and sustainability will become more questionable, especially in regions where water shortages are expected to persist. Regulated water utilities, many of which are nongovernmental, are likely to charge customers for the full (accounting) cost of service. Presently many government-owned (but not all) water systems are reluctant to charge the full cost of service through rates. That will change albeit slow due to the political nature of the beast. Census Bureau data illustrate a persistent gap between expenses and revenues for water and wastewater services (comparatively). Remember, ratemaking can be politicized (“willingness to charge”), which may play a role in cost avoidance, including investment deferrals as we have seen from our not so stimulating U.S. stimulus plan. However, cost allocation and rate design are both technical skills that reside within the body of a water utility. And don’t leave out political skills which are needed too (communications, participatory processes, and accountability) in order to prepare the public for the inevitable price increases that we believe will be 3x-5x your present water bill over the next five years.


Often overlooked by most people, politics has and will continue to play the leading role in setting the ultimate price of water globally, resulting in prices that short term, may remain artificially low in comparison to the intrinsic value of water in certain parts of the world; not enough water stress exists in those areas to move pricing that wakes up the end user. Shortsighted but prevalent. Consider this as likely scenario…even while the average water usage drops among end users, the cost to maintain existing operations continues to climb. First, a minimum usage charge for those areas that the water usage does not support the underlying cost will be implemented. Ultimately, however, we will pay the full cost and when that occurs, pricing will become significantly higher and hopefully more intelligently applied across the usage spectrum. We anticipate that regional pricing structures will become more creative (as we have seen in certain parts of water starved California) – including tiered rates where the first tranche of water-basic “human right” water is priced just below or at full cost while the next tranche of water beyond the first tier is substantially increased through tariffs and usage levels that provide a true and measurable disincentive to overuse. So while you ponder over your next underpriced water bill (if you are lucky enough), consider picking up a few shares of the local water company if it’s a publicly traded security.


By William S. Brennan
Brennan Investment Partners LLC

Bio and more info: http://www.water-stocks.com/Bill_Brennan/

Disclaimer: This column, Hydrocommerce Corner-Where Water & Money Meet with Bill Brennan, is the opinion of William S Brennan.Content found in the articles is subject to the terms found in the InvestorIdeas.com disclaimer and does not represent a recommendation of investment advice. Investors should seek the advice of a qualified investment professional prior to making any investment decisions.

Investors following the water sector can subscribe to the news feed at http://www.investorideas.com/RSS/feeds/Water-Stocks.xml.


http://www.water-stocks.com/, an investor portal within the InvestorIdeas.com content umbrella, offers water investors sector- close- ups, research tools, news, Blogs, online conferences, Podcasts , interviews and a directory of public companies within the water sector .The water-stocks content hub has created a global marketplace and meeting place for investors, public companies, industry buyers and sellers of water technology, services and water assets.
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He is currently serving as the BP Fellow for Energy and Environmental Advancement at the Cleveland Foundation, one of the largest community foundations in the US with over $1.6 Billion in assets. He works with various public and private sector stakeholders to promote commercial activity in advanced energy in the Cleveland area. Mr. Stuebi has authored numerous articles that have appeared in such leading industry periodicals as The Electricity Journal and Public Utilities Fortnightly, and has presented at numerous major energy conferences. He is a contributing columnist to Cleantech Blog, writing on alternative energy issues, news and events. Prior to joining the Foundation, Richard founded NextWave Energy, a professional firm focused on capitalizing upon new business opportunities stemming from innovative energy technologies. As President of NextWave Energy, he assisted several emerging and established private-sector clients in various aspects of business development, including strategy and capital formation. Previously, Richard was a senior vice president at Louis Dreyfus, the global commodity trading firm and was a management consultant in the energy practice of McKinsey & Co. Richard earned degrees in economics from the Massachusetts Institute of Technology and Stanford University. His areas of expertise include: Economics in alternative and renewable energy, energy policy, trade, and development. Cleantech finance and technology strategy. You can contact him at rts@nextwave-energy.com. Ms. Heather Rae Heather is a green marketing expert and a long-time advocate of green technology and sustainable business. Through her consultancy Brae Consulting, Heather has worked for energy companies, cleantech startups, and nonprofits (she is currently working with a home energy efficiency program of the Maine Governor's office). Her previous corporate marketing experience includes Xcel Energy (demand-side management and green power) and Qwest Communications. A hands on expert - Heather has practiced what she preached. She is certified in high performance residential building (Green Advantage®) and has served as co-director of Colorado's Interfaith Power & Light. Readers of Cleantech Blog will know that Heather converted a retired school bus into the Brae Bio Bus, a recreational vehicle running on biodiesel (B100) with solar panels for auxiliary power, and recently drove it across the country blogging the experiences in finding biodiesel in different parts of the US. Having reached her destination at Maine Home Performance, a program of the Maine Governor's Office where Heather is helping design programs to certify and link Maine contractors with homeowners who want to "go green", Heather is now tackling the conversion of an 1880s Maine farmhouse into an energy efficiency and green showcase. Heather graduated from Wesleyan University and is a contributing columnist to Cleantech Blog writing on green and sustainable products and marketing from the consumer's point of view. Her areas of expertise include: Green marketing programs and strategies, grass roots green and sustainable programs for consumers, using green technologies in the home. You can contact her at heather.rae@braeconsulting.com Mr. John Addison John is an accomplished writer, speaker, and expert in technology marketing and strategy. He is one of the IT converts that are driving the cleantech industry. Since 1992, his marketing consultancy OPTIMARK, Inc. has provided educational programs, market intelligence, market development and partner development for technology and government leaders. A believer in cleantech's potential to change the world for the better, John is the Publisher of the Clean Fleet Report and serves on the Board of the California Hydrogen Business Council. He is a contributing columnist to Cleantech Blog. He is the author of the book Revenue Rocket on channel marketing in technology, and the upcoming book Save Gas, Save the Planet on what we as individuals can do to help save the planet. Earlier in his career John was an area channel manager for Sun Microsystems. For three years, he led a sales team to 300% annual growth in 15 states, increasing revenue from $4 to $110 million. He has taught courses about marketing and innovation at U.C. Davis and U.C. Santa Cruz Extension. He is a popular speaker in the Americas, Europe and Asia. You can find more of his speeches and articles on his websites Clean Fleet Report and Revenue Rocket. His areas of expertise include: Technology marketing and marketing strategy, channel marketing, fuel cells and the hydrogen economy, alternative fueled fleets, and California's energy tech corridor. You can contact him at johnaddison1@gmail.com. Dr. Peter Beadle Peter is the owner and CEO of GreenJobs.com. He is an is an experienced technology executive and an expert on a wide range of green and energy technologies, including photovoltaics, fuel processing, fuel cells, and oil & gas technologies. Green Jobs is one of the few dedicated job sites for the renewables and cleantech industry. They put out the online Green Directory, as well as a weekly newsletter on People News in cleantech. Peter is a contributing columnist to Cleantech Blog writing on renewable energy news and events. 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